Stockade Companies, LLC et al v. Kelly Restaurant Group, LLC

Filing 106

ORDER DENYING 96 Motion for Attorney Fees. Signed by Judge Andrew W. Austin. (dl)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
STOCKADE COMPANIES, LLC AND
STOCKADE FRANCHISING, LP
V.
KELLY RESTAURANT GROUP, LLC
MICHAEL KELLY

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A-17-CV-143 RP

ORDER
Before the Court are Defendants’ Opposed Motion for Attorneys’ Fees and Costs (Dkt. No.
96); Plaintiffs’ Objection (Dkt. No. 98); Defendants’ Reply (Dkt. No. 101); and Plaintiff’s Sur-Reply
(Dkt. No. 104). The District Court referred the motion to the undersigned for resolution pursuant
to 28 U.S.C. § 636(b)(1)(A), FED. R. CIV. P. 72 and Rule 1(c) of Appendix C of the Local Rules.
I.

GENERAL BACKGROUND

Plaintiffs Stockade Companies, LLC and Stockade Franchising, LP (together “Stockade”)
own and license the proprietary trademarks for Sirloin Stockade, Coyote Canyon, and Montana
Mike’s restaurants. On June 4, 2014, Stockade entered into fifteen separate franchise agreements
with Kelly Restaurant Group, LLC (“KRG”). After KRG defaulted on the royalty payments due
under the franchise agreements, Stockade sent KRG a Notice of Default, Demand for Payment, and
Opportunity to Cure. The Default Notice stated that KRG was in default and gave KRG until
February 10, 2017 to pay all amounts due. KRG failed to cure the default by that date. Stockade
then sent KRG a Notice of Termination, which advised that the franchise agreements had terminated
and that KRG “was to immediately cease use” of any proprietary marks. KRG has continued to use
Stockade’s proprietary marks and to operate multiple Sirloin Stockade, Coyote Canyon, and
Montana Mike’s restaurants.

