IP Law Daily Voluntarily dismissed DTSA claims not subject to award of defendant’s attorney fees
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Wednesday, November 14, 2018

Voluntarily dismissed DTSA claims not subject to award of defendant’s attorney fees

By Cheryl Beise, J.D.

A district court properly determined that the Defend Trade Secrets Act (DTSA) does not allow a defendant to recover attorney fees for defending against a plaintiff’s claims that were voluntarily dismissed without prejudice because the defendant in a such case does not qualify as a "prevailing party" under the statute’s fee shifting provision, the U.S. Court of Appeals in New Orleans has held. Because the interpretation of "prevailing party" status in a federal statute is a question of federal law, the defendants’ reliance on judicial interpretation of state statutes modeled on the Uniform Trade Secret Act was misplaced. Under federal statutes, such as the Copyright Act and the Patent Act, a dismissal without prejudice does not grant prevailing party status because it does not result in a "material alteration of the legal relationship of the parties" (Dunster Live, LLC v. LoneStar Logos Management Co. LLC, November 13, 2018, Costa, G.).

LoneStar Logos & Signs, LLC had a contract with the state to construct and install the blue informational signs on Texas highways. In the months leading up to the contract’s expiration in 2016, several members of LoneStar Logos & Signs formed a new company, which subsequently won the state contract for the signs. The remaining members, through a related limited liability company (the "plaintiff"), filed suit against the former members and their new company (the "defendants") in the federal court in the Western District of Texas, asserting claims for trade secret misappropriation under the DTSA and related state law claims. After the district court denied the plaintiff’s request for a preliminary injunction, the plaintiff moved to dismiss the case without prejudice. The plaintiff claimed it longer wished to pursue the federal trade secrets claim, which was the only basis for federal subject matter jurisdiction. The defendants opposed the motion, arguing that the plaintiff was engaging in "bad faith" by seeking to avoid an adverse merits ruling. The district court allowed the dismissal without prejudice and later denied the defendants’ motion for an award of more than $600,000 in attorney fees. The plaintiff filed essentially the same lawsuit in state court, but without the DTSA claim. The defendants appealed the district court’s denial of attorney fees, but not its dismissal without prejudice.

The DTSA allows a court to "award reasonable attorney’s fees to the prevailing party" in cases where "a claim of the misappropriation is made in bad faith, which may be established by circumstantial evidence, a motion to terminate an injunction is made or opposed in bad faith, or the trade secret was willfully and maliciously misappropriated" 18 U.S.C. §1836(b)(3)(D).

The Eleventh Circuit explained that most federal fee statutes allow a court to award fees only to a prevailing party and that a dismissal without prejudice does not make any party a prevailing one. Under the standard adopted by the Supreme Court for determining prevailing party status, a dismissal without prejudice that allows for refiling does not result in a "material alteration of the legal relationship of the parties." Buckhannon Bd. and Care Home, Inc. v. W.V. Dept. of Health and Human Res., 532 U.S. 598, 604 (2001). This standard has been applied to the fee shifting provisions in several federal statutes, such as the Copyright Act and the Patent Act.

The defendants also argued that making a "bad faith claim" of trade secret misappropriation supports a fee award even when the defendant has not officially prevailed. The court disagreed. Allowing bad faith alone to support a fee award would improperly read "the prevailing party" phrase out of the statute. To be eligible for an award of attorney fees, a party (1) must prevail and (2) must do so in one of the three listed scenarios that also require a showing of bad faith or malice, the court observed.

The defendants alternatively argued that if prevailing party status is a requirement for fees under the Defend Trade Secrets Act, then "prevailing party" should be interpreted similarly to state statutes based on the Uniform Trade Secrets Act (UTSA) because the DTSA also is modeled after the UTSA. One problem with this argument, the court pointed out, is that the judicial decisions cited by the plaintiff did not seem to turn on anything special about trade secrets law, but rather relied on general state attorney fees laws that more liberally award fees.

The larger problem with the defendant’s argument is that "prevailing party" status in a federal statute is a question of federal law, the court explained. "And when Congress repeats a term of art like ‘prevailing party’ in a new statute like the Defend Trade Secrets Act, it ‘knows and adopts the cluster of ideas that were attached to each borrowed word in the body of learning from which it was taken and the meaning its use will convey to the judicial mind unless otherwise instructed,’" the court said (citation omitted). Moreover, adopting uniform rules for the numerous federal fee statutes makes it more efficient for district courts to process the substantial numbers of fee motions they receive, the court noted.

Finally, the court rejected the defendants’ assertion that prevailing on the plaintiff’s motion for a preliminary injunction made them the prevailing party. Unlike a situation where a court grants a preliminary injunction due to a likelihood of success on the merits, which causes a party to change its behavior, the denial of an injunction does not change the status quo; it preserves it, the court said.

The winner of this dispute will be decided in state court. "Because there was never a final score in this federal lawsuit, the Defend Trade Secrets Act does not allow attorney’s fees," the court concluded. The district court’s judgment was affirmed.

This case is No. 17-50873.

Attorneys: Peter Dermot Marketos (Reese Marketos, LLP) for Dunster Live, LLC. Samuel Johnson (Scott Douglass & McConnico LLP) for LoneStar Logos Management Co., LLC d/b/a LoneStar Media Group and Media Choice, LLC. Andrew F. York (Armbrust & Brown, PLLC) for Johnston Media, LLC. Douglass Dodson Hearne, Jr. (Law Office of Douglass D. Hearne Jr.) for LoneStar Logos & Signs, LLC.

Companies: Dunster Live, LLC; LoneStar Logos Management Co., LLC d/b/a LoneStar Media Group; Media Choice, LLC; Johnston Media, LLC; LoneStar Logos & Signs, LLC

MainStory: TopStory TradeSecrets LouisianaNews MississippiNews TexasNews

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