Krafft v. Downey

• Decision Date: 22 July 2013
• Parties: Jack and Linda KRAFFT, Appellees v. Lawrence M. and Jane A. DOWNEY, Appellants.
• Court: Pennsylvania Superior Court

68 A.3d 329

2013 PA Super 119

Jack and Linda KRAFFT, Appellees

v.Lawrence M. and Jane A. DOWNEY, Appellants.

Superior Court of Pennsylvania.

Argued Dec. 4, 2012.

Filed May 17, 2013.

Reargument Denied July 22, 2013.

Paul J. Malizia, Emporium, for appellants.

Vincent A. Coppola, Pittsburgh, for appellees.

BEFORE: DONOHUE, ALLEN and STRASSBURGER ^*, JJ.

OPINION BY DONOHUE, J.:

Lawrence M. and Jane A. Downey (“the Downeys”) appeal from the judgment entered against them following a jury verdict in favor of Jack and Linda Krafft (“the Kraffts”). Specifically, the Downeys challenge the denial of their motion for attorney fees under the Pennsylvania Uniform Trade Secrets Act (“the PUTSA”), 12 Pa.C.S.A. §§ 5301–5308. After careful review, we vacate the trial court's order and remand for further proceedings. ¹

The record reflects the following facts and procedural history relevant to this appeal. The Kraffts operated a business called “Framing on Stone,” selling pieces of flagstone that portrayed images transferred from photographs and works of art. Linda Krafft learned how to transfer images onto ceramics in 1995 while in Alberta, Canada by taking a course on the subject. After several years of experimenting and fine-tuning the process to work on flagstone, she began selling images she transferred onto flagstone at craft shows.

The Downeys, who were the Kraffts' neighbors and friends, expressed interest in creating and selling the flagstone art. On April 13, 2004, the two parties entered into a “Franchise Contract.” In relevant part, the contract permitted the Downeys to use the name “Framing on Stone,” and provided that the Kraffts would teach the Downeys the process used to transfer the images onto flagstone and identify the chemicals used in the process in exchange for $20,000.00 plus ten percent of the Downeys' net sales. The contract further prohibited the Downeys from revealing the process used to create the flagstone art to anyone.

The Downeys ceased paying commissions to the Kraffts in 2007. They also stopped using the name “Framing on Stone,” and began selling flagstone art, made using the same process, under the name “Rock of Ages.” On December 3, 2007, the Kraffts filed the original Complaint in this matter alleging that the Downeys were in breach of contract. On January 4, 2008, the Downeys filed an Answer, New Matter and Counterclaim. The Counterclaim included two counts: breach of contract by the Kraffts and fraudulent inducement based upon the Kraffts' representation that the process used was secret and proprietary.

On January 10, 2008, at the request of the Kraffts, the trial court held an injunction hearing.² At that hearing, Linda Krafft testified, inter alia, that she was aware that the process she was using to transfer images to flagstone was already “out there,” and that she previously investigated having the process patented through an attorney and learned that “[i]t could not be patented.” N.T., 1/10/08, at 16, 21. She testified that she nonetheless believed it to be “a secret process,” id. at 27, because of the steps she took to refine and modify it, e.g., painting the stones first, coating the prints four times, applying the coats in opposite ways, specifying the temperature of the water, sanding the stones, and using oil base. Id. at 28. She believed the process to be her own, without conducting any research, based upon the fact that she had “never seen anybody else do it.” Id. at 27. At that hearing, in opposition to the entry of an injunction against their use of the transfer process, the Downeys presented various exhibits revealing that the process was not only the subject of an expired patent, but readily discoverable in multiple books and articles available on the internet. Id. at 29–31, 33–34.

Following the injunction hearing, the trial court entered an order denying the requested relief. In its findings of facts and conclusions of law accompanying the order, the trial court stated the following:

While plaintiffs may have refined and made minor changes and improvements in the technology, the process of transferring images on to stone is in the public domain as it has been the subject of various expired patents.

* * *

The process used in creating images on stone by the plaintiffs and defendants is essentially in the public domain, and is not new or unique to the parties of this agreement.

Findings of Fact, Conclusions of Law and Discussion on Preliminary Injunction, 2/19/08, at ¶ 7 (Findings of Fact), ¶ 3 (Conclusions of Law) (emphasis added). The Kraffts did not appeal this decision although, pursuant to Rule of Appellate Procedure 311(a)(4), this denial of a request for a preliminary injunction was immediately appealable.

