trade secrets litigationIn June 2022, a federal judge sitting in the Southern District of New York issued an order denying defendants Lionbridge Technologies, Inc. (“Lionbridge”) and its parent company HIG Middle Market, LLC (“HIG”) attorneys’ fees and costs related to their assertion that plaintiff Transperfect Global, LLC (“Transperfect”) brought a misappropriation of trade secrets claim under the Defend Trade Secrets Act (“DTSA”) in bad faith. The 2019 lawsuit was filed roughly 15 months after completion of a bidding war for the sale of Transperfect in a Delaware court-supervised auction. One of the participants in the auction was HIG, which had acquired Lionbridge—a competitor of Transperfect—in February 2017. In its suit, Transperfect alleged that HIG engaged in “fake bidding” during the auction so that it could access trade secrets in the form of confidential pricing data and customer lists and improperly share them with Lionbridge to poach two of Transperfect’s biggest clients.

During the course of the lawsuit, Transperfect sought to discover evidence in support of its claims. However, the court granted summary judgment in favor of defendants, noting that Transperfect failed to adduce any evidence that the defendants used its trade secrets for any purpose other than what was permitted by the terms of the auction, and further failed to show that HIG disclosed any trade secrets to unauthorized individuals at Lionbridge. Subsequent to its success on summary judgment, defendants sought $11,604,469 in attorneys’ fees and $259,791 in costs from Transperfect based on a claim of misappropriation “made in bad faith” which “may be established by circumstantial evidence.” 18 U.S.C. § 1836(b)(3)(D). To meet its burden of proof to merit such an award, defendants needed to satisfy a two-prong standard: (1) that the claim was without any colorable basis under the law; and (2) that the claim was brought in bad faith (i.e., motived by improper purpose). Under the law, both elements must be supported by a “high degree of specificity in the factual findings.” See Opinion and Order at 5-6.

Ultimately the court denied defendants’ request for fees and costs, holding that while they certainly made a strong showing, they failed to meet the rigorous two-prong standard to merit the requested award. The denial, however, did not save Transperfect from harsh words by the court, which noted that even though Transperfect “felt” that Lionbridge was unfairly competing against it, “feelings” do not provide a good faith basis for filing a lawsuit. Id. at 6-7. The court stated that even after it became clear Transperfect did not have a viable claim and could not prove it suffered damages from any alleged trade secret misappropriation, it continued to pursue its claim, making its litigation conduct an “unsavory business.” Id. at 7-8.

This ruling is important for at least two reasons. First, despite the court’s criticisms with respect to the absence of legitimate bases for Transperfect’s misappropriation of trade secrets claims, and the corresponding lack of proof of damages, the court was still reluctant to grant defendants the requested relief and make a finding of bad faith. Second, this illustrates the obvious tension between the ability to demonstrate bad faith by circumstantial evidence and what meets the undefined “something more” standard to merit sanctions of attorneys’ fees and costs. This is particularly true given that federal courts seem to be split on whether objective bad faith, subjective bad faith, or a showing of both, are required to establish “bad faith” misappropriation claims.  See, e.g., Aday v. Westfield Ins. Co., No. 21-3115, 2022 WL 203327, at *14 (6th Cir. Jan. 24, 2022) (requiring subjective bad faith such that a party defending against a misappropriation claim 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.”) compared to Akira Techs., Inc. v. Conceptant, Inc., 773 F. App’x 122, 125 (4th Cir. 2019) (because claim not objectively meritless, sanctions not warranted); Insurent Agency Corp. v. Hanover Ins. Co., 2020 WL 86813 (S.D.N.Y. Jan. 8, 2020) (claim must be “wholly without merit” to be entitled to attorneys’ fees under the DTSA).