Sunday, February 19, 2012

The Weekly Posner (No. 2)

Because damages are often extremely difficult to prove (and because injunction issues are decided early in a case), attorneys' fees often become the driving force in non-compete or trade secret litigation. Indeed, an early litigation thrust usually means that the legal bills hit mid-five or -six figures before the parties even have an idea of what they are in for.

So for any plaintiff or defendant in an unfair competition lawsuit, the ability to shift fees becomes a driving, paramount concern. The basis for fee shifting usually is found in a contract (a prevailing party clause) or the statute under which a party is suing (or much less frequently, a statute of general applicability).

One common method of attempting to recover fees finds its home in the Trade Secrets Act, which contains a fee provision allowing a plaintiff to recover fees if the defendant's misappropriation is "willful." Conversely (and as a mirror image to the willfulness standard), a defendant can obtain its fees if the suit was filed or maintained in "bad faith." Very little in the way of case law helps us figure out a uniform test, despite the fact the Trade Secrets Act is a uniform act adopted everywhere now but New York, Massachusetts, and Texas.

It is appropriate, therefore, to look elsewhere, including Judge Posner's opinion in Nightingale Home Healthcare, Inc. v. Anodyne Therapy, LLC, 626 F.3d 958 (7th Cir. 2010), where he surveyed the semantic jumble in determining when fees were appropriate for "exceptional" cases of trademark or trade dress infringement under the Lanham Act.

Much of Judge Posner's discussion in Nightingale Home Healthcare discusses the tort of abuse of process and the stark reality that disputes between competitors are often about litigation costs, not judgment-oriented outcomes. Put another way, parties to litigation often use the litigation as the end itself - not a means to an end. As Judge Posner notes, a new market entrant may have a clearly meritorious claim for infringement against a large opponent, but may find itself bullied into submission through a scorched earth defense strategy (and which has no hope of prevailing). On the other side of the coin, a dominant player in the market may sue a new, much smaller entrant on dubious claims just to force that competitor out of the market under the specter of six-figure legal bills.

This is what drives Judge Posner's standard for defining "exceptionality" for purposes of Lanham Act fee shifting. The same considerations likely would motivate him if, and when, he looked at fee shifting under the Trade Secrets Act. Very little separates trademark infringement from trade secret misappropriation, save for the fact the latter is much harder to define. Trade secrets can be made up on the fly, while marks are registered.

So the public policy behind allowing for fee shifting in the trade secrets context has to be the same as that in the trademark context, and Judge Posner likely would focus on whether and how parties in trade secrets suits used the litigation for improper purposes to ramp up lawyers' fees needlessly. These types of suits are too close of cousins for any other result to make much sense. One potential side issue: his opinion in Nightingale Home Healthcare seems to have more applicability to a defense-side fee petition. The exceptionality standard seems more akin to bad faith, than it does "willfulness." Stated another way, a defendant may be liable for the plaintiff's fees if he intentionally stole something he should have known was secret, even if that defendant did nothing to pile on legal fees or engage in vexatious litigation conduct.

Also of significance in Nightingale Home Healthcare is Judge Posner's feelings on fee petitions themselves. As is often the case, fee petitions are pursued at the tail end of a lawsuit, usually after all the wheat has been separated from the chaff and the merits have been disposed of. In this sense, Judge Posner believes that parties in fee petitions should not engage in an "elaborate inquiry into the state of mind of the party from whom reimbursement of attorneys' fees is sought." Therefore, he would look at objective indicia of exceptionality (or, bad faith, presumably), and determine whether the facts objectively can be shown to demonstrate the use of legal process to heap costs on adversaries.

This is an incredibly important case, for it looks at fee-shifting differently. It requires a court to assess the undercurrent of virtually all competitive litigation: the asymmetry of costs and the use of process itself to achieve something in the marketplace.

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