U.S. District Judge Gregg Costa of Galveston. Courtesy photo

A federal appeals court has ruled that a defendant in a trade secrets case is not a prevailing party and thus entitled to attorney fees when the plaintiff successfully moves to have the lawsuit dismissed without prejudice.

A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit on Tuesday affirmed a ruling by a judge from the Western District of Texas who said that a dismissal without prejudice does not equate to a judgment in favor of the defendant.

“Because such a dismissal does not establish the winner of the dispute, we affirm the denial of fees,” wrote Fifth Circuit Judge Gregg Costa for the panel. Judges W. Eugene Davis and Andrew Oldham joined in the ruling.

Entitlement to fees ”ordinarily requires being ahead when the final whistle blows in a case, not at halftime,” the panel said.

According to the opinion, the dispute involves two Texas companies: Dunster Live and Lonestar Logos Management. The two companies previously were one single entity and had a contract to construct and maintain signs along Texas highways notifying motorists about food, gas and lodging options available at upcoming exits.

The company split in 2016, and Lonestar won the contract for the signs.

Dunster then filed a lawsuit against Lonestar, alleging that Lonestar stole propriety software and a company database in violation of the federal Defend Trade Secrets Act, which allows for the award of attorney fees to prevailing parties.

Dunster sought a protective injunction, which a judge denied. Dunster then moved successfully to have its lawsuit dismissed without prejudice. According to the court, the company “explained that it no longer wished to pursue the federal trade secret claim, which was the only basis for subject matter jurisdiction.”

Lonestar then moved for $600,000 in counsel fees, arguing that it was the prevailing party under the act. The fee petition was denied, but Lonestar appealed, contending that Dunster's move to dismiss the lawsuit without prejudice was made in “bad faith” since it feared it would ultimately lose the lawsuit on the merits, and that the move was “opportunistic.”

The appeals court disagreed.

Lonestar instead argued that it became a prevailing party when the lower court denied Dunster's request for a protective injunction, but that argument failed at the Fifth Circuit, too.

“Defendants argue that even if the dismissal does not make them a prevailing party, they achieved that status earlier in the case when they defeated the request for a protective injunction,” Costa said.

“But prevailing party status ordinarily requires being ahead when the final whistle blows in a case, not at halftime,” he said. “Taking the lead early in the lawsuit … did not make defendants eligible for fees.”

Dunster retained Peter Marketos of Reese Marketos in Dallas. Lonestar turned to Andrew York of Armbrust & Brown in Austin. Neither returned a call seeking comment on the ruling.