On February 24, 2017, Stockade sued KRG and Michael Kelly (together “Kelly”) alleging
trademark infringement and false designation of origin, breach of non-competition covenant, and
misappropriation of trade secrets, and sought to immediately and permanently enjoin Kelly from
using or otherwise infringing on any of its proprietary information and from violating the Franchise
Agreements. On May 11, 2017, the Court denied Kelly’s Motion to Compel Arbitration after
concluding that the Franchise Agreements contained a carve-out provision explicitly permitting
Stockade to seek temporary or injunctive relief in court to protect its trademarks and other rights.
See Dkt. No. 20.
On May 31, 2017, the District Court granted in part and denied in part Stockade’s Motion
for Preliminary Injunction. See Dkt. No. 26. The Court granted Stockade’s request to enjoin Kelly
from infringing or otherwise using any of Stockade’s proprietary marks, but denied its request to
enjoin Kelly from violating the non-competition provisions in Section 7.04 of the franchise
agreements or to enjoin Kelly from using or transferring Stockade’s confidential information. Id.
In that order, the Court directed Kelly to de-brand its Sirloin Stockade, Coyote Canyon and Montana
Mikes’ franchise restaurants within 21 days. Kelly then re-branded the restaurants as “Kansas
Buffets.”
On July 28, 2017, Stockade filed another Motion for Preliminary Injunction, this time
seeking an order enjoining Kelly from operating “family-style buffets” at former Stockade
restaurants. Specifically, Stockade asked the Court to enjoin Kelly from “using Stockade’s
confidential information in violation of the parties’ [f]ranchise [a]greements,” “misappropriating
Stockade’s trade secrets in violation of the Texas Uniform Trade Secrets Act,” and “infringing on
Stockade’s trade dress in violation of the Lanham Act.” Because the District Court determined that
Stockade had “not demonstrated a high likelihood of success on any of its three claims,” the Court
denied the Motion for Preliminary Injunction. See Dkt. No. 86.
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On October 30, 2017, Kelly filed a Motion to Dismiss seeking to dismiss all of Stockade’s
claims under Federal Rule of Civil Procedure 12(b)(6). See Dkt. No. 88. On December 6, 2017,
Stockade filed “Plaintiffs’ Notice of Voluntary Dismissal of Claims Without Prejudice” seeking to
“dismiss all claims against all Defendants without prejudice.” See Dkt. No. 92. On December 7,
2017, pursuant to Federal Rule of Civil Procedure 41, the District Court ordered that “Plaintiffs’
claims against all defendants in this action be dismissed without prejudice” and ordered that “all
costs shall be taxed to the party incurring the same.” See Dkt. No. 94.
Kelly has now filed the instant Motion for Attorneys’ Fees and Costs requesting the Court
to award it $369,221.00 in attorneys’ fees and $5,838.21 in costs.
II. STANDARD OF REVIEW
Traditionally, under the American rule, “each litigant pays his own attorney’s fees, win or
lose, unless a statute or contract provides otherwise.” Baker Botts LLP. v. ASARCO LLC, – U.S.–,
135 S. Ct. 2158, 2160 (2015). Accordingly, “[a] district court may not award attorneys’ fees ‘unless
a statute or contract provides’ the basis for such an award.” Spear Mktg., Inc. v. BancorpSouth Bank,
844 F.3d 464, 470 (5th Cir. 2016) (quoting Baker Botts, 135 S.Ct. at 2164). Federal Rule of Civil
Procedure 54(d)(2) provides the procedure for the prevailing party, by motion, to specify the statute,
rule, or other grounds entitling them to the award. Fed. R. Civ. P. 54(d)(2). See White v. Regional
Adjustment Bureau, Inc., 2013 WL 12175083, * 4 (N. D. Tex. June 16, 2013) (noting that party must
identify a statute or rule to recover fees under Rule 54). However, Rule 54(d)(2) does not supply the
substantive prerequisites for obtaining attorneys’ fees and expenses; rather, those requirements are
“governed by the same law [e.g., federal or state] that serves as the rule of decision for the
substantive issues in the case.” Mathis v. Exxon Corp., 302 F.3d 448, 461 (5th Cir. 2002). “One
basic substantive requirement is that the requested fees and expenses be recoverable in the first
place.” Rodriguez v. Quicken Loans, Inc., 257 F. Supp. 3d 840, 844 (S.D. Tex. 2017). “Even when
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a party has satisfied Rule 54(d)(2)’s procedural requirements and the governing substantive law
permits recovery, the decision whether to award attorney's fees and expenses remains subject to the
district court's equitable discretion.” Id.
Although Kelly argues that Texas state law applies to the award of attorneys’ fees in this
case, Stockade’s lawsuit alleged both state and federal claims. In addition, the District Court applied
both federal and state law in granting and denying Stockade’s Motions for Preliminary Injunction.
See Dkt. Nos. 26 and 86. Accordingly, Texas state law and federal law govern the issue of
attorneys’ fees in this case. See Rodriguez, 257 F. Supp.3d at 844 (applying federal substantive law
to federal claims and state law to state claims in determining fees). Regardless, however, “[f]ederal
and Texas law both recognize that although ‘the prevailing litigant is ordinarily not entitled to collect
a reasonable attorneys’ fee from the loser,’ such recovery is permissible if explicitly provided for by
statute or an enforceable contract.” Id. at 845 (quoting Travelers Cas. & Sur. Co. v. Pac. Gas & Elec.
Co., 549 U.S. 443, 448 (2007) and Intercont'l Grp. P'ship v. KB Home Lone Star L.P., 295 S.W.3d
650, 653 & n.7 (Tex. 2009)).
II. ANALYSIS
Kelly argues that it is the prevailing party in the case because Stockade voluntarily dismissed
this lawsuit to avoid an unfavorable judgment on the merits. Kelly argues that it is entitled to
$369,221.00 in attorneys’ fees and $5,838.21 in costs pursuant to Federal Rule of Civil Procedure
54(d), Section 19.11 of the Franchise Agreements, Section 134A.005 of the Texas Civil Practices
& Remedies Code, and Federal Rule of Civil Procedure 41(d).
In response, Stockade argues that the Court should deny the Motion because the arbitration
clause contained in the Franchise Agreements requires Kelly to arbitrate its claim for attorneys’ fees.1
1

Interestingly, the parties have reversed their previous positions on the issues of arbitration
and arbitrability. In Kