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At a Glance
- A federal court applied the same two-part test to determine whether claims were brought in "bad faith" under both the federal Defend Trade Secrets Act (DTSA) and the California Uniform Trade Secrets Act (CUTSA).
- The court found that even though the trade-secret claims were dismissed on the pleadings, they were not "objectively specious" where the record showed a pattern of recruiting the plaintiff's engineers and plausible allegations of theft by former employees.
- The court held that because the claims were not objectively specious it did not need to consider whether the plaintiff acted with an improper purpose, and it denied OpenAI's request for more than $1 million in attorney's fees against SpaceXAI.
The Northern District of California recently addressed a recurring issue in trade-secret litigation: when can a defendant that wins dismissal make the plaintiff pay its legal fees? In SpaceXAI Corp. v. OpenAI, Inc., the court confirmed that both the DTSA and CUTSA allow a prevailing party to recover reasonable attorney's fees when a misappropriation claim is made in bad faith. The court's order clarifies that losing a case — even at the pleading stage — does not by itself establish bad faith.
Background
SpaceXAI sued OpenAI, alleging that OpenAI recruited and hired a series of former SpaceXAI engineers over a short period and encouraged them to share SpaceXAI's trade secret information. SpaceXAI alleged that at least two of those former employees took trade-secret information when they left. The court dismissed SpaceXAI's second amended complaint without leave to amend, and OpenAI then moved for more than $1 million in attorney's fees.
What the Court Decided
The Court Applied the Same Two-Part Test to Assess "Bad Faith" under Federal and California Law
The court applied a two-part test drawn from California law to assess bad faith: (1) whether the claim was objectively specious; and (2) whether the plaintiff brought or maintained the action subjectively in bad faith, meaning for an improper purpose. The court noted that California federal courts routinely apply the same test to DTSA claims, and that the Ninth Circuit has assumed, without deciding, that "bad faith" means the same thing under both statutes.
Claims Dismissed on the Pleadings Are Not Necessarily Objectively Specious
A claim is objectively specious when it superficially appears to have merit but there is a complete lack of evidence supporting it. The court acknowledged that the evidence was limited because the case ended on the pleadings. Even so, the court found that the uncontroverted record showed OpenAI's pattern of recruiting SpaceXAI engineers over a short time period, and that SpaceXAI plausibly alleged theft by at least two of the former SpaceXAI employees. Although the allegations fell short of plausibly showing that OpenAI itself acquired or induced SpaceXAI's former employees to exfiltrate SpaceXAI's confidential information, the court found that this did not amount to a complete lack of evidence.
Failing the First Prong Ends the Inquiry
Because the claims were not objectively specious, the court held that it did not need to reach the second prong — whether SpaceXAI acted with an improper purpose — and denied the fee motion. The order therefore leaves open how the court would weigh evidence of subjective motive, such as competitive or strategic reasons for filing suit, in a closer case.
What This Means for You
- Companies sued for misappropriation after hiring a competitor's employees should expect that winning dismissal will not automatically lead to recovery of legal fees. Indeed, a fee award generally requires showing a complete lack of evidence, not merely a pleading deficiency.
- Companies recruiting from competitors should recognize that a pattern of hiring, combined with misconduct by individual hires, may result in a lawsuit, and should consider onboarding certifications and instructions that new hires not bring prior employers' confidential information or trade secrets.
