The Ohio Supreme Court issued a significant opinion this morning affirming in large part a Columbus, Ohio jury’s award of $26.5 million to a small company and its founders who claimed that a trade secret case brought against them by their former employer was brought to disrupt or destroy their business. In American Chemical Society v. Leadscope, Inc., the Ohio Supreme Court found that Leadscope and its founders had properly asserted a claim for unfair competition arising out of malicious litigation. A link to the opinion, which is lengthy, can be found here.
Factual Background: In 2002, American Chemical Society (ACS) sued several former employees and their company, Leadscope, for allegedly stealing technology from ACS. Two of the former employees, Paul E. Blower Jr., Ph.D. and Glen J. Myatt, Ph.D., had worked to develop a software tool named Pathfinder that was intended to improve the ability of researchers to access and organize the voluminous information available in ACS’s databases. ACS suspended the Pathfinder project in 1997 to the disappointment of Blower and Myatt, who later left to form Leadscope and to develop a software product to aid in exploring and displaying chemical compounds.
ACS came to learn of Leadscope’s development of its software, carefully monitored its progress from afar, and ultimately claimed in the lawsuit that it was concerned that Leadscope had misappropriated its Pathfinder technology. In the spring of 2002, ACS demanded that Leadscope turn over its patent for its new software and pay ACS $1 million. When those negotiations broke down, ACS brought suit, made it known that the technology was in dispute, and made statements to others that Leadscope had improperly taken that technology from ACS. All of these actions substantially impacted Leadscope’s ability to get financing and run its business.
The inpidual defendants and Leadscope counterclaimed, arguing that ACS had brought the litigation in bad faith as part of a larger plan to disrupt, if not destroy, their new business. A jury awarded over $26.5 million in compensatory and punitive damages to Leadscope and the former employees, as well as attorneys fees, which has now swelled to over $40 million due to additional attorneys fees and prejudment interest. The Tenth District Court of Appeals affirmed the jury’s verdict and agreed the trial court had properly applied a subjective “bad faith” standard, as opposed an objectively baseless standard, in finding that a claim for malicious prosecution existed. The Tenth District also found that the award of attorneys fees was proper under Ohio’s Uniform Trade Secret Act because of the jury’s finding that the trade secret claims were in bad faith.
The Ohio Supreme Court’s Holding: The Supreme Court grappled with the issue of whether a claim for unfair competition could include a theory of malicious litigation, a contention that had sufficiently troubled the State of Ohio enough that the Ohio Attorney General’s Office had filed an amicus brief and appeared and argued in support of ACS’s position.
As an initial matter, the Supreme Court disagreed with the application of the “bad faith” standard by the trial court and Tenth District, reasoning that a party had to show that the legal action is objectively baseless and that the opposing party had the subjective intent to injure the party’s ability to be competitive. In applying that “objectively baseless” standard, the Supreme Court found that the claims against ACS remained viable and that there was no evidence in the record to support ACS’s supposed trade secret claims. For example, the Supreme Court noted that ACS had failed to provide any support for its claims of misappropriation and emphasized the gaps in the testimony of the witnesses that ACS had called. On this point, the Supreme Court summarized that “ACS presented a theory, but offered no concrete evidence that Leadscope stole its product.”
As for the issue of ACS’s subjective intent, the Supreme Court found ample support for the jury’s finding that ACS had the intent to injure Leadscope and its founders. It noted that ACS’s president had closely monitored Leadscope and had even sent out an email to then-Ohio-Governor Robert Taft to abort a visit by the governor to Leadscope’s offices. ACS’s former information technology director also provided damaging testimony documenting ACS’s president’s hostility towards Leadscope. In addition, ACS took actions or made statements that interfered with Leadscope’s ability to get funding (for example, by dissuading an venture capitalist interested in investing in Leadscope by telling him that there were legal issues with Leadscope’s technology) and took actions in the litigation to disrupt Leadscope’s ability to get insurance coverage for the dispute.
The Takeaway? As numerous other high profile cases have been brought recently against law firms and former employers for allegedly bringing trade secret actions in bad faith, this case may prove to be a bellwether opinion. The ACS case provides a lesson in the dangers of potentially overreaching in a weak trade secrets case, as well as on the power of the “David v. Goliath” theme for juries. Seemingly innocent or unrelated actions were woven together very effectively to show malice and an intent to destroy or disrupt a promising business, but those facts would have been of no value if ACS had been able to objectively demonstrate that it had a trade secret claim in the first place.
Further Thoughts (Sept. 19, 2012): One of the challenges in blogging is the importance of posting timely and concisely. In my zeal to get this post up about a very important case here in Ohio, there were two other points that in retrospect that I should have made:
(1) There was a defamation claim premised on some of the statements made to the local press and in a company-wide email that the Supreme Court dismissed; this too was an important issue and claim and I will cover it in a future post. The dismissal of the defamation claim will probably lead to a substantial reduction in the award, although it is unclear how much from the face of the majority opinion; and
(2) There are a number of interesting procedural issues presented by this 4-3 ruling (especially for Ohio lawyers). In particular, the Supreme Court’s decision to affirm after reviewing the “voluminous” record rather than to remand it back for another trial, despite its imposition of a new legal standard on the unfair competition claim, appears to be highly unusual and will be talked about by lawyers here in Ohio for some time to come.