November 26, 2018

A Dismissal Without Prejudice May Not Support Fee Award Under the DTSA

Holland & Knight Trade Secrets Blog
Dawn Rudenko Albert

In a case of first impression, Judge Gregg Costa of the Fifth Circuit, affirming a lower court decision, held that a dismissal without prejudice of a Defend Trade Secrets Act (DTSA) case does not support a prevailing-party fee award. Dunster Live, LLC v. Lonestar Logos Management Company, (5th Cir.-- F.3d -- (2018)) 2018 WL 5916486.

The plaintiff and defendants are former members of a limited liability company that previously had the contract with Texas to construct and install highway signs at approaching exits. Prior to the expiration of that contract, the defendants formed a new company without the plaintiffs. The defendants' new company won the new contract. The plaintiff sued in the Western District of Texas claiming that the defendants stole proprietary software and a database in violation of the DTSA.

After losing its preliminary injunction motion, the plaintiff sought to dismiss the litigation without prejudice claiming that it was no longer going to pursue the federal trade secret claim – the basis for federal subject matter jurisdiction. Opposing the motion, defendants argued that the plaintiff was acting in bad faith only seeking to avoid an adverse merits decision and liability for attorneys' fees. The lower court granted the dismissal without prejudice. After dismissal, the defendants sought $600,000 in attorneys' fees. Denying the fee request, the district court ruled that a dismissal without prejudice does not make the defendant a "prevailing party" under the attorneys' fees provision of the DTSA.

On appeal, the defendants offer several theories as to why a fee award under the DTSA is warranted by a dismissal without prejudice. They first claim that to find otherwise allows plaintiffs to seek a dismissal without prejudice to evade a fee award. Rejecting this argument, the court notes that a later requested dismissal without prejudice requires court approval, which may be denied based on a plaintiff's bad faith. The district court made no such finding, and defendants did not appeal that issue.

Turning to the DTSA fee provision, the court concludes that the statute expressly requires both "bad faith" and a "prevailing party" for a fee award. And that applying bad faith alone to support a fee award would improperly read the "prevailing party" language out of the statute. "Erasing 'prevailing party' from the fee statute would be especially troubling because it is a term of art that Congress has used in numerous attorney's fees statutes."

In their final argument, the defendants posit that if "prevailing" is required for a DTSA fee award, which is modeled after the Uniform Trade Secrets Act (UTSA), then it should be construed similar to state adopted laws modeled under UTSA, some of which take a broader view of prevailing party status in trade secret cases. According to the defendants, because they prevailed at the preliminary injunction stage, they should be considered prevailing parties for purposes of a fee award under the DTSA.

Unpersuaded, the court concluded that those laws do not turn on trade secret law, but rather on general state attorney fee laws that can more liberally award fees. As a federal statute, absent other instructions by Congress, the "terms of art" used in the DTSA must be interpreted to mean the same thing that those same terms mean in other federal statutes. Under those statutes, prevailing party means that there is a "winner." A "[p]revailing party [] requires being ahead when the final whistle blows in a case, not at halftime."

Accordingly, while courts have awarded attorneys' fee under the DTSA, a fee demand may be refused if the case is dismissed without prejudice. See Trade Secret Defendant Awarded Fees for "Objectively Specious" DTSA Claim.

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