Even if you are in the right when you file a lawsuit against a former employee who admittedly took your trade secrets, sometimes the reward is simply not worth the expense. Here, an employer had a former manager dead to rights in misappropriating trade secrets but still couldn’t get a jury to award a dime. Who was the prevailing party?
Employee Takes the ‘Good Stuff’
Applied Medical Distribution Corporation sells and distributes medical devices produced by its parent company, Applied Medical Resources. Stephen Jarrells began working for Applied as a director of academic medical centers in January 2011.
At the time he was hired, Jarrells and Applied entered into a proprietary information agreement, in which he agreed “to hold in strictest confidence, and not to use except for the benefit of the Company, or to disclose to any person, firm or corporation without written authorization of the Board of Directors of the Company, any trade secrets, confidential knowledge, data or other proprietary information.” He also agreed at termination he would “deliver to the Company (and will not keep in my possession, recreate or deliver to anyone else) any and all devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other [Applied] documents or property.”
During his tenure at Applied, Jarrells repeatedly was promoted, first to district sales manager, then to director of corporate accounts, director of advanced energy education, and finally vice president in charge of group purchasing organizations. In December 2018, he accepted a position as vice president of sales for Bruin, another medical device manufacturer.
Before resigning from Applied in January 2019, Jarrells created a folder on his laptop titled “Good Stuff” and copied to it trade secrets and confidential information belonging to Applied. He transferred the contents of the “Good Stuff” folder onto a thumb drive and uploaded them to a computer issued to him by Bruin. He then wiped his Applied computer and network drives and returned it to Applied. He shared Applied’s documents with employees of Bruin.
Jarrells knew his actions violated the proprietary information agreement. He admitted he never told anyone at Applied about his actions or requested their permission because he “did not want the company to know what [he] had done.” After noticing a suspicious increase in the volume of downloads and transfers of data, Applied hired an outside forensics expert to investigate the nature and extent of what Jarrells had done.
Employer Files Suit, But Jury Unimpressed
In February 2019, one month after Jarrells resigned, Applied sued him for misappropriation of trade secrets and breach of the proprietary information agreement, later adding a claim against Jarrells for breach of fiduciary duty and asserting claims against Bruin for misappropriation and intentional interference with contractual relations. Applied and Jarrells stipulated to an injuction that Jarrells would (1) return all files containing Applied’s business information and any devices on which such business information had ever been stored, (2) not destroy, manipulate, or alter any evidence, and (3) refrain from possessing, using, or disclosing Applied’s business information until a court lifted the restriction.
Following trial, a jury found the following:
- Jarrells breached the agreement and acquired, used, or disclosed Applied’s trade secrets by improper means—but that conduct wasn’t a substantial factor in causing damage to Applied or unjustly enriching Jarrells.
- Bruin acquired, used, or disclosed Applied’s trade secrets by improper means—but Applied wasn’t harmed, and Bruin wasn’t enriched by that improper acquisition, use, or disclosure.
- Jarrells didn’t breach any fiduciary duty to Applied, and Bruin didn’t interfere with any contract between Jarrells and Applied.
- The jury awarded no damages to Applied on any of its claims. Applied requested $3,348,878 in attorneys’ fees and $562,222 in costs, for a total of $3,911,100. The trial court granted fees of only $513,963 and $39,943 in costs. It made permanent the following injunction:
- Jarrells and Bruin are prohibited from possessing, using, or disclosing Applied’s trade secrets.
- Jarrells and Bruin must return to Applied its trade secrets and permanently delete that information from their electronic systems, devices, and accounts.
- Jarrells and Bruin must, at their own expense, retain a qualified and independent third-party computer forensic professional to examine their devices and electronic accounts, identify Applied’s trade secrets, and ensure the misappropriation of trade secrets has been remediated.
- Jarrells and Bruin must submit to Applied and the court a report by the third-party computer forensic professional describing the remediation protocols and their results.
Both parties appealed.
Even Though No Money Awarded, Applied Prevailed
Jarrells argued Applied couldn’t be the prevailing party on its trade secret misappropriation claim because, although the jury found he misappropriated the company’s trade secrets, it did not find that caused Applied to suffer damages or resulted in him being unjustly enriched. He argued he therefore prevailed on this claim because proof of damages or unjust enrichment is an essential element of a trade secret misappropriation claim.
By its terms, the California Uniform Trade Secrets Act (UTSA) doesn’t require proof of causation or damages as elements of a misappropriation claim. Nothing in the California UTSA supports an interpretation that a trade secret hasn’t been misappropriated unless the plaintiff can prove the misappropriation caused it to suffer damages or unjustly enriched the defendant. In light of the jury’s misappropriation finding and the court’s imposition of an injunctive remedy, Applied was the prevailing party on its trade secret misappropriation claim.
The trial court also ruled against Applied on the issue of willfulness, without sending the issue to the jury. The trial judge decided that willfulness required proof of bad intent behind the misconduct, which Applied wasn’t able to provide. The appeals court reversed that decision.
Jarrells admitted he knew downloading and taking Applied’s documents violated the proprietary information agreement. He took steps to conceal his acts of misappropriation by erasing the contents of his Applied computer to prevent the company from learning what he had done. He targeted and purposefully misappropriated its business plans, research and development documents, sales strategies, training information, and customer pricing information. He refused to return its trade secrets even after the preliminary injunction was in place. Based on all this, a reasonable jury could have concluded his misappropriation was willful and malicious. The trial court therefore erred by stopping this issue from reaching the jury.
Applied Entitled to Attorneys’ Fees, But How Much?
Applied was entitled to payment based on Jarrells’ agreement to reimburse it for the reasonable attorneys’ fees, costs, and expenses it incurred to obtain an injunction restraining him from breaching any of the covenants in the proprietary information agreement. The covenants included his agreement not to disclose its trade secrets to others or use its trade secrets to benefit anyone other than Applied. The court nevertheless awarded Applied substantially less than the full amounts it sought.
A trial court’s resolution of the attorneys’ fee issue must be affirmed if it is supported by substantial evidence. Because Applied prevailed on its trade secret claim against Jarrells, it was entitled to an award of the reasonable attorneys’ fees, costs, and expenses it incurred to obtain the permanent injunction against Jarrells. It has long been the law in California that, despite the general rule that all parties to litigation bear their own fees and costs, a litigant may obtain an award of reasonable attorneys’ fees and costs when it is a party to an agreement that provides for such an award.
Since Applied only received relief on its injunction claim and lost the three claims for monetary relief, the trial court cut the fee request by 75%. The appeals court reversed that formulation:
In applying a blanket 75 percent reduction, the trial court appeared to perform a mechanical, mathematical exercise, without any analysis of the extent to which the other three claims rested, in whole or in part, on the same core of underlying facts that formed the basis for the trade secret misappropriation cause of action. That was an abuse of the court’s discretion.
Rather, the trial court must “determine the extent to which the allegations supporting the four causes of action overlapped, including, by way of example, the extent to which the discovery and evidence reasonably necessary for Applied to prove its misappropriation claim overlapped with the discovery and evidence reasonably necessary for the other three causes of action.”
The trial court also erred in rejecting all of the expert witness costs. Under the agreement between the parties, the expert testimony regarding ongoing damage might not have been recoverable because Allied didn’t prevail on those claims. However, the company spent $80,000 on the expert examination of Jarrells’ computer right after he resigned to join the competition, and that’s where the theft of documents was found. Therefore, that was an expense necessary to enforce the trade secret contract between the parties and must be awarded.
Although the appeals court reversed the trial court’s order of a 75% reduction in fees and costs, it declined to determine the final amount of awardable fees, costs, and expenses. The trial court is in the best position to determine the extent to which the allegations supporting the four claims overlapped, so the appeals court sent the issue back to the lower court to make determinations regarding apportionment of the fees, costs, and expenses Applied reasonably incurred to prevail on its trade secrets claim and obtain equitable relief and to calculate a reasonable award based on them. The willfulness question was also sent back for further jury trial. Applied Medical Distribution Corporation v. Stephen Jarrells, Court of Appeal of the State of California Fourth Appellate District Division Three, G062056, Filed 33/8/24.
Bottom Line
Given Jarrells’ admittedly bad behavior, one wonders why a jury refused to award even a dollar, and why the trial court was so narrow in ruling on both willfulness and attorneys’ fees? Fortunately for Applied, it will have another day in court, where it can hope the judge and jury take a more generous view. But for now, winning the case was far more expensive than passing on it. That is the kind of cost-benefit analysis everybody should make before commencing litigation.
Mark I. Schickman is the editor of California Employment Law Letter. You can reach him at mark@schickmanlaw.com.