Thereafter, on August 1, 2008, the Kraffts filed an Amended Complaint, raising (I) a violation of the PUTSA, (II) conversion of trade secrets, (III) breach of contract, and (IV) breach of implied duty of good faith. The Downeys filed an Answer, New Matter and Counterclaim to the Kraffts' Amended Complaint on September 22, 2008, averring, inter alia, that the Downeys are entitled to attorney's fees because the Kraffts brought claims (I) and (II) (“the Trade Secret Claims”) in bad faith. The Kraffts filed a Reply to the New Matter and Counterclaim on October 30, 2008.

On November 20, 2009, the Downeys filed a motion for partial summary judgment on the Trade Secret Claims based upon the Kraffts' inability to prove that the process they used to transfer images to flagstone was a trade secret. On January 4, 2010, the Kraffts signed a stipulation to withdraw the Trade Secret Claims.

On February 10, 2010, the Downeys filed a motion for attorney's fees related to expenses incurred in defending the Trade Secret Claims. On March 17, 2010, the trial court entered an order dismissing the motion without prejudice to the Downeys' ability to raise the issue again at the conclusion of litigation. Following a jury verdict in favor of the Kraffts for breach of contract and against the Downeys for their counterclaims, the Downeys renewed their request for attorney's fees arising from the Trade Secret Claims. On February 14, 2012, the trial court denied their request.

The Kraffts filed a praecipe to enter judgment on February 24, 2012. The Downeys filed a timely notice of appeal on March 14, 2012, and thereafter complied with the trial court's request for a concise statement of errors complained of on appeal pursuant to Pa.R.A.P. 1925(b). On appeal, they challenge the trial court's denial of their request for attorney's fees pursuant to the PUTSA. Appellants' Brief at 4.

We review a trial court's determination regarding the award of attorney's fees for an abuse of discretion. Kraisinger v. Kraisinger, 34 A.3d 168, 175 (Pa.Super.2011). An abuse of discretion requires more than a difference of opinion as to the conclusion reached; rather, discretion is abused “if in reaching a conclusion, the law is overridden or misapplied, or the judgment exercised is manifestly unreasonable, or the result of partiality, prejudice, bias or ill-will, as shown by the evidence of record.” Id. (citation omitted).

The PUTSA provides, in relevant part, that “[a] court may award reasonable attorney fees, expenses and costs to the prevailing party: (1) if a claim of misappropriation is made in bad faith[.]” 12 Pa.C.S.A. § 5305(1). Neither the PUTSA nor any Pennsylvania appellate court defines the term “bad faith” as it applies to PUTSA claims. While nearly all of the states (as well as the District of Columbia and the U.S. Virgin Islands) have adopted the Uniform Trade Secrets Act (“the UTSA”) in some form, very few have defined what constitutes bad faith warranting the grant of attorney's fees. The Downeys, the Kraffts, and the trial court, both below and on appeal, unanimously agree that a two-prong test adopted by a number of federal district courts should be applied. See Appellants' Brief at 10–11; Appellees' Brief at 5; Brief in Response to Defendants' Motion for Hearing for Attorney's Fees, 3/15/10, at unnumbered page 3; Defendants' Proposed Findings of Fact and Conclusions of Law, 10/21/11, at 2; Trial Court Opinion, 2/14/12, at 1–2.

The two-prong test advanced by the parties in this case originated in 1989 in the United States District Court for the Central District of California in Stilwell Dev. Inc. v. Chen, 1989 WL 418783 (C.D.Cal. Apr. 25, 1989). The court in Stilwell was faced with a claim for attorney's fees under California's UTSA (“the CUTSA”), which contains a nearly identical provision for attorney's fees as the PUTSA. SeeCal. Civ.Code § 3426.4. The court recognized that the California state courts had not yet defined what “bad faith” meant in that context, but rejected the parties' suggestion that it look to federal law for guidance on the meaning. Instead, the Stilwell court considered the Commissioners' Comment that accompanied the UTSA's attorney's fee provision, which stated that the award of attorney's fees was intended to deter “specious claims of misappropriation.” ³ It found that “deterrence [ ... ] requires conduct more culpable than mere negligence. To be deterrable, conduct must be at least reckless or grossly negligent, if not intentional and willful.” Stilwell Dev. Inc., 1989 WL 418783, at *3. It further sought definition for the word “specious” in the Webster's Dictionary: “apparently right or proper: superficially fair, just, or correct but not so in reality [.]” Id. (citation omitted). In light of these considerations, the federal district court in Stilwell ultimately crafted a two-prong test for bad faith: (1) objective speciousness of the claim and (2) subjective misconduct by the plaintiff in making the claim (“the two prong test”). Id.

In 2002, California's Fourth District Court of Appeal adopted as the law of California the two-prong test to determine whether a claim of misappropriation of a trade secret is made in bad faith in Gemini Aluminum Corp. v....