A Voluntary Dismissal without Prejudice does not Yield a Prevailing Party for Purposes of Fee Shifting under the Defend Trade Secrets Act

December 12, 2018

In its first case construing the Defend Trade Secrets Act, the U.S. Court of Appeals for the Fifth Circuit held that defendants were properly denied attorneys’ fees after the district court granted the plaintiff’s Rule 41(a)(2) motion to dismiss the case without prejudice because the defendants were not “prevailing parties” under the Act, 18 U.S.C.S. § 1836 (b) (3) (D).  Dunster Live, LLC v. Lonestar Logos Mgmt. Co., LLC, No. 17-50873, 2018 U.S. App. LEXIS 32139 (5th Cir. Nov. 13, 2018).  

Plaintiff, Dunster Live, LLC and defendants used to be members of the same limited liability company.  The company had a contract with the state of Texas to construct and install traffic signs on Texas highways that advertise food, lodging and gas stations located at exits.  Before contract expiration in 2016, Defendants formed a new company without Plaintiff.  That new company won the state contract for the signs.

Dunster Live sued the defendants claiming they stole proprietary software and a database in violation of the Defend Trade Secrets Act and related state laws.  Plaintiff sought and was denied a preliminary injunction to stop the new company from taking over the contract and using the alleged trade secrets.  After denial of its preliminary injunction, Dunster Live moved for a dismissal without prejudice pursuant to Fed. R. Civ. P. 41(a)(2), which requires court approval for dismissal once the opposing party has answered or moved for summary judgment.  Notwithstanding Defendants claims of plaintiff’s bad faith, the court granted the motion to dismiss without prejudice.

Defendants then moved for an award of attorneys’ fees of approximately $600,000.  The district court denied the motion concluding that a dismissal without prejudice does not make the defendant a prevailing party because the plaintiff is “free to resurrect its claims against the defendant and may prevail at a later date.”  Indeed, after dismissal of the federal lawsuit, Plaintiff refiled the case in state court with the exception of the federal DTSA claim.

On appeal, the Fifth Circuit affirmed the denial of the fee award because “[a] dismissal without prejudice means no one has prevailed; the litigation is just postponed with the possibility of the winner being decided at a later time in a new arena.”  Slip op. at *4.  Rather, “a dismissal that allows for refiling does not result in a ‘material alteration of the legal relationship of the parties.’”  Slip op. at *4 (quoting Buckhannon Bd. and Care Home, Inc. v. W.V. Dept. of Health and Human Res., 523 U.S. 598, 604 (2001)).  The Fifth Circuit observed that the district court rejected defendants’ bad faith argument, which might have justified a dismissal with prejudice, and defendants did not appeal the court’s dismissal without prejudice. 

The Fifth Circuit similarly rejected the argument that the plaintiff’s alleged bad faith could justify a fee award even when the defendant has not officially prevailed.  The relevant statutory provision states:

[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).  The court reasoned that allowing a fee award based solely on bad faith would improperly read the “prevailing party” language out of the statute.  “Instead, the statute makes prevailing a necessary but not sufficient requirement for fees.  To be eligible, the party seeking fees (1) must prevail and (2) it must do so in one of the three listed scenarios that also require a showing of bad faith or malice.”  Id., Slip op. at *6.  The Fifth Circuit emphasized that “prevailing party” is a term of art in numerous federal fee-shifting statutes, and should be interpreted in the DTSA to mean the same thing it means in all of these other fee-shifting laws, which “makes it more efficient for district courts to process the substantial numbers of fee motions they receive.”  Id., Slip op. at 7-8. 

The court also rejected the argument that defendants were prevailing parties because they defeated the preliminary injunction motion.  The court recognized an exception that allows fees when a court grants a preliminary injunction because of a likelihood of success on the merits and that injunction causes the defendant to change its conduct thereby mooting the case.  However, the denial of an injunction does not change the status quo; rather it preserves it.  “Because there was never a final score in this federal lawsuit, the Defend Trade Secrets Act does not allow attorney’s fees.”