Another Frivolous Trade Secret Case: Court Finds Bad Faith in Cypress v. Maxim

Cypress Semiconductor Corporation and Maxim Integrated Products are two big Silicon Valley tech companies, both with an interest in touchscreen technologies. In February 2011, Maxim engaged a recruiter named Zion Mushel to help the company fill some positions with employees who had experience with touchscreen. Mushel solicited several such Cypress employees, some of whom Maxim had previously attempted to recruit.

In April 2011, T.J. Rodgers, the president of Cypress, wrote to Maxim’s president Tunc Doluca accusing Maxim of attempting to steal its trade secrets by poaching several of its employees. Cypress threatened a lawsuit if Maxim did not cease and desist. The parties then exchanged several letters back and forth.

On May 13, 2011, Cypress filed a lawsuit against the recruiter Mushel and his company Eurika Consultants. Both were based in Israel. Efforts to serve process on these defendants were ultimately unsuccessful. Eventually, Cypress dismissed its complaint. A month later, on June 8, 2011, Cypress filed a second lawsuit, this time against Maxim and Doluca. The second lawsuit accused Maxim of misappropriation of trade secrets and unfair competition.

Cypress advanced two theories of misappropriation: The first was that Maxim was using Cypress’s trade secrets to identify the company’s touchscreen employees. The second was that Maxim was poaching Cypress’s touchscreen employees to gain access to trade secrets they had acquired while working for Cypress.

I use the term “advanced” loosely: Maxim’s complaint principally offered speculation and little in the way of factual allegations. With respect to the first theory of misappropriation, the complaint alleged: “Maxim has used a headhunter to repeatedly target Cypress’s touchscreen employees, apparently using improperly obtained confidential information regarding Cypress touchscreen employees to do so.” And for the second theory, Maxim offered the following: “By improperly soliciting and targeting Cypress’s employees, Maxim has improperly obtained a list or roster of Cypress employees working on touchscreen technology and has improperly used that information to try to poach Cypress employees who have knowledge regarding Cypress’s advanced technological achievements in this area.”

Two days after filing its complaint, Cypress sought an ex parte temporary restraining order that would prohibit Maxim and Doluca from soliciting any Cypress touchscreen employees and require Maxim to immediately return to Cypress any of the company’s trade secrets it had in its possession. The application was accompanied by the declaration of Cypress’s president, a human resources officer and a touchscreen technologist. The upshot of these declarations: Maxim was trying to poach Cypress employees who had valuable, confidential information. Ultimately, the parties stipulated to a court-ordered 30-day mutual standstill, during which time neither party would solicit the other’s employees.

On June 29, 2011, Maxim served Cypress with a demand to identify the specific trade secrets at issue, pursuant to Cal Civil Code 2019.210. Cypress did not respond. In July, Maxim filed a demurrer. The crux of its demurrer was that (1) the identities of Cypress’s touchscreen employees were not trade secrets (2) the complaint failed to allege any conduct constituting misappropriation (3) the cause of action for unfair business practices was preempted by the California Uniform Trade Secrets Act (“CUTSA”). That demurer was set for hearing on November 1, 2011, but was never heard because Cypress filed an amended complaint on October 19, 2011. The amended complaint was substantially the same as the original.

On October 31, 2011, Cypress finally served its response identifying two supposed trade secrets: (1) A compilation or list of Cypress employees who worked with Cypress’s touchscreen technology and products area and their employee information, including contact information and (2) Cypress’s confidential information regarding its proprietary touchscreen technology and high performance products.

On November 23, 2011, Maxim filed a second demurrer, raising the same issues. In support of its second demurrer, Maxim filed a declaration listing 93 Cypress employees with touchscreen experience who the company identified using publicly available websites and records from the PTO. A week later, Cypress moved to voluntarily dismiss its complaint without prejudice. Maxim moved for fees under the CUTSA, which provides that a prevailing defendant can recover attorney’s fees if the claim for misappropriation was made in bad faith. Ultimately, the court granted Maxim’s request for attorney’s fees and awarded roughly $180,000 plus costs. Cypress appealed.

On appeal, Cypress raised two arguments: First, that Maxim was not the prevailing party. Second, that the trial court had erred in finding bad faith. The California Court of Appeal, Sixth District, soundly rejected both of these arguments.

With respect to the prevailing party issue: Cypress pursued a frivolous lawsuit then gave up before it faced an adverse determination on the merits. The court reasoned that Cypress had gained no practical benefit from the action, other than to intimidate other companies in the market and warn them off from poaching its employees. This objective – basically stifling competition – is contrary to California law. To the extent Cypress achieved that objective, that achievement cannot be the basis of deeming Cypress the prevailing party.

