Trade secrets can be one of the most important assets possessed by commercial entities, offering businesses and individuals valuable protection to their proprietary and confidential information. In 2016, these protections were codified on the federal level by the Defend Trade Secrets Act (DTSA), creating a federal civil remedy for misappropriation of trade secrets, and providing a ticket into federal court for any lawsuit asserting a DTSA claim. While the importance of such trade secret protection statutes is unquestionable, the availability of a federal cause of action can also provide an incentive to assert a DTSA claim for improper or entirely speculative bases, opening up a defending party to invasive and expensive discovery on a claim brought without a legitimate basis. To curb these occurrences, the DTSA and most parallel state statutes permit a prevailing party to recover attorney fees if they can show with direct or circumstantial evidence that a claim of misappropriation was made in “bad faith.” 18 U.S.C. §§ 1836(b)(3)(D).
However, federal courts across the country have had limited opportunity to consider what constitutes “bad faith” sufficient to entitle a movant to attorney fees, resulting in the absence of certainty in many jurisdictions regarding what conduct is sanctionable.
In those jurisdictions that have established how a movant can establish bad faith under trade secret misappropriation statutes, these requirements can vary drastically between jurisdictions, with courts split on whether objective bad faith, subjective bad faith, or a showing of both are required to establish “bad faith.” This is due to many federal courts looking to and adopting pre-existing state court frameworks as opposed to adopting a universal standard applied by other federal courts.
First, the “California Standard,” which provides the highest burden on a movant, requires that the misappropriation claim was asserted with both “objective speciousness” and “subjective bad faith.” See SASCO v. Rosendin Elec., Inc., 207 Cal. App. 4th 837 (2012). In other words, the movant must show not only that the plaintiff acted with a culpable state of mind (subjective bad faith) but must also show that the claims were objectively frivolous (objective speciousness). This or a similar framework has been adopted in other federal jurisdictions. See Aday v. Westfield Ins. Co., No. 21-3115, 2022 WL 203327, at *14 (6th Cir. Jan. 24, 2022) (a plaintiff must prove that “the claims advanced were meritless, that counsel knew or should have known this, and that the motive for filing the suit was for an improper purpose such as harassment.”).
Some jurisdictions have dropped the subjective requirement and have found that bad faith can be established by a showing that the claim is objectively meritless. See Akira Techs., Inc. v. Conceptant, Inc., 773 F. App'x 122, 125 (4th Cir. 2019); Insurent Agency Corporation v. Hanover Insurance Company, 2020 WL 86813 (S.D.N.Y. January 8, 2020) (claim must be “wholly without merit” to be entitled to attorney fees under the DTSA). However, as has been shown in these decisions, it is often very difficult for a party to make a showing of objective bad faith as all a plaintiff must do is provide some legitimate basis for believing misappropriation may have occurred.
By contrast, Illinois courts have ruled that in order to establish “bad faith” a movant need only establish subjective bad faith, meaning that if the circumstantial evidence demonstrates an improper motive for bringing the claim, a movant can be entitled to an award of attorney fees. See Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 1:16-CV-03545 (N.D. Ill. Nov. 30, 2020). In such cases, however, the courts have also noted that evidence that a claim was objectively meritless and that the asserting party was on notice of this fact is compelling evidence supporting a finding of subjective bad faith. Successful movants have also pointed to evidence such as a party’s disruptive or improper discovery tactics and other “litigation shenanigans” as a basis for finding subjective bad faith.
In summary, the burden to establish entitlement to attorney fees may be high but can vary significantly depending on the jurisdiction. No universally applied federal standard appears to be on the horizon, so counsel for all involved parties should familiarize themselves with the local standard for “bad faith” in order to determine the proper course of action as the specific facts of each case will strongly impact the outcome of seeking attorney fees as a prevailing party under the DTSA.
