Absent an agreement to the contrary, the dismissal of a statutory cause of action providing for attorneys’ fees to the prevailing party would seem to entitle a defendant to its reasonable fees and costs. In a matter of first impression at the U.S. Court of Appeals level, the Fifth Circuit recently affirmed the denial of a request for attorneys’ fees in a case where the plaintiff dismissed its trade secrets claim under the federal Defend Trade Secrets Act without prejudice.
In Dunster Live v. LoneStar Logos Management Company, Dunster had a contract with the Texas state government to construct and install signs advertising food, lodging and gas stations on Texas highways. Shortly before the contract between Dunster and the state was to expire, members of Dunster left to form their own LLC, LoneStar Logos, and were awarded a new state contract. Dunster sued under the DTSA, claiming that LoneStar’s new members stole its proprietary software and a database before forming the new LLC.
When Dunster moved for a preliminary injunction it was swiftly denied, prompting the company to request a dismissal without prejudice from the district court. Despite LoneStar’s vociferous opposition on the ground that Dunster was engaging in “bad faith” by seeking to avoid an adverse merits ruling and liability for substantial attorneys’ fees, the court nonetheless dismissed the case without prejudice. Upon dismissal, LoneStar and its members sought to recover attorneys’ fees of approximately $600,000. The court denied the request, ruling that a dismissal without prejudice does not render a defendant a “prevailing party.”
Reviewing the district court’s ruling, the Fifth Circuit held that, as with other federal fee statutes, a dismissal without prejudice (no matter how frivolous the claim) does not render the defendant a prevailing party.
In response to the defendants’ argument that such a rule enables plaintiffs to bring frivolous claims and avoid poor results without penalty, the circuit court noted that the defendants did not appeal the actual dismissal without prejudice and did not file a motion for sanctions under Fed. R. Civ. P. 11.
The Fifth Circuit also refused to look to state laws that allowed for attorneys’ fees in similar situations. For example, Oregon law provides that, when a trade secrets plaintiff files a notice of voluntary dismissal, either with or without prejudice, the defendant is generally the prevailing party for purposes of award of attorneys’ fees. Keith Manufacturing Company. v. Butterfield; see also Krafft v. Downey, (remanding for attorneys’ fees even though the plaintiff had voluntarily withdrawn its claims by stipulation). In so doing, the Dunster Live court held that the definition of a prevailing party under a federal statute is a matter of federal law and that “when Congress repeats a term of art like ‘prevailing party’ in a new statute like the DTSA, it ‘knows and adopts the cluster of ideas that were attached to each borrowed word in the body of learning from which it was taken and the meaning its use will convey to the judicial mind unless otherwise instructed.’” The Fifth Circuit thus points out a new distinction between federal and state trade secrets laws.
Although the ramifications of this ruling are yet to be seen, it might embolden trade secret plaintiffs to file their claims only under the DTSA and to dismiss before final judgment to avoid paying attorneys’ fees. The lesson for trade secret defendants is to ensure that, in the event such a situation arises, they not only oppose a motion for a voluntary dismissal without prejudice, but also serve and file a motion for sanctions under Fed. R. Civ. P. 11 — and, if necessary, appeal the dismissal itself if it is granted without prejudice.