Fee Awards in Trade Secret and Trademark Cases

The rule and the exceptions

Texas and federal courts follow the American rule: a party pays its own attorney's fees unless a statute or a contract provides otherwise. The general Texas picture, with its exceptions for contract claims and specific statutes, is set out in who pays attorney's fees in Texas business cases. Trade secret and trademark cases sit inside that rule, with three statutes that shift fees in defined situations and, very often, a contract that shifts them more broadly.

The exceptions share a design. None of them awards fees to a winner simply for winning. Each requires something more: bad faith, willfulness and malice, or a case that stands out from the ordinary. That design has a consequence owners should understand before filing. In the typical case, where the taking or the infringement is proved but the conduct was not egregious, the statutes award nothing, and the fee question is decided by whether a contract clause applies.

The Texas Uniform Trade Secrets Act: three grounds

Section 134A.005 of the Civil Practice and Remedies Code provides that the court may award reasonable attorney's fees to the prevailing party if a claim of misappropriation is made in bad faith, if a motion to terminate an injunction is made or resisted in bad faith, or if willful and malicious misappropriation exists. The award is discretionary in each case.

The third ground is the owner's. Section 134A.002(7) defines willful and malicious misappropriation as intentional misappropriation resulting from the conscious disregard of the rights of the owner of the trade secret. A former employee who copied files knowing they were confidential, lied about it on an exit form and used them to take customers presents that case. An employee who kept a folder by oversight and never used it does not. The same finding unlocks exemplary damages of up to twice actual damages under section 134A.004(b), so the two are usually pursued together, and the fact finder decides the finding on the evidence.

The first ground is the defendant's. A company that sues over information that was public, that it never protected, or that it cannot identify, and presses on after that becomes clear, risks paying the defendant's fees. Courts look at whether the claim was objectively baseless and brought for an improper purpose, such as to keep a former employee from working. The second ground is rare in practice but protects both sides once an injunction is in place.

How the Act fits with the rest of a trade secret case is covered in the Texas Uniform Trade Secrets Act, explained.

The Defend Trade Secrets Act: the same grounds, with a notice condition

The federal statute, 18 U.S.C. § 1836(b)(3)(D), allows the court to award reasonable attorney's fees to the prevailing party if a claim of misappropriation is made in bad faith, which may be established by circumstantial evidence, or if the trade secret was willfully and maliciously misappropriated. A motion to terminate an injunction made or opposed in bad faith is also a ground. Exemplary damages of up to two times the damages award follow the same willful and malicious finding under subparagraph (C).

The federal Act adds a condition that catches employers. Under 18 U.S.C. § 1833(b)(3), an employer must give notice of the Act's whistleblower immunity in any contract with an employee, contractor or consultant that governs the use of trade secrets or confidential information, and an employer that did not comply may not be awarded exemplary damages or attorney fees under the DTSA in an action against an employee to whom notice was not provided. An employer whose agreements lack the notice still has its Texas fee claim under section 134A.005, which has no such condition, but it loses the federal one against that employee.

The Lanham Act: exceptional cases, and counterfeits

Section 35(a) of the Lanham Act, 15 U.S.C. § 1117(a), provides that the court in exceptional cases may award reasonable attorney fees to the prevailing party. Either side may be the prevailing party. In Octane Fitness, LLC v. ICON Health & Fitness, Inc. (2014) the Supreme Court construed the identical words in the Patent Act to mean a case that stands out from others with respect to the substantive strength of a party's litigating position, considering both the governing law and the facts, or the unreasonable manner in which the case was litigated, decided case by case in the court's discretion on the totality of the circumstances and proved by a preponderance of the evidence. Federal courts apply that reading to the Lanham Act's exceptional-case language, which replaced the earlier requirement in some circuits that the losing party have acted in bad faith.

Under that standard, fees are awarded against infringers who copied deliberately and litigated to delay, and against plaintiffs who asserted marks they knew were weak or pursued claims after discovery showed no confusion. An ordinary dispute between two businesses that honestly disagreed about likelihood of confusion is not exceptional, whoever wins.

Counterfeiting is treated differently. Section 1117(b) provides that for intentional use of a counterfeit mark, absent extenuating circumstances, the court shall award three times profits or damages together with a reasonable attorney's fee. There the fee is the rule. The remedies in a trademark case as a whole are set out in remedies in a trademark case under the Lanham Act.

