The state Superior Court has instructed a Potter County judge to calculate attorney fees in favor of the defense related to two trade secrets claims that the plaintiffs agreed to withdraw prior to prevailing before a jury in the remainder of their lawsuit.
A party seeking attorney fees under Pennsylvania’s Uniform Trade Secrets Act — the PUTSA — must prove bad faith, the standard for which the majority of the split Superior Court panel acknowledged was an issue of first impression in this state. And, while the court applied a test developed in California federal courts to resolve the case at bar, the majority declined to further adopt the two-pronged test as applicable to all PUTSA claims where a party alleges bad faith in seeking counsel fees.
The majority, led by Judge Christine L. Donohue, reasoned that because both parties and the trial court had used the test below, the panel would likewise use it to see if the trial judge had abused his discretion.
The test for bad faith is whether there was "objective speciousness" in the trade secrets claims and whether there was "subjective misconduct" by the plaintiff making the claim.
The underlying lawsuit in Krafft v. Downey is between two neighbors over an agreement in which plaintiffs Jack and Linda Krafft agreed to show defendants Lawrence and Jane Downey the method Linda Krafft used for her "flagstone art" business. The business, Framing on Stone, involves transferring images from artwork and photographs onto flagstone, a process Linda Krafft claimed she had revised, refined and made her own over the years, even though the general practice was, as she put it, "out there."
For $20,000 and 10 percent of the Downeys’ net sales, the Kraffts allowed the Downeys to use the company’s name and taught them the process.
The legal battle started when the Downeys stopped paying commissions to the Kraffts and started their own company, called Rock of Ages, using the same process, Donohue said.
Before deciding the case, Donohue devoted several pages of her 20-page opinion to reviewing federal district court decisions to use the two-pronged test, starting with the U.S. District Court for the Central District of California’s 1989 decision in Stilwell Development v. Chen. Other courts, including the Western District of Pennsylvania, have applied it, but the court noted other states have specifically defined bad faith for the purpose of awarding attorney fees and not adopted a uniform test.
In the instant case, over some apparent apprehension, the majority of the court utilized the test in order to decide if the trial judge abused his discretion but declined to adopt it in this state.
Donohue said the plaintiffs did not contest the objective speciousness of their withdrawn trade secrets claims, which she defined in a footnote as actions that superficially appear to have merit but completely lack supporting evidence.
Therefore, the subjective misconduct prong — which is fulfilled when a plaintiff knows or is reckless in not knowing that their claim for trade secrets misappropriation has no merit — was the only prong to resolve in Krafft.
Donohue said the defense survived the second prong, while the court’s dissenting judge contended the majority had confused the two prongs for one another.
For Donohue, the subjective misconduct was in plain sight.
Donohue noted that Linda Krafft, before she and her husband filed their trade secrets claims in an amended complaint, had testified that she learned the process she used to transfer images to flagstone was "out there" and could not be patented. The Downeys, during the same proceeding, presented evidence in the form of an expired patent on the subject and books and Internet information on the same.
That was at a January 2008 injunction hearing. Later that year, the Kraffts filed an amended complaint setting forth causes of action for a violation of the PUTSA, conversion of trade secrets, breach of contract and breach of implied duty of good faith.
After the Downeys moved for summary judgment on the two trade secrets claims, the Kraffts signed a stipulation to withdraw them, Donohue said. Before trial, the Downeys moved for attorney fees related to the expense of litigating the withdrawn claims. The judge dismissed it without prejudice, allowing the defendants to raise the issue again after trial.
At trial, the jury came back in favor of the plaintiffs on their breach of contract claims and against the defendants for their counterclaims. The defense again moved for attorney fees related to the trade secrets claims and the trial court denied its request.
For Donohue, the fact that the plaintiffs knew their process of transferring images onto the flagstone was "out there" before they filed the trade secrets claims was dispositive.
"In summary, not only did the Kraffts have irrefutable evidence that the process was not a trade secret, but the trial court made a clear determination that the process was not and could not be a trade secret when it denied their request for injunctive relief," Donohue said. "There is no question that the Kraffts were aware that they did not possess a trade secret when they filed the trade secret claims."
"In spite of that knowledge, they included the trade secrets claims in their amended complaint," she added.
Senior Judge Eugene B. Strassburger, in a five-page dissenting opinion, said there was no evidence the Kraffts engaged in subjective misconduct.
Strassburger noted the trial court concluded the Kraffts genuinely believed Linda Krafft’s refinement of the flagstone art process was a unique one. The evidence did not support the Downeys’ position that the Kraffts were reckless in failing to accept their claims lacked merit before the Downeys "put all their cards on the table" and moved for summary judgment, Strassburger said.
He concluded his dissent by taking issue with the majority’s decision to apply, and its subsequent application of, the two-pronged test, saying it is "clear from the extensive dicta in the majority opinion that the majority is not fond of the objective/subjective test applied by the federal courts in Uniform Trade Secrets Act — UTSA — claims related to attorney fees."
"In holding that the Kraffts are guilty of acting in bad faith because they should have known that they did not have a case, the majority has made subjective bad faith the same as objective bad faith," Strassburger said. "Thus, it is the majority, not the trial court, that has misapplied the law."
The Kraffts’ attorney, Vincent A. Coppola of Pribanic & Pribanic in Pittsburgh, said he plans to seek reconsideration by an en banc panel of the court.
"The majority really turned the standard of review on its head," Coppola said. "What is the standard of review? It’s abuse of discretion."
He agreed with Strassburger that the majority had, in Coppola’s word, "conflated" the issues of objective speciousness and subjective misconduct.
Paul J. Malizia of Malizia & Malizia in Emporium, Pa., represented the Downeys.
Malizia said he advocated the adoption of either the two-prong test under Stilwell or case law interpreting Pennsylvania Rule 1023.1 or 42 Pa.C.S.A. Section 2503(9).
Although the court did not officially adopt the test in applying it to the case at hand, Malizia said he was "100 percent satisfied" with the court’s analysis.
"I got no complaints. I don’t care how they got there," he said.
He said he acknowledged to the court that Stilwell has its complications, which the court apparently told counsel to address at oral argument of the case.
"I shrugged my shoulders at oral argument; I said, ‘I don’t disagree with you,’" Malizia added, referring to the court.
"But I also said there’s nothing else out there."
(Copies of the 25-page opinion in Krafft v. Downey, PICS No. 13-1128, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •