Defend Trade Secrets Act Part 3: Who picks up the check?

The Defend Trade Secrets Act [hereinafter ‘the Act’] explicitly allows attorney fee awards to a prevailing party where misappropriation claims were made in bad faith.  However, although the Act is a federal statute numerous federal district courts have relied upon state law when resolving whether to award attorney fees. For example, in Xoran Holdings LLC v. Luick et al., 2017 U.S.  Dist. Lexis 147868 (E. D. Michigan September 13, 2017) the court denied the defendant’s motion to dismiss his former employer’s trade secret misappropriation claim, but it also denied the employer’s request for attorney fees for two reasons. First, the employer had never provided the Act’s notice of whistleblower immunity in the defendant ‘s employment agreement or another appropriate  document. Because the Act explicitly requires this notice before an employer may recover attorney fees, then Xoran could not recover these fees. Secondly, the court observed that both Act and state trade secret law require allegations of willful misappropriation with malice for an award of attorney fees.

In Farmer’s Edge, Inc. et al. v. Farmobile LLC et al., 2019 WL 3747833 (D. Neb. August 7, 2018) hereinafter ‘Farmer’s Edge’ and ‘Farmobile’], Farmer’s Edge alleged that its former employee and a competing business misappropriated its confidential source code, but the defendants prevailed on the merits of the case.  The court denied the defendant’s request for attorney fees, because under both state and federal law the lawsuit was not brought in subjective bad faith and had not been objectively baseless. An appeal of this decision is currently pending in the U. S. Court of Appeals for the Eighth Circuit.

Farmer’s Edge and Xoran are not isolated decisions in which a federal court relied at least in part on state law when awarding attorney fees under the Act. For example, in Swarmify, Inc. v. Cloudflare, Inc., 2018 WL 4680177(N.D. Calif. September 28, 2018) the court awarded attorney fees to a defendant for proceedings occurring when the plaintiff improperly continued the litigation after unequivocal evidence exonerated the defendant. Relying in part on state law, the court held that maintaining the lawsuit after disclosure of this evidence was objectively baseless and for an improper purpose.

For an award of attorney fees under the Act there must also be a prevailing party, and whether a prevailing party exists is an issue raised in other Act decisions. The United State Court of Appeals for the Fifth Circuit has interpreted the Act’s term ‘prevailing party’ exclusively under federal case law. Dunster Live, LLC v.  Lonestar Logos Management Corp. et al., 908 F.3d 948 (5th Cir. 2018). In Dunster, the appellate court affirmed the denial of attorney fees to the defendant for the claim under the Act. In so holding the court explicitly stated that prevailing party status under the Act is exclusively determined by federal law.  More particularly, under federal law a dismissal without prejudice does not result in prevailing part status, and an earlier denial of the plaintiff’s request for an injunction also did not result in this status.

In Southern HVAC Corp. v. Konforte et al., 2019 WL 918072 (M. D. Fla. February 8, 2019), although not bound by Fifth Circuit precedent the magistrate relied upon Dunster to recommend that attorney fees be denied to the defendant.  In this instance the magistrate had originally recommended that the complaint be dismissed without prejudice, and under federal law dismissal without prejudice does not result in a prevailing party. Unfortunately, we do not yet know whether the remaining federal circuits will rely exclusively upon federal law to interpret ‘prevailing party’ as well as other terms of the Act.

© 2019 Adrienne B. Naumann, all rights reserved. Ms. Naumann does not endorse or sponsor the advertisements at adriennebnaumann.wordpress.com.

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