The Defend Trade Secrets Act (commonly called “DTSA”) is a federal law that prohibits trade secret misappropriation. DTSA states, at 18 U.S.C. section 1836(a), that “[a]n owner of a trade secret that is misappropriated may bring a civil action under this subsection if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” DTSA allows a party to recover “reasonable attorney’s fees the prevailing party” if a claim of misappropriation is “made in bad faith.” DTSA, however, does not define the term “bad faith.” A body of federal case law has evolved to determine what will trigger a determination of “bad faith” for recovery of attorney’s fees to the prevailing party. One of the predominant tests is the so-called “Stilwell test,” based on the decision from the United States District Court for the Central District of California in Stilwell Dev., Inc. v. Chen, 1989 WL 418783 (C.D. Cal. Apr. 25, 1989). Peter Mavrick is a Fort Lauderdale business litigation attorney, and represents clients in business litigation in Miami, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.
The Stilwell test is a two-pronged analysis that has been frequently adopted to evaluate claims of bad faith in the context of trade secret misappropriation. Under Stilwell, “[t]he party seeking an award of attorney’s fees must show (2) the objective speciousness of [an] opposing party’s claim, and (2) the subjective bad faith of the opposing party in bringing or maintaining the action for an improper purpose.” In Kipu Sys. LLC v. Zencharts LLC, 2021 WL 1891710 (S.D. Fla. Apr. 6, 2021), the United States District Court for the Southern District of Florida essentially used the Stilwell test. Kipu explained that “objective speciousness” means “generally shown with a demonstration that there was no misappropriation or threatened misappropriation or that the opposing party could not have suffered any economic harm…’Objective speciousness exists where there is a complete lack of evidence supporting Plaintiff’s claims.’” The second prong, requiring subjective bad faith, is satisfied when it may be inferred from the evidence that a party “intended to cause unnecessary delay, filed the action to harass [the opposing party], or harbored an improper motive.” Relying on California appellate court precedent, Kipu explained that “[s]ubjective bad faith means the action was commenced or continued for an improper purpose, such as harassment, delay, or to thwart competition…That question ‘involves a factual inquiry into the plaintiff’s subjective state of mind: Did he or she believe the action was valid? What was his or her intent or purpose in pursuing it?’” Kipu relied, in part, on case law from the United States Court of Appeals for the Sixth Circuit, in Degussa Admixtures, Inc. v. Burnett, 27 F.App’x 530 (6th Cir. 2008), concerning an award of attorneys’ fees in a trade secret case governed by Michigan law. Degussa awarded attorneys’ fees under Michigan law when the evidence showed, not that the plaintiff had an objectively supportable and good-faith claim that the defendant was using trade secrets to gain new customers, but that the plaintiff’s “own product-quality, employee-retention and marketing shortcomings led it to file this action in an attempt to slow the bleeding from those self-inflicted wounds—to avoid losing additional market share and salespeople to [the competitor] and to convert [the defendant’s] confidentiality agreement into a noncompete agreement.” The Degussa decision summarized its holding that, “[f]iling a trade-secret action to restrain legitimate competition and job mobility, needless to say, is not proper.”
Federal courts do not generally look at the failure to properly state a claim, by itself, as enough to warrant an inference of bad faith for an award of attorney’s fees. The United States Court of Appeals for the Eleventh Circuit, in Mar. Mgmt., Inc. v. United States, 242 F.3d 1326 (11th Cir. 2001), explained that “[i]n determining the propriety of a bad faith award, ‘the inquiry will focus primarily on the conduct and motive of a party, rather on the validity of the case.'”
Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.