But Cypress did not go quietly. It offered a litany of reasons why it should be considered the prevailing party – or – why Maxim could not be considered the prevailing party. First, Cypress claimed that it was forced to dismiss its claims in an effort to prevent disclosure of its trade secrets and other confidential information. Cypress argued that the court had wrongly denied its motion to seal certain materials and – as a result – it had no choice but to drop the lawsuit or reveal its secrets. Second, Cypress argued that it had prevailed in the action because it had accomplished its objective: During the course of the litigation, Maxim had stopped soliciting Cypress’s employees. As such, Cypress reasoned that had obtained its primarily objective and was the prevailing party. Next, Cypress argued that its inability to obtain discovery from Mushel, the recruiter, had ruined the case. Finally, Cypress argued that if it wasn’t the prevailing party, then there was no prevailing party because Maxim had failed to achieve its litigation objective.

The court evaluated and rejected each of these and ultimately reached the following conclusion:

The only plausible explanation for Cypress’s dismissal of the action is that it feared a determination on the merits. Had Maxim’s demurrer been heard, it would almost certainly have been sustained.

Turing to the question of bad faith, court held that a complete absence of evidence of misappropriation in the record could – standing alone – support a finding of bad faith. And here, the record contained no evidence of misappropriation whatsoever. Further, in spite of the Complaint’s repeated references to Maxim’s unfair conduct, there was no evidence whatsoever that Maxim had done anything other than pursue the most qualified candidates for its job openings.

Beyond the objectively baseless nature of the claims, there was the manner in which Cypress conducted the litigation. Cypress had amended its complaint at the 12th hour, thereby forcing Maxim to file a second demurrer. The amendments themselves were insubstantial. Cypress refused to respond to Maxim’s demand for specification of the trade secrets at issue until four months had elapsed. When ultimately provided, those responses were evasive. And finally, in an act of outright absurdity (and stupidity), Cypress filed a frivolous motion to seal the aforementioned compilation of the names of 94 of its touchscreen technicians—– The list that Maxim prepared mostly from LinkedIn profiles. Ultimately, both the objectively baseless nature of the lawsuit and the manner in which Cypress pursued the litigation supported a finding of bad faith.

The Takeaways:

• Trade Secrets: I tell people that before they consider filing a lawsuit for trade secrets, they’d better make sure they have trade secrets. I know— that sounds ridiculous. But given the amount of frivolous trade secret litigation in our courts today, it’s a fair point. In fact, we just wrapped up a trade secret case in the United States District Court for the Middle District of Florida where the plaintiff – like Cypress – sought to voluntarily dismiss its case after concluding that its claims were bogus. I’d like to see more courts come down hard on the plaintiffs in these types of cases.  Some plaintiffs are able to avoid a finding of bad faith by dismissing before the record is fully developed.  That should be a nonstarter:  If you bring an objectively weak trade secret case and dismiss it before turning over discovery or letting the defendant build the record, you should have to pay for it.

• Employee Poaching and Raiding: Companies are always raising the issue of employee poaching or raiding. Where non-compete agreements are present, the predicate for liability is fairly clear (tortious interference if those agreements are enforceable). In the absence of non-compete agreements (e.g. California), there are still some plausible theories of liability, but those theories are far more limited.  We’re basically looking at theft of trade secrets or a violation of state unfair trade practices statute.  As for the first, without trade secrets and actual evidence of misappropriation, that’s off the table.  As for the second, a claim for unfair or deceptive trade practices based on employee raiding needs some sort of plus factor (i.e. something objectively deceptive or unethical).  Bottom line:  Just because a rival is trying to hire away your employees doesn’t mean it’s raiding and illegal. Here’s a link to my recent post on this topic.

• LinkedIn: There’s lots of litigation these days that implicates LinkedIn. If you can find it on LinkedIn, it is not a trade secret. I’ll go a step further: Even if it’s a compilation of LinkedIn contacts, it’s still not a trade secret. Don’t be ridiculous.

The case is Cypress Semiconductor Corp. v. Maxim Integrated Products, Inc., No. H038555, 2015 WL 1911121 (Cal. Ct. App. Apr. 28, 2015).

Jonathan Pollard is a trial lawyer and business litigation attorney based on Fort Lauderdale, Florida.  He focuses his practice on competition law and has extensive experience litigating non-compete, trade secret and antitrust claims.  He is licensed in all Florida federal and state courts and routinely represents clients in Miami, Fort Lauderdale, West Palm Beach, Fort Myers, Tampa, Orlando and Jacksonville. His office can be reached at 954-332-2380.