Federal District Court Declines to Award ‘Bad Faith’ Fees for Party’s Failure to Sufficiently Identify Trade Secrets in Federal Claim

See Design Gaps, Inc. v. Hall, No. 3:23-CV-186-MOC, 2024 WL 203244 (W.D.N.C. Jan. 18, 2024). 

While the Act permits “bad faith” fees as to “transparently flawed” claims, the court declined to award such fees absent actual findings of bad faith or conduct warranting punishment or deterrence. 

Background

Jocelyn Hall resigned her employment with Design Gaps and went to work for Design Gap’s competitor, Peters Custom Homes. Design Gaps and its officers sued both Hall and Peters Custom Homes in federal court, bringing claims for false advertisement and designation of origin under the Lanham Act, and several state law claims including misappropriation of trade secrets, unfair and deceptive trade practices, and tortious interference with contract.

Hall and Peters Custom Homes moved to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim, but the Design Gap plaintiffs amended their complaint, which mooted the motion before resolution. The amended complaint added a claim for misappropriation of trade secrets under the DTSA. The defendants again moved to dismiss. The district court granted the defendant’s motion, resolving the federal claims in favor of the defendants and declining supplemental jurisdiction over the state law claims. According to the court, the Copyright Act preempted the Lanham Act claims, and the DTSA claim failed because the plaintiffs had not sufficiently identified the trade secrets at issue, nor had they refrained from disclosing the alleged secrets. Following dismissal, the defendants moved for “bad faith” fees under the Lanham Act and the DTSA. The district court denied fees under both. 

Defend Trade Secrets Act. The district court found that while Hall and Peters Custom Homes could have satisfied the standard for fees under the DTSA, such an award fell within the court’s discretion and was not warranted in this case. The DTSA allows recovery for cases in which a plaintiff raises a claim for misappropriation of trade secrets in “bad faith,” meaning the claim has no chance of success. Id. at *4 (citing Akira Techs., Inc. v. Conceptant, Inc., 773 Fed. Appx. 122, 126 (4th Cir. 2019). 

Hall and Peters Custom Homes argued that the Design Gaps plaintiffs’ failure to identify the trade secrets at issue evidenced their bad faith in bringing the DTSA claim. The court agreed that it was difficult to find that the claims had any chance of success. Indeed, the plaintiffs not only failed to sufficiently define the trade secrets at issue but had also already disclosed the alleged secrets. Still, however, the court noted that the Black’s Law Dictionary’s definition of “bad faith” focuses on improper intent and that it was not persuaded that the Design Gaps plaintiffs’ shortcomings warranted a finding of bad faith. While the claims were “transparently flawed,” there was no evidence of a dishonest belief, purpose, or motive.

Takeaway

Courts have set a high bar for recovery of “bad faith” attorney’s fees, and the court in Design Gaps reinforces this bedrock principle. A party’s mistakes or flawed litigation strategy, while not always ideal or convenient, may not be sufficient to justify recovery of attorney’s fees — at least not with respect to “bad faith” fees under the DTSA, and at least not with respect to failure to sufficiently identify trade secrets.

Contact Linda Jackson or Tierra Jones if you have any questions regarding this article.