February 18, 2020

SDNY Court: Claim Must Be "Wholly Without Merit" to be Entitled to Attorney Fees Under DTSA

Holland & Knight Trade Secrets Blog
Dawn Rudenko Albert
Trade Secrets Blog

Magistrate Judge James L. Cott of the U.S. District Court for the Southern District of New York recently recommended denial of a motion for attorneys' fees to a prevailing party under the Defend Trade Secrets Act (DTSA). The motion was sought by one of three defendants, The Hanover Insurance Company, after all claims against it were dismissed through either a motion to dismiss or summary judgment. Insurent Agency Corporation et al. v. The Hanover Insurance Company et al., 2020 WL 86813 (S.D.N.Y. January 8, 2020).

Plaintiffs Insurent Agency Corporation and RS Holdings Corporation sued defendants, The Hanover Insurance Company, Guarantr LLC d/b/a The Guarantors Agency, and Ronald MacDonald, alleging inter alia, copyright infringement, unfair competition, trade secret misappropriation and several state law claims. Insurent was the first company to provide residential lease guarantees to tenants in New York City. The Guarantors Agency, formed by a former Insurant customer, began soliciting potential investors and insurance carriers to build a similar business. Hanover agreed to be Guarantors' insurance carrier, thereby authorizing Guarantors as Hanover's agent. Ronald MacDonald, a former Insurent employee, joined Guarantors. Plaintiffs' trade secret misappropriation claim arose from actuarial data included in a pitch presentation by Guarantors to Hanover, data of which Insurent claims was misappropriated.

After two motions to dismiss and a summary judgment motion, all claims against Hanover were dismissed. The surviving claims against the other defendants ultimately settled. Hanover moved for attorneys' fees and costs under the Copyright Act, Lanham Act and DTSA. Finding that Hanover was a prevailing party as to the claims that were dismissed based on the motion to dismiss and through summary judgment, the court considered whether, as the prevailing party, Hanover was entitled to coverage of its attorneys' fees under the DTSA.

Under Section 1836(b)(3)(D) of the DTSA, a court "may" award attorneys' fees if a misappropriation claim is made in bad faith, which may be established through circumstantial evidence. Finding that neither the legislature nor the courts have defined "bad faith" in the trade secret misappropriation context, the court turned to the U.S. Court of Appeals for the Second Circuit case law. The Second Circuit defines "bad faith" as a claim that is 1) meritless and 2) brought for improper purposes, e.g., harassment or delay. Both prongs must be met to find bad faith.

In support of its claim for attorneys' fees, Hanover relied on the district court's summary judgment finding on the DTSA claim wherein District Court Judge Lorna G. Schofield found that the plaintiffs' DTSA claim failed because no evidence was proffered evincing that Hanover had notice of any misappropriated trade secrets. Rejecting Hanover's position, the court concluded that nothing in the record showed that the DTSA claim was "wholly without merit and brought in bad faith." Plaintiffs' claim failed as a matter of "proof," not bad faith.

The court also rejected Hanover's argument that the DTSA claim was a fishing expedition that was baseless and costly. While acknowledging that it was sensitive to Hanover's argument that it incurred considerable expense to defend against the claim, the court also indicated its sensitivity to a plaintiff's common need to understand how a defendant operates to know what trade secrets have been misappropriated. The court also noted that the misappropriation claim survived against the other defendants, and the temporal connection and agency relationship between Hanover and Guarantors at least suggested trade secret misappropriation by Hanover. Therefore, the claim arguably had merit.

In summary, while the specific facts of each case will strongly impact the outcome of seeking attorneys' fees as a prevailing party under the DTSA, at least based on Magistrate Judge Cott's recommendation to the district court, the burden to establish that attorneys' fees are warranted may be high. Dismissal of all claims through a motion to dismiss or summary judgment, without more, may not be sufficient. Rather in the Southern District of New York, the prevailing party appears to be required to establish that the claim was "wholly without merit" – a significant hurdle to overcome – and that the party brought the claim for improper purposes. It remains to be seen whether other jurisdictions will apply a similarly stringent test.

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