Court Opinion

ID: 4428580
Source: CourtListenerOpinion
Date Created: 2019-08-20 19:09:15.268748+00
Date Added: 2024-06-11T08:48:14.587490
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
                               APPROVAL OF THE APPELLATE DIVISION
        This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the
     internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.

                                                         SUPERIOR COURT OF NEW JERSEY
                                                         APPELLATE DIVISION
                                                         DOCKET NO. A-4685-16T1

SOMA LABS, INC.,

          Plaintiff-Respondent,

v.

MANAVKUMAR G. SHAH
and VITACARE PHARMA,
LLC, f/k/a VITACARE LABS,
LLC,

          Defendants-Appellants,

and

PRIME PACK, LLC, d/b/a
PRIME PHARMACEUTICALS,

     Defendant.
_____________________________

                    Argued January 31, 2019 – Decided May 13, 2019

                    Before Judges Simonelli, O'Connor and DeAlmeida.

                    On appeal from Superior Court of New Jersey,
                    Chancery Division, Middlesex County, Docket No. C-
                    000114-13.
             Susheela V. Verma argued the cause for appellants
             (Law Offices of Susheela Verma, attorneys; Susheela
             V. Verma, of counsel and on the brief; Mildred V.
             Spiller, on the brief).

             Larry E. Hardcastle, II, argued the cause for respondent
             (Lanciano & Associates, LLC, attorneys; Larry E.
             Hardcastle, II, on the brief).

PER CURIAM

       In this matter, plaintiff Soma Labs, Inc. (Soma) alleged that its former

employee, defendant Manavkumar G. Shah, misappropriated its trade secrets

and breached a confidentiality and non-solicitation agreement by, in part,

soliciting Soma's major customer on behalf of Shah's business, defendant

VitaCare Pharma, LLC (VitaCare), a competitor of Soma.1                 Defendants

prevailed at trial, but appeal from the March 13, 2015 Chancery Division order

denying their motion for leave to amend their answer to assert a counterclaim

against Soma and a third-party complaint against Soma's principal, John

Botzolakis. Defendants also appeal from two separate May 22, 2017 orders

denying their motion for frivolous litigation sanctions pursuant to N.J.S.A.

1
    We shall sometimes collectively refer to Shah and VitaCare as defendants.

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                                        2
2A:15-59.1 and Rule 1:4-8, and their motion for fee-shifting under the New

Jersey Trade Secrets Act (NJTSA), N.J.S.A. 56:15-1 to -9.2 We affirm.

                                        I.

      We first address the denial of defendants' motions for frivolous litigation

sanctions under N.J.S.A. 2A:15-59.1 and Rule 1:4-8. The following facts inform

our review.

      Soma manufactures custom dietary supplements known as nutraceuticals,

which it ships to its customers who then sell them to the public under the

customers' brand names and labels.           Nutraceuticals are foods or tablets

containing health-giving additives.     To create a nutraceutical tablet, "[i]n

general, you take a mixed blend; you put it into the hoppers of a tablet machine;

get the weight, the hardness, the thickness. And once it's approved by the lab,

then it's run." However, in order to create the "mixed blend," the "manufacturer

must determine whether the formula is directly compressible in a tablet press or

will require granulation before it is compressible."

2
  Defendants also appealed from the June 18, 2015 order denying their motion
for reconsideration of the March 13, 2015 order; however, they failed to address
this issue in their merits brief. The issue, therefore, is deemed waived. See
Sklodowsky v. Lushis, 417 N.J. Super. 648, 657 (App. Div. 2011); Pressler &
Verniero, Current N.J. Court Rules, cmt. 5 on R. 2:6-2 (2019).
                                                                         A-4685-16T1
                                        3
      "Directly compressible means you can take that mixture, mix it, and put it

directly onto the tablet machine; it will run it." Where granulation is required,

"[i]t means the flow may be bad, the compressibility may not be good;

everything. There’s a list of things that may not allow the material to be

compressed."    Further, granulation is a lengthier process, taking "at least

[twenty], [twenty-five]" hours more than direct compression.

      Soma claimed it developed two processes, alleged to be trade secrets,

which would permit direct compression of mixtures otherwise requiring

granulation. The first purported trade secret was used to introduce moisture into

the mixture through a completely dry ingredient (the 1:1 trade secret). The

second purported trade secret eliminated undesirable tablet characteristics that

would otherwise have to be eliminated through granulation (the ratio trade

secret).

