noncompete bookA crucial weapon in pursuing trade secret theft claims is the Defend Trade Secrets Act.

But it's a double-edged sword.

How Filing an Improperly Vetted DTSA Claim Can Prove Very Costly

To be sure, the Federal Defend Trade Secrets Act affords claimants who prove their case significant relief that would otherwise be unavailable, such as the possibility of bringing your action in Federal court (which would often be unavailable without this federal statute), including the benefit of a typically faster docket, and what is generally assumed to be a stronger bench than its state counterpart. Moreover, the DTSA specifically provides that if it is found that the trade secret information was misappropriated willfully or maliciously, the offending party can be hit with double damages as well as attorney's fees

Therefore, it is certainly understandable why many companies seeking to aggressively protect their proprietary information would prefer to include a cause of action for violations of the federal Defend Trade Secrets Act among their state common law (i.e., non-statutory) causes of action for trade secret misappropriation, 

That said, DTSA claims come with a prominent warning label, as noted in a recent decision that was handed down by a Federal District Court for the Southern District of New York in Transperfect Global Inc. v. Liobridge Technologies, Inc. et al. just a few weeks ago, on May 31, 2022. 

What Happened in Transperfect Global Inc. v. Liobridge Technologies, Inc.

In Transperfect, the plaintiff sued, asserting that the defendants had improperly gained access to TransPerfect’s proprietary pricing methodologies during an auction and used this information to poach TransPerfect clients. The problem was, they had no hard proof to back up their claims, which ultimately led to the dismissal of their claims on summary judgment.

And that's where it got really interesting - because the defendants were represented by a megafirm, who now asked the court to pass on their legal fees , which totaled more than $11 million - to the plaintiff, who they contended brought this action without adequate basis and in bad faith.

In response to the motion seeking recovery of their legal fees, the District Court stated, in pertinent part, as follows:

"The DTSA permits a court to “award reasonable attorneys’ fees to the prevailing party” when a claim of misappropriation is “made in bad faith,” which “may be established by circumstantial evidence.”  18 U.S.C. § 1836(b)(3)(D).  Courts also have the inherent power to award attorneys’ fees for bad faith.  Kerin v. U.S. Postal Serv., 218 F.3d 185, 190 (2d Cir. 2000).  To impose fees through a court’s inherent power, the movant must satisfy a two-pronged standard.  It must show “first, that the challenged claim was without a colorable basis and, second, that the claim was brought in bad faith, i.e., motivated by improper purposes such as harassment or delay.”  Int'l Techs. Mktg., Inc. v. Verint Sys., Ltd., 991 F.3d 361, 368 (2d Cir. 2021) ...

"There is no question that the Defendants are the prevailing party in this litigation.  At issue is whether they have shown that TransPerfect brought the misappropriation claim in bad faith ... In defending its filing of the lawsuit, TransPerfect principally explains that it did not bring the action until after its counsel had spent months trying to understand what Evaluation Material had been provided to H.I.G. and performing legal research, after it heard that its sales staff “felt” that Lionbridge was competing unfairly, and after its counsel had interviewed a 6 “whistleblower” for an hour. While feelings may provide a reason to investigate a claim, they do not provide a good faith basis for filing an action.  It also appears that any reasonably conducted interview of the so-called whistleblower would have quickly revealed that he could provide no adequate support for the claims brought here. ... 

" The Court of Chancery compared Transperfect's litigation strategy as akin to "throwing pizzas at the wall" ...."

Ultimately, the Court denied the motion seeking attorneys' fees and costs, but in light of the above, it is also clear that the plaintiffs avoided this $11 million plus sanction by the skin of their teeth.

 

 

 

 

Jonathan Cooper
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Non-Compete, Trade Secret and School Negligence Lawyer
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