On September 2, 2020, the Fifth Circuit declined to void a fee award of nearly $2.3 million in favor of an employer that had prevailed on its trade secret theft claim against its former employee, because the employee willfully failed to comply with the bankruptcy court’s “extremely explicit” order regarding his objections to the award.

Background

Based on its belief that employee Christopher Ridgeway (“Ridgeway”) intended to use its confidential business information at his next job, Stryker Corporation (“Stryker”) filed suit in the United States District Court for the Western District of Michigan, alleging misappropriation of trade secrets in violation of Michigan’s Uniform Trade Secrets Act (“MUTSA”) and other business torts. A jury found in favor of Stryker on all counts, and found that Ridgeway’s MUTSA violation was “willful and malicious,” entitling Stryker to reasonable attorney’s fees.

On March 23, 2016, the day that Stryker’s request for attorney’s fees was due, Ridgeway filed a Chapter 11 bankruptcy petition in the Eastern District of Louisiana, which automatically stayed the misappropriation litigation and prevented Stryker from filing its request for fees. Instead, Stryker filed a proof of claim in the bankruptcy proceeding for nearly $2.3 million in attorney’s fees. In addition to hours billed in litigating the MUTSA claim, the proof of claims was supported by billing entries relating to Stryker’s additional claims. Stryker argued that, by virtue of the “Common Core” doctrine, it was entitled to attorney’s fees related to all of its claims against Ridgeway.

Ridgeway objected, arguing that the Common Core doctrine was limited to fee awards in civil rights cases. After the bankruptcy court confirmed a plan of reorganization, they issued an order directing Ridgeway to file and serve a list of objectionable billing entries, specifying the basis for his claim of non-liability, with a summary of total amounts for each objection category. After Ridgeway repeatedly failed to do so, the bankruptcy court allowed Stryker’s full proof of claim, awarding it the full $2.3 million. The district court affirmed, and Ridgeway appealed to the United States Court of Appeals for the Fifth Circuit.

The Fifth Circuit’s Decision:

Ridgeway first argued that only a Michigan jury – not a Louisiana bankruptcy judge – could award Stryker attorney’s fees based on its MUTSA claim.  The Fifth Circuit flatly rejected this argument, concluding that the argument “border[ed] on frivolous.” While Ridgeway focused his argument on “what Michigan law has to say about jury involvement in attorney’s fees[,]” Stryker’s claim was brought in federal court. The court reasoned that the question of who was empowered to award attorney’s fees was governed by Federal Rule of Civil Procedure 54(d), which provides that a claim for attorney’s fees must be made by motion unless the substantive law requires fees to be proved at trial as an element of damages. As MUTSA includes no mention of a jury requirement for an award of fees, Ridgeway’s first argument was without merit.

Ridgeway argued next that the Common Core doctrine was not applicable to his case. However, the Fifth Circuit reasoned that as the bankruptcy court had acted within its discretion when it struck those objections, the real issue was whether the decision to strike was an abuse of discretion.

The Fifth Circuit first noted that Ridgeway’s objections to opposing counsel’s entries fell roughly into three buckets: (1) entries relating solely to non-MUTSA claims; (2) entries relating to both MUTSA and non-MUTSA claims; and (3) entries where it was unclear whether MUTSA work had been performed  The bankruptcy court’s order required Ridgeway to specify which bucket each objected-to entry fell into, so that in the event the bankruptcy court held that Stryker was not entitled to claim fees under the Common Core doctrine, the bankruptcy could go through entries and disallow inappropriate amounts included in Stryker’s claim. The Fifth Circuit concluded that Ridgeway had not complied with the order. As such, the Fifth Circuit held that the decision to strike the objections was akin to a Rule 37(b) sanction “striking pleadings in whole or in part[.]” Such sanctions, the Court noted, are justifiable when there is willful misconduct and when lesser sanctions will not achieve the desired effect.

The Court found that the “willful misconduct” criterion was satisfied. The Fifth Circuit reasoned that, after Stryker moved to strike Ridgeway’s objections, Ridgeway was provided with multiple opportunities to correct the mistake, but he repeatedly failed to do so.  While Ridgeway raised several arguments in response to the notion that he had engaged in “willful misconduct,” most notably that it was “impossible” to comply with the order, the court flatly rejected these contentions: “It’s a time-consuming activity, and it’s certainly not fun. But a party’s unwillingness to engage in unglamorous work does not make that work impossible.”

Lastly, the Court found that while a continuance may have been appropriate at an earlier date in the case, by the time that the court had already denied a motion for reconsideration, “a continuance would have only rewarded Ridgeway’s intransigence.” The Fifth Circuit thus affirmed, concluding “[t]he bankruptcy court’s choice of sanction was therefore not an abuse of discretion.”

Takeaways

For trade secret defendants, this decision highlights the importance of detailed objections to attorneys’ fees claims, and points out that bankruptcy will not necessarily stave off the financial consequences of the underlying litigation.

Trade secret misappropriation impacts businesses across a variety of industries, and the consequences can be severe. A potential victim of trade secret theft, or the accused, should swiftly consult experienced litigation counsel.