On November 13, 2018, the United States Court of Appeals, Fifth Circuit, affirmed the United States District Court for the Western District of Texas's denial of prevailing party attorneys' fees in a matter of first impression under the Defend Trade Secrets Act ("DTSA"). In short, the Fifth Circuit held that a dismissal without prejudice of a DTSA case does not support an award of prevailing party attorney's fees.
In context of Federal Fee Statutes, Dismissals Without Prejudice are Essentially Ties
Plaintiff sued in federal court alleging that Defendants stole proprietary software and a database in violation of the DTSA and related state law claims. Shortly thereafter, Plaintiff sought a preliminary injunction to stop Defendants from assuming the state contract and using the alleged trade secrets. The district court denied the request, after which Plaintiff sought permission to dismiss the case without prejudice.
Defendants opposed the motion on grounds Plaintiff was engaging in bad faith by seeking to avoid an adverse merits ruling and liability for substantial attorney's fees, but the district court nevertheless granted the motion. After dismissal, Defendants sought over $600,000 in attorney's fee which the district court denied. Defendants then appealed.
Application to DTSA Attorney's Fees Provision
The DTSA's fee-shifting provision provides, in relevant part:
[I]f 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, [a court may] award reasonable attorney's fees to the prevailing party.
18 U.S.C. § 1836(b)(3)(D).
Prevailing party status is therefore a necessary, but not sufficient, requirement for attorney's fees under the DTSA. To be eligible for attorney's fees, the seeking party must 1) prevail and 2) do so in one of the three listed scenarios that also require a showing of bad faith or malice. "Prevailing party" is a term of art and means the same thing under the DTSA as it does in other federal fee statutes like the Civil Rights Act, American with Disabilities Act, and the Copyright Act.
In upholding the district court's denial of Defendants' attorney's fees request, the Fifth Circuit observed that most federal fee statutes allow a court to award fees only to a prevailing party. Utilizing the standard for determining prevailing party status promulgated by the Supreme Court, the Fifth Circuit reasoned that a dismissal that allows for refiling does not result in a "material alteration of the legal relationship of the parties." Buckhannon Bd. & Care Home, Inc. v. W. Virginia Dept. of Health & Human Res., 532 U.S. 598, 604 (2001). As such, a dismissal without prejudice does not create a prevailing party.
The Defendants argued, however, that such a rule permits plaintiffs to evade paying fees by strategically seeking dismissal without prejudice once a plaintiff realizes the suit will fail. The Fifth Circuit noted, however, that the Federal Rules of Civil Procedure have built in safeguards against this behavior; namely, Rule 41 requires court approval for a dismissal without prejudice unless it occurs early in the suit while Rule 11 permits sanctions against a party litigating in bad faith even when there is no prevailing party.
The Fifth Circuit further rejected the Defendants' argument that "prevailing party" has a different meaning under the DTSA than all other federal fee statutes because it is modeled after the Uniform Trade Secrets Act ("UTSA") and many states adopting UTSA language take a broader view of prevailing party status in trade secret cases. The Fifth Circuit pointed out that these decisions do not turn on anything special about trade secret law, but instead rely on general state attorney's fees laws that more liberally award fees.
More importantly, the Fifth Circuit reasoned that prevailing party status in a federal statute is a question of federal law. When Congress repeats a term of art such as prevailing party in a new statute like the DTSA, "it knows and adopts the cluster of ideas that were attached to each borrowed work in the body of learning from which it was taken and the meaning its use will convey to the judicial mind unless otherwise instructed. Morissette v. United States, 342 U.S. 246, 263 (1952). In addition to the textual rationale for common interpretation of prevailing party across federal fee statutes, the Fifth Circuit also concluded that setting uniform rules for the numerous fee statutes would be more efficient for the district courts tasked with processing myriad such fee motions.
The Final Whistle on Prevailing Party Fees under the DTSA
In rejecting the Defendants' argument that prevailing party status was achieved when they defeated the request for preliminary injunction, the Fifth Circuit noted that, "prevailing party status ordinarily requires being ahead when the final whistle blows in a case, not a halftime." Dunster Live, LLC v. LoneStar Logos Mgmt. Co., LLC., 17-50873, 2018 WL 5916486, at *3 (5th Cir. Nov. 13, 2018).
The Court blew the final whistle on this issue by declaring, "[t]aking the lead early in the lawsuit thus did not make Defendants eligible for fees. Nor did the trial court's postponement of the litigation when it allowed Plaintiff to dismiss the federal suit without prejudice. The dispute has now been rescheduled for state court, where the winner will be decided. Because there was never a final score in this federal lawsuit, the DTSA does not allow attorney's fees." Id.
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