      Shah learned of the two processes during his employment with Soma. In

November 2008, Shah executed a confidentiality and non-solicitation agreement

(agreement), which precluded him from disclosing or using any of Soma's

confidential information and trade secrets, soliciting any of Soma's customers

for a three-year period following termination of his employment, or hiring any

of Soma's employees.

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                                       4
      Shortly after Shah's resignation in January 2011, Soma analyzed his

computer and discovered that he removed some of Soma's confidential

information while still employed, having sent it from his work email address to

his personal email address.     Soma also discovered that Shah forwarded

additional Soma business information to his personal email address after his

resignation and that defendants had hired a former Soma employee.

      Soma later discovered, in June 2013, that Shah had solicited a "large"

customer of Soma, discussing pricing for manufacturing nutraceuticals. As a

result, Soma filed a complaint against defendants asserting claims for breach of

the duty of loyalty, misappropriation of confidential and proprietary

information, tortious interference with contract, tortious interference with

prospective economic advantage, breach of contract, breach of the implied

covenant of good faith and fair dealing, unjust enrichment, violation of the

Computer System Act, N.J.S.A. 2A:38A-1 to -6, and misappropriation of trade

secrets. Soma later filed an amended complaint adding claims of conversion,

violation of the NJTSA, and fraudulent concealment and destruction of

evidence.

      The parties engaged in extensive motion practice during this litigation.

Defendants repeatedly argued before Judge Frank M. Ciuffani that Soma's trade

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                                       5
secrets claims were frivolous and "nothing more than a hoax" to harass

defendants and stifle competition. Notably, however, defendants consented to

the entry of temporary restraints, enjoining them, in part, from "using or

disclosing any confidential or proprietary information of [Soma,]" which

remained in effect throughout the litigation.      In addition, Soma withstood

defendants' motion for partial summary judgment, attempts to bar Soma's expert,

and defendants' motion for involuntary dismissal at the close of Soma's

evidence.

      Soma's central claim was that defendants misappropriated Soma's trade

secrets. Defendants' expert testified at the trial that the 1:1 trade secret was

actually a process in the public domain referred to as "moisture activated dry

granulation." He also testified that the ratio trade secret was in the public

domain, pointing to a nutraceutical product line, available at Walmart, that he

believed utilized the ratio trade secret in its manufacturing process.

      Judge Ciuffani ultimately held that Soma failed to prove that the 1:1 trade

secret and ratio trade secret were trade secrets or that Shah took trade secrets.

In reaching this conclusion, the judge found Soma failed to protect the

confidentiality of the purported trade secrets. For example, Soma did not have

contractors or visitors at its facility sign confidentiality agreements; Soma

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                                        6
utilized the purported trade secrets prior to 2008, several years before to having

its employees execute confidentiality agreements; and Soma did not adequately

designate formulations and other protocols as trade secrets. The judge credited

the testimony of defendants' expert that the two purported trade secrets were in

the public domain. The judge also found that Shah took Soma's confidential

information, but did not use it to compete against Soma.

      Notably, Judge Ciuffani did not rule against Soma because he believed its

claims lacked merit or that Soma instituted and continued the action in bad faith

or for an improper purpose. In fact, the judge had indicated the opposite. When

denying defendants' motion to dismiss at the close of Soma's case-in-chief, the

judge noted "there certainly was enough there, including expert testimony and

the like for the [c]ourt to find there . . . was protectable information." The judge

further noted that he had "granted motions to dismiss at the end of a plaintiff's

case. But this is a case where there's enough that's been put before this [c]ourt

on a prima facie basis to withstand a motion to dismiss." Further, the judge was

well aware of defendants' repeated assertion that the litigation was frivolous, but

made no finding the litigation was frivolous and nothing in the voluminous

record or the judge's extensive post-trial opinion indicate he ever believed the

litigation was frivolous.

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                                         7
      Nevertheless, defendants filed a post-trial motion for frivolous litigation

sanctions against Soma's attorney under Rule 1:4-8 and against Soma under

N.J.S.A. 2A:15-59.1. The backbone of defendants' frivolous litigation argument

was that Soma did not possess proprietary knowledge or information to

substantiate its claim for misappropriation of trade secrets and therefore brought

this litigation in bad faith to harass defendants and stifle competition.

      The record reveals that defendants served a safe harbor notice on Soma in

accordance with Rule 1:4-8 demanding dismissal of count four (Shah's

misappropriation of trade secrets), count five (Shah's misappropriation of

confidential     and   proprietary   information)   and   count   six   (VitaCare's

misappropriation of confidential and Proprietary information) of the first

amended complaint.       Defendants rooted the safe harbor notice entirely on

Soma's first amended response to interrogatory 2, which asked the following:

               State in detail, and not in summary fashion, each and
               every formulae that you claim to be proprietary and
               confidential together with the facts based upon which
               you allege that you spent significant amount of money
               and resources in developing the same and that the same
               have been stolen, misappropriated and used by the
               defendants.

The safe harbor notice stated that Soma's trade secrets claims were frivolous

because "[i]n its first amended response to [interrogatory 2], Soma admitted that

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                                          8
it is unable to 'identify documentation, which is proprietary and/or confidential

to Soma . . . that has been misappropriated by defendants herein'" and thus "the

factual   allegations   that   Soma's   proprietary    information      has      been

misappropriated does not have evidentiary support." However, Soma's entire

response to interrogatory 2 was as follows:

            Objection: As this interrogatory and several other
            interrogatories set forth compound questions and given
            the twenty (20) total number of interrogatories shown
            on the face of the subject First Set of Interrogatories
            served by the defendants, this interrogatory in the
            aggregate violates paragraph 3 of the July 22, 2013
            [c]ase [m]anagement [o]rder limiting interrogatory
            demands to twenty (20) with no subparts.

            Subject thereto and without waiving said objection, see
            the documentation produced in discovery and marked
            ATTORNEYS' EYES ONLY, CONFIDENTIAL or as
            unmarked, specifically, without limitation, see
            documentation bates stamped Soma v. Shah
            ATTORNEYS' EYES ONLY 001743 through 005376.

            More specifically, this interrogatory uses the term
            "formula." As a term of art in the nutraceutical
            industry, it is not the position of the plaintiff that a
            formula (i.e. a "label claim" or a "listing of
            ingredients") in and of itself constitutes a trade secret
            or is necessarily proprietary or confidential to
            [p]laintiff Soma Labs, Inc. However, it is the position
            of [p]laintiff Soma Labs, Inc. that formulations or
            "master formulas" with manufacturing method(s) and
            process(es) (as produced throughout the documentation
            bates stamped Soma v. Shah ATTORNEYS' EYES
            ONLY 001743 through 005376) are proprietary and

                                                                              A-4685-16T1
                                        9
           confidential to Soma Labs, Inc. and, furthermore, taken
           as a whole and in specific parts, constitute trade secrets.
           All of this documentation and the information
           embodied thereon constitute property and confidences
           of the plaintiff. Development of a formula in an
           acceptable dosage form involves knowledge of
           pharmaceutical sciences and years of experience in
           working with various products. Over the past fifteen
           (15) years, Soma Labs, Inc. has developed numerous
           products and spent many hours in resolving specific
           problems and/or refining formulations in order to
           manufacture products with quality attributes.

           Apart from the documentation identified and attached
           to the July 9, 2013 Botzolakis [c]ertification, until the
           defendants actually completely produce                the
           formulations and other documentation used in the
           enterprise of [d]efendant VitaCare Pharma, L.L.C., the
           plaintiff[] cannot at this time further identify
           documentation,      which    is   proprietary     and/or
           confidential to Soma Labs, Inc., that has been
           misappropriated by the defendants herein. The plaintiff
           thus expressly reserves the right to amend this
           interrogatory response accordingly.

           [(Emphasis added).]

The "documentation identified and attached to the July 9, 2013 Botzolakis

[c]ertification" was in addition to documents Soma had already produced to

support its trade secrets claims, and the newly produced documents included

hundreds of pages of confidential and proprietary information of Soma.

     Judge Ciuffani rejected defendants' challenge to the sufficiency of Soma's

response to interrogatory 2, finding the information contained within the

                                                                         A-4685-16T1
                                      10
documents Soma produced could form the basis of a trade secrets claim. The

judge expressly held, when discussing the response and the trade secrets theory

discussed within, that Soma was "very specific there. [Soma is] saying that it's

not just . . . a formula, it's the process."

      Judge Arnold L. Natali, Jr. heard defendants' motion for frivolous

litigation sanctions, as Judge Ciuffani had retired. Judge Natali reviewed the

entire record, including over forty-two orders, approximately 2400 pages of

exhibits, and twenty-one transcripts, and heard extensive oral argument. The

judge found the motion appeared to be procedurally defective. Nevertheless,

the judge addressed the merits and found "[t]here simply wasn’t anything in the

record that [he] could locate to indicate that Judge Ciuffani in either words or

substance concluded that the complaint [did not] have merit at any point." The

judge emphasized it was difficult to "harmonize [defendants'] positions [that the

litigation was frivolous] with the . . . undeniable fact that for some reason this

case was never dismissed on trade secret [grounds] or otherwise[.]" The judge

concluded that Soma's "firm[] belie[f] that the [complement] of events of

[Shah's] transfer of the data, the contracting of [Soma's] employee, the access

[Shah] had to information, and [Soma's] belief through expert testimony that [it]

had a trade secret was why [Soma] prosecuted [the action]."

                                                                          A-4685-16T1
                                          11
      On appeal, defendants argue that Judge Natali failed to consider the

significance of Soma's actions in bringing the lawsuit for which there were no

legitimate grounds and which was designed to harass defendants and stifle

competition.

      We review the judge's decision on a motion for frivolous lawsuit sanctions

under an abuse-of-discretion standard. McDaniel v. Man Wai Lee, 419 N.J.

Super. 482, 498 (App. Div. 2011). Reversal is warranted "only if [the decision]

'was not premised upon consideration of all relevant factors, was based upon

consideration of irrelevant or inappropriate factors, or amounts to a clear error

in judgment.'" Ibid. (quoting Masone v. Levine, 382 N.J. Super. 181, 193 (App.

Div. 2005)). We discern no abuse of discretion here.

      Rule 1:4-8 frivolous litigation sanctions against an attorney or pro se party

"are specifically designed to deter the filing or pursuit of frivolous litigation [.]"

LoBiondo v. Schwartz, 199 N.J. 62, 98 (2009). A second purpose of the rule is

to compensate the opposing party in defending against frivolous litigation. Toll

Bros., Inc. v. Twp. of W. Windsor, 190 N.J. 61, 71 (2007). The rule provides

for the imposition of sanctions where the attorney or pro se party filed a pleading

or a motion with an "improper purpose, such as to harass or to cause unnecessary

delay or needless increase in the cost of litigation[,]" Rule 1:4-8(a)(1), or by

                                                                              A-4685-16T1
                                        12
asserting a claim or defense that lacks the legal or evidential support required

by Rule 1:4-8(a)(2), (3) and (4). State v. Franklin Sav. Account No. 2067, 389

N.J. Super. 272, 281 (App. Div. 2006). "For purposes of imposing sanctions

under Rule 1:4-8, an assertion is deemed 'frivolous' when 'no rational argument

can be advanced in its support, or it is not supported by any credible evidence,

or it is completely untenable.'" United Hearts, LLC v. Zahabian, 407 N.J. Super.

379, 389 (App. Div. 2009) (quoting First Atl. Fed. Credit Union v. Perez, 391

N.J. Super. 419, 432 (App. Div. 2007)).

      The nature of litigation conduct warranting sanctions under Rule 1:4-8 has

been strictly construed. Pressler & Verniero, Current N.J. Court Rules, cmt. 2

on R. 1:4-8 (2019). Accordingly, Rule 1:4-8 sanctions will not be imposed

against an attorney who mistakenly files a claim in good faith. Horowitz v.

Weishoff, 346 N.J. Super. 165, 166-67 (App. Div. 2001); see also First Atl. Fed.

Credit Union, 391 N.J. Super. at 432 (holding that an objectively reasonable

belief in the merits of a claim precludes an attorney fee award); K.D. v. Bozarth,

313 N.J. Super. 561, 574-75 (App. Div. 1998) (declining to award attorney's fees

where there is no showing the attorney acted in bad faith).

      Frivolous litigation sanctions must be in accord with the procedural

requirements of Rule 1:4-8. Subsection (b)(1) of the Rule requires a party

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                                       13
seeking frivolous litigation sanctions to "file a separate motion [for the sanction]

describing the specific conduct alleged to be a violation of the Rule." Toll Bros.,

190 N.J. at 69. Prior to filing such a motion, the litigant seeking the sanction

must "serve a written notice and demand on the attorney or pro se party, which

must include a request that the allegedly frivolous paper [or pleading] be

withdrawn." Ibid. This notice is generally referred to as a "safe harbor" notice.

Ibid. The notice must "set [] forth 'with specificity' the basis for his or her belief

that the pleading is frivolous. The notice must be sufficiently specific and

detailed to provide an opportunity to 'withdraw the assertedly offending

pleadings.'" Ferolito v. Park Hill Ass'n, 408 N.J. Super. 401, 408 (App. Div.

2009) (quoting Trocki Plastic Surgery Ctr. v. Bartkowski, 344 N.J. Super. 399,

406 (App. Div. 2001)). Further, the motion must be filed "no later than [twenty]

days following the entry of final judgment." R. 1:4-8(b)(2). Strict compliance

with each procedural requirement is "a prerequisite to recovery[,]" and failure

to conform to the rule's procedural requirements will result in a denial of the

request for an attorney's fees sanction. Franklin Sav. Account No. 2067, 389

N.J. Super. at 281.

      The court may award reasonable attorney's fees and costs to the prevailing

party on a motion for frivolous lawsuit sanctions under Rule 1:4-8(b)(2). In

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                                        14
order to establish reasonableness, the moving party's attorney must submit an

affidavit of services along with the motion, Rule 4:42-9(b), which shall include

the following information:

            (1) the time and labor required, the novelty and
            difficulty of the questions involved, and the skill
            requisite to perform the legal service properly;

            (2) the likelihood, if apparent to the client, that the
            acceptance of the particular employment will preclude
            other employment by the lawyer;

            (3) the fee customarily charged in the locality for
            similar legal services;

            (4)      the amount involved and the results obtained;

            (5) the time limitations imposed by the client or by
            the circumstances;

            (6) the nature and length of the professional
            relationship with the client;

            (7) the experience, reputation, and ability of the
            lawyer or lawyers performing the services;

            (8)      whether the fee is fixed or contingent.

            [RPC 1.5(a).]

The affidavit of services must also include "a detailed statement of the time

spent and services rendered by paraprofessionals, a summary of the

paraprofessionals'     qualifications   and   the   attorney's   billing   rate   for

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                                         15
paraprofessional services to clients generally[,]" and a statement as to how much

the client had paid, and "what provision, if any, has been made for the payment

of fees to the attorney in the future." R. 4:42-9(b) and (c).

      N.J.S.A. 2A:15-59.1(a)(1), which governs frivolous litigation sanctions

against parties,3 provides that:

            [a] party who prevails in a civil action, either as
            plaintiff or defendant, against any other party may be
            awarded all reasonable litigation costs and reasonable
            attorney fees, if the judge finds at any time during the
            proceedings or upon judgment that a complaint,
            counterclaim, cross-claim or defense of the
            nonprevailing person was frivolous.

A finding that the pleading is "frivolous" must be based upon a finding that:

            (1) The complaint, counterclaim, cross-claim or
            defense was commenced, used or continued in bad
            faith, solely for the purpose of harassment, delay or
            malicious injury; or

            (2) The nonprevailing party knew, or should have
            known, that the complaint, counterclaim, cross-claim or
            defense was without any reasonable basis in law or
            equity and could not be supported by a good faith
            argument for an extension, modification or reversal of
            existing law.

            [N.J.S.A. 2A:15-59.1(b)(1)-(2).]

3
  Frivolous litigation claims against parties governed by N.J.S.A. 2A:15-59.1
are affected by the procedural but not the substantive provisions of Rule 1:4-8
governing attorneys. Toll Bros., 190 N.J. at 69-73.
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                                       16
The frivolous litigation statute is interpreted restrictively. DeBrango v. Summit

Bancorp, 328 N.J. Super. 219, 226 (App. Div. 2000). Sanctions should be

awarded only in exceptional cases. Fagas v. Scott, 251 N.J. Super. 169, 181

(Law Div. 1991).

      "'[T]he burden of proving that the non-prevailing party acted in bad faith'

is on the party who seeks fees and costs pursuant to N.J.S.A. 2A:15-59.1."

Ferolito, 408 N.J. Super. at 408 (alteration in original) (quoting McKeown-

Brand v. Trump Castle Hotel & Casino, 132 N.J. 546, 559 (1993)). When a

prevailing party's allegation is based on an assertion that the non-prevailing

party's claim lacked "a reasonable basis in law or equity," and the non-prevailing

party is represented by an attorney, "an award cannot be sustained if the '[non -

prevailing party] did not act in bad faith in asserting' or pursuing the claim."

Ibid. (quoting McKeown-Brand, 132 N.J. at 549). As we stated:

            The rationale for requiring proof of bad faith is that
            clients generally rely on their attorneys "to evaluate the
            basis in law or equity of a claim or defenses," and "a
            client who relies in good faith on the advice of counsel
            cannot be found to have known that his or her claim or
            defense was baseless."

            [Ibid. (quoting McKeown-Brand, 132 N.J. at 557-58).]

      "When the [non-prevailing party's] conduct bespeaks an honest attempt to

press a perceived, though ill-founded and perhaps misguided, claim, he or she

                                                                          A-4685-16T1
                                       17
should not be found to have acted in bad faith." Belfer v. Merling, 322 N.J.

Super. 124, 144-45 (App. Div. 1999). "Thus, a grant of a motion for summary

judgment in favor of a [prevailing party], without more, does not support a

finding that the [non-prevailing party] filed or pursued the claim in bad faith."

Ferolito, 408 N.J. Super. at 408.

      Defendants' motion was procedurally defective.             First, "a prevailing

party's obligation to give proper notice as a condition of recovering an award of

fees and costs is not fulfilled by a notice that alerts a party to the frivolous nature

of a different claim." Id. at 409. Defendants' safe harbor notice identified only

three of the fourteen claims in the first amended complaint as being frivolous,

namely, Shah's alleged misappropriation of trade secrets, and Shah's and

VitaCare's alleged misappropriation of confidential and proprietary information .

Thus, the safe harbor notice was ineffective as to the remaining claims.

      Second, Soma's response to interrogatory 2 was the sole basis for

defendants' claim that counts four, five and six were frivolous. The safe harbor

notice stated that Soma admitted it was unable to identify documentation, which

is proprietary and/or confidential to Soma that had been misappropriated by

defendants. The safe harbor notice did not state any other reason the claims

were frivolous. However, Soma produced documents, both before and with its

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                                         18
interrogatory response, that were proprietary and/or confidential to Soma, and

Judge Ciuffani found the information contained within those documents could

form the basis of a trade secrets claim. Thus, the safe harbor notice was also

inadequate as to the misappropriation of trade secrets and the misappropriation

of confidential and proprietary information claims.

      Lastly, defendants' counsel did not submit the mandated affidavit of

services. Rather, she submitted a lengthy certification replete with hearsay, in

violation of Rule 1:6-6. For all of these reasons, the motion was procedurally

defective warranting the denial of the motion. Franklin Sav. Account No. 2067,

389 N.J. Super. at 281.

      The motion was also substantively without merit for the reasons Judge

Natali expressed in his oral opinion. We have considered defendants' arguments

to the contrary in light of the record and applicable legal principles, and

conclude they are without sufficient merit to warrant further discussion. R.

2:11-3(e)(1)(E).   We are satisfied that defendants failed to establish the

requirements for frivolous litigation sanctions under N.J.S.A. 2A:15-59.1 and

Rule 1:4-8. Defendants failed to prove that Soma or its attorney acted in bad

faith in asserting or pursuing this matter.    To the contrary, the evidence

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                                      19
established that, however ill-founded or misguided Soma's conduct may have

been, it honestly sought to protect it business interests.

                                        II.

      Defendants also moved for fee shifting under the NJTSA. The statute's

bad faith litigation provision, N.J.S.A. 56:15-6(b), provides, in pertinent part,

that the court may award attorneys' fees and costs to the prevailing party if "a

claim of misappropriation is made in bad faith[.]" The NJTSA "is based on the

'Uniform Trade Secrets Act' [UTSA] prepared by the National Conference of

Commissioners on Uniform State Laws." N.J. Assembly Comm. Statement to

A. 921 (2011). Of the fifty-one jurisdictions to adopt legislation based on the

UTSA, only New Jersey has taken the measure of defining what constitutes "bad

faith." N.J.S.A. 56:15-6 defines "bad faith" as

            that which is undertaken or continued solely to harass
            or maliciously injure another, or to delay or prolong the
            resolution of the litigation, or that which is without any
            reasonable basis in fact or law and not capable of
            support by a good faith argument for an extension,
            modification or reversal of existing law.

The statute's definition of bad faith mirrors the language of Rule 1:4-8(a)(1)-(4)

and N.J.S.A. 2A:15-59.1(b)(1)-(2); therefore, the law interpreting the rule and

statute is instructive. There is thus no need to look to other jurisdictions for

guidance, as defendants propose, specifically California and Pennsylvania,

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                                        20
which adopt the standard of "objective speciousness . . . and subjective bad

faith," unknown in New Jersey law. See e.g SASCO v. Rosendin Elec., Inc.,

142 Cal. Rptr. 3d 828, 845-48 (Ct. App. 2012).4 Nevertheless, we address that

standard for the sake of completeness.

      We agree with Judge Natali that the out-of-jurisdiction case law is

inapposite and adopting foreign analysis would constitute a failure to recognize

that New Jersey veered from the UTSA by internally defining "bad faith." The

judge also recognized the similarities between N.J.S.A. 56:15-6, N.J.S.A.

2A:15-59.1, and Rule 1:4-8, finding that the New Jersey Legislature imported

N.J.S.A. 56:15-6 into the frivolous litigation standard.

      Lastly, Judge Natali reapplied the N.J.S.A. 2A15:59.1/Rule 1:4-8 standard

in the context of defendants' motion for fee shifting under the NJTSA, again

denying the motion for the same reasons he denied their motion under Rule 1:4-

8 and N.J.S.A. 2A:15-59.1. Because the judge made the correct legal decision

by analyzing N.J.S.A. 56:15-6 in terms of the existing New Jersey frivolous

litigation framework, we will briefly discuss his analysis of the "objective

speciousness and subjective bad faith" standard.

4
   Further, opinions from other jurisdictions are not binding on us. See
Lipkowitz v. Hamilton Surgery Ctr., LLC, 415 N.J. Super. 29, 36 (App. Div.
2010); R. 1:36-3.
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      Citing Yield Dynamics, Inc. v. TEA Sys. Corp., 66 Cal. Rptr. 3d 1, 28 (Ct.

App. 2007), Judge Natali found that under the "objective speciousness and

subjective bad faith" standard, the imposition of sanctions are not warranted for

merely "the inability to prove the necessary elements of the cause of action[,]"

objective speciousness. Citing Gemini Aluminum v. Cal. Custom Shapes, Inc.,

116 Cal. Rptr. 2d 358 (Ct. App. 2002), the judge determined that rather, a court

must also find "subjective misconduct by relying upon direct evidence of [a]

plaintiff's knowledge during certain points of the litigation and they also infer

from the specious[ness] [of] the trade secret claim." Citing Aerotek, Inc. v.

Johnson Grp. Staffing Co., No. C070832, 2014 Cal. App. Unpub. LEXIS 3365

(Ct. App. May 13, 2014), the judge considered the record in light of the above

standards and found it was insufficient to support fee shifting. The judge noted

that unlike the examples from California, such as testimony that the individual

who was seeking to put the other individual out of business, the judge found

nothing in the record to indicate "subjective bad faith."

      Judge Natali's review of defendants' motion for fee shifting under the

NJTSA was impressive; he considered the relevant factors, explored the

proposed alternatives, and reached a decision based on careful consideration of

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the statute, case law, and the record. His denial of defendants' motion for fee

shifting under the NJTSA was not an abuse of discretion.

                                       III.

      Defendants' remaining argument is that Judge Ciuffani erred in denying

their motion to amend their answer to assert a counterclaim against Soma and a

third-party complaint against Botzolakis for breach of the implied covenant of

good faith and fair dealing with respect to the agreement. Judge Ciuffani found

the amendment would be futile. We agree.

      "Rule 4:9-1 requires that motions for leave to amend be granted liberally."

Kernan v. One Washington Park Urban Renewal Assocs., 154 N.J. 437, 456

(1998). We review the grant or denial of a motion for leave to amend for abuse

of discretion. Franklin Med. Assocs. v. Newark Pub. Sch., 362 N.J. Super. 494,

506 (App. Div. 2003). "That exercise of discretion requires a two-step process:

whether the non-moving party will be prejudiced, and whether granting the

amendment would nonetheless be futile." Notte v. Merchs. Mut. Ins. Co., 185

N.J. 490, 501 (2006); see also Pressler & Verniero, Current N.J. Court Rules,

cmt. 2.2.1 on R. 4:9-1 (2019). Courts are thus "free to refuse leave to amend

when the newly asserted claim is not sustainable as a matter of law . . . [because]

a subsequent motion to dismiss must be granted." Notte, 185 N.J. at 501-02

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(quoting Interchange State Bank v. Rinaldi, 303 N.J. Super 239, 256-59 (App.

Div. 1997)).

       "A covenant of good faith and fair dealing is implied in every contract in

New Jersey." Wilson v. Amerada Hess Corp., 168 N.J. 236, 244 (2001) (quoting

Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420 (1997)). Our Supreme

Court has formulated the covenant as follows:

             In every contract there is an implied covenant that
             neither party shall do anything which will have the
             effect of destroying or injuring the right of the other
             party to receive the fruits of the contract; which means
             that in every contract there exists an implied covenant
             of good faith and fair dealing.

             [Id. at 245 (quoting Sons of Thunder, 148 N.J. at 421).]

To establish a claim for breach of the covenant, the claimant must allege conduct

by the opposing party which "destroyed [the claimant]'s reasonable expectations

and right to receive the fruits of the contract [.]" Sons of Thunder, 148 N.J. at

425.

       Defendants' argument in support of the amendment fell within three

general categories: (1) the agreement was a contract of adhesion, as it was

prepared by Soma without any input from Shah; (2) the agreement would

unfairly burden the future employment prospects of Soma's former employees,

as it contained one sided, vague and broad terms and would prevent an

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employee, including Shah, from engaging in gainful employment of their choice

after departure from Soma; and (3) Soma's creation and enforcement of the

agreement were both done in bad faith, as Soma had no definite information that

was deemed to be proprietary or was desired to be protected, Botzolakis was

aware of this, and Soma and Botzolakis knew that Soma was not facing any

irreparable harm.

      Defendants' proposed amendment, and argument in support thereof, failed

to allege the destruction of Shah's reasonable expectations and right to receive

the fruits of the agreement. Rather, as Judge Ciuffani noted, the amendment and

argument spoke only to whether or not the agreement was a valid enforceable

agreement. The judge was thus correct to disregard defendants' argument as

either the classic argument against enforceability of restrictive covenants in the

post-employment context, or a duplication of defendants' argument that Soma's

claims were frivolous.

      We recognize the defendants' argument relating to the adhesive formation

of a contract, or bad faith in its execution or enforcement, or the undue exercise

of discretion, can support an affirmative claim for a breach of the implied

covenant of good faith and fair dealing. See Seidenberg v. Summit Bank, 348

N.J. Super. 243, 260-61 (App. Div. 2002) (detailing many examples from case

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law of "the application of the implied covenant of good faith and fair dealing").

For example, in Seidenberg, the plaintiffs alleged that the defendant "used

insufficient energy in discretionary areas[,]" by failing to pursue leads,

withholding information, and frustrating and delaying marketing efforts. Id. at

261.

       This is akin to defendants' argument that Soma and Botzolakis unfairly

exercised discretion in broadly identifying purported trade secrets . However,

the missing link in defendants' argument is the effect the alleged undue exercise

of discretion had on Shah's reasonable expectations and right to receive the fruits

of the contract. Seidenberg is clear these factors are essential to sufficiently

allege a claim for breach of the implied covenant of good faith and fair dealing:

            That is, plaintiffs allege that [the defendant] failed to
            pursue or create leads, frustrated or delayed marketing
            efforts, and deprived plaintiffs of information which
            might improve their benefits under the contract, thus
            sufficiently alleging a cause of action under the
            discretionary tranche of the multi-faceted implied
            covenant of good faith and fair dealing.

            [Ibid. (emphasis added).]

See also id. at 262 (alteration in original) (In outlining a claim under the bad

faith tranche, "the issue is whether . . . [the defendant] acted in bad faith or

violated any commercially reasonable standard thereby depriving plaintiffs of

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their right to make a reasonable profit[]" from supply contract (quoting Wilson,

168 N.J. at 253)). In failing to address the effect of Soma's and Botzolakis's

alleged conduct on Shah's reasonable expectations and rights to receive the fruits

of the agreement, Sons of Thunder, 148 N.J. at 425, defendants did not propose

a legally sufficient claim of breach of the implied covenant of good faith and

fair dealing.

      Judge Ciuffani saw through defendants' transparent attempt to shelter its

argument under the "good faith and fair dealing" umbrella in an effort to raise

an affirmative claim. After affording defendants' attorney a second opportunity

to provide "an offer of proof" as to what counsel would present to the court to

substantiate the proposed claim, and receiving the same arguments in reply, the

judge properly denied defendants' motion.

      On appeal, defendants essentially "double down" on the argument made

before Judge Ciuffani, focusing on the broad language of the agreement and

Soma's and Botzolakis's alleged failure to identify trade secrets or proprietary

information. Again, defendants fail to address how these allegations, even if

true, destroyed Shah's reasonable expectations and right to receive the fruits of

the agreement.

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      Further, defendants argue that Judge Ciuffani denied the motion because

he was of the view that breach of the implied covenant of good faith and fair

dealing was not a stand-alone cause of action. The motion transcript plainly

contradicts this argument. It is clear from the colloquy between the judge and

defendants' attorney that when the judge said "[t]here is no such claim[,]" he

was referring to the deficient claim defendants were attempting to assert, which

did not conform to the requirements of a cause of action for breach of the implied

covenant of good faith and fair dealing.

      Because the proposed amendment was not sustainable as a matter of law,

the denial of defendants' motion to amend based on futility was not an abuse of

discretion.

      Affirmed.

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