The Texas Trademark Act

Section 16.104(c) of the Business and Commerce Code allows the court, where the violator acted with knowledge of the registrant's mark, in bad faith or as the circumstances otherwise warrant, to award reasonable attorney's fees to the prevailing party, alongside up to treble profits and damages. The state standard is framed around the infringer's knowledge rather than the exceptional-case test, which can make fees easier to reach against a knowing infringer in a case pleaded under a Texas registration.

The contract clause: usually the bigger lever

In most trade secret cases the information was covered by a confidentiality agreement, an employment agreement or a license, and in most trademark licensing disputes there is a license. Those agreements often contain a fee clause, and Texas law adds one. Section 38.001 of the Civil Practice and Remedies Code allows a person who prevails on a claim for an oral or written contract to recover reasonable attorney's fees from an individual or organization, with narrow exceptions for governmental and charitable entities. A plaintiff who proves breach of an NDA and recovers damages therefore recovers fees on that claim without proving bad faith or malice at all. The details are in recovering attorney's fees in a Texas contract case.

Two cautions follow. A prevailing-party clause in the agreement runs both ways, so a plaintiff who loses the contract claim may owe the defendant's fees under the same clause. And Texas requires a party claiming fees to segregate recoverable fees from unrecoverable ones, so where the contract claim and the trade secret claim overlap, counsel must show which work advanced the fee-bearing claim, or that the work was so intertwined it cannot be separated. Fee evidence is kept from the first day with that in mind.

Fees as a risk for the plaintiff

Owners tend to think of fee provisions as a reward. In trade secret and trademark litigation they are at least as often a risk. A plaintiff that files a trade secret case to slow a departing employee, without being able to identify a secret or show reasonable measures, invites a bad-faith fee motion under section 134A.005 and, in federal court, under the DTSA. A trademark plaintiff that asserts a descriptive name against a competitor using common words, and loses, faces an exceptional-case motion. Defendants' counsel raise these early, in the answer and in correspondence, precisely to change the plaintiff's calculation.

The honest assessment at the start of a case therefore includes the fee exposure on both sides: what the client can recover if it proves the worst about the other party, and what it could owe if the court concludes the claim should not have been brought.

How fee awards are decided and proved

Once a ground for fees exists, the amount is a separate question. Texas and federal courts begin with the reasonable hours spent multiplied by reasonable hourly rates in the community for similar work, supported by billing records that describe the tasks, and then adjust for the results obtained and other factors. Fees are proved with testimony, usually from the lawyer who did the work, and records that let the court see what was done and why. Vague or block-billed entries are discounted. Where the agreement has a fee clause and the statute also applies, counsel elects the ground that fits the proof.

Example

Suppose a Dallas distributor sues a former sales manager and his new employer under TUTSA, the DTSA and the manager's confidentiality agreement, which has a prevailing-party fee clause and the federal whistleblower notice. Forensic evidence shows the manager copied the customer and pricing files after giving notice, told the company in writing that he had nothing, and used the files at the new employer within a week. At trial the jury finds misappropriation, finds it willful and malicious, and awards damages. The court awards exemplary damages and fees under both trade secret statutes against the manager, and fees against the new employer under TUTSA because the jury found it knowingly used the files. The distributor also recovers fees on the contract claim under section 38.001 and the clause, with its counsel having segregated time between the claims. Had the evidence shown only that the manager kept a folder he never opened, the same jury might have found misappropriation without malice, no exemplary damages would have followed, and the only fee award would have been on the contract claim.

What this means for the decision to sue or to fight

• A strong owner's case with proof of deliberate copying and deception carries a realistic fee claim under TUTSA, the DTSA and any contract clause.
• An ordinary case, proved but without malice, usually recovers fees only on the contract claim, so the existence and wording of a confidentiality or license agreement matters to the budget.
• A weak claim, filed to pressure a competitor or an employee, carries a real risk of paying the other side.
• In trademark cases, fees follow the exceptional case, with counterfeiting as the exception where they follow the win.

Tina Wysk represents Dallas companies and individuals on both sides of trade secret and trademark disputes in state and federal court; the practice is described at trade secret litigation.