California Court SLAPPs Down Employee’s Malicious Prosecution Suit Based on Employer’s Trade Secret Case Against Him

| Zuckerman Spaeder Team

Companies prize their formulas for best-selling products like nothing else.  Visitors to the World of Coca-Cola can visit the vault holding the soda syrup recipe.  And KFC’s fried chicken seasoning method has been described as one of its most valuable assets.

NuScience Corporation makes the skin product CELLFOOD, which it describes as an “oxygen and nutrient supplement” using “proprietary water-splitting technology.”  And as recounted by the California Court of Appeal in a recent opinion, NuScience  has fought hard to keep the CELLFOOD formula secret.  The California court’s decision addressed an unusual spinoff of NuScience’s trade secret battle: a malicious prosecution complaint filed by a former employee, David McKinney, who alleged that NuScience wrongfully brought a prior racketeering and misappropriation case against him.  See McKinney v. NuScience Corp., No. B240831 c/w B244074 (Cal. Ct. App. 2013).

According to the court, most of NuScience’s trade secret troubles involved the Henkel family – father John and sons Michael and Robert – who found a copy of the CELLFOOD formula after it had been purchased by NuScience.  After discovering the formula, the Henkels then repeatedly sought to sell it to other buyers, get money from NuScience to hand it over, or sell a competing product.  NuScience won federal court injunctions against the Henkels, but Michael and Robert didn’t stop their efforts.  And after NuScience fired McKinney, its vice president of sales and marketing, the Henkels got him involved in their efforts to discredit NuScience and use the formula.  NuScience then filed its racketeering lawsuit against McKinney and Robert Henkel, alleging that the two engaged in a conspiracy to disparage CELLFOOD and violate the federal judgment against Robert.  NuScience eventually dismissed that case without prejudice, asserting that it did so because Robert was threatening to disclose the CELLFOOD formula.

McKinney then filed a malicious prosecution lawsuit based on NuScience’s decision to voluntarily give up the case.  However, NuScience quickly moved to strike his lawsuit based on California’s anti-SLAPP statute (Cal. Code Civ. Proc., § 425.16). 

SLAPP is an acronym for “strategic lawsuit against public participation.”  Under the California anti-SLAPP law, a plaintiff can’t bring a lawsuit arising from a person’s exercise of their “right to petition” the government, unless the lawsuit meets certain requirement.  NuScience was exercising its right to petition when it filed the racketeering case, and therefore McKinney couldn’t sue it for that conduct – unless he satisfied the anti-SLAPP law.

The California Court of Appeal decided that McKinney could not meet the statutory anti-SLAPP test for three reasons: (1) he didn’t actually win the underlying racketeering case; (2) NuScience had probable cause to bring that case; and (3) NuScience relied on its lawyer’s advice in bringing the case.  The voluntary dismissal, the court said, didn’t reflect on whether the case had merit.  Further, NuScience had evidence to support its claims, because it had obtained an e-mail chain between McKinney and Robert Henkel in which the two had discussed using the CELLFOOD formula and disparaged NuScience’s manufacturing of the product.  Finally, it was undisputed that NuScience had provided this evidence to its attorney, who advised it to file the racketeering case.

As a result of losing on the anti-SLAPP issue, McKinney was ordered to pay NuScience $130,000 in attorneys’ fees.

The McKinney case teaches a couple of lessons.  First, if you are going to file a racketeering case against a former employee (or anyone else), you can help protect yourself from later allegations of malicious prosecution if you conduct a proper preliminary investigation and obtain the advice of outside counsel.  Second, malicious prosecution cases are difficult to win, especially in jurisdictions with anti-SLAPP laws, because they implicate a party's open access to the courts and right to petition the government for relief.

If you are interested in more information about legal issues involving executives and their employers, on December 10, 2013, Zuckerman Spaeder LLP partners and Suits by Suits contributing editors Ellen D. Marcus and Jason M. Knott will present a webinar titled “Whistleblower Watch: Big Issues in the Latest Whistleblower Cases Under Dodd-Frank, Sarbanes-Oxley, and the Internal Revenue Code.”  In the session, Ms. Marcus and Mr. Knott will discuss the basics of these whistleblower and anti-retaliation provisions and address new developments in the law, including the Sarbanes-Oxley case currently pending before the U.S. Supreme Court.  To register, click here.  For a chance to win free registration, click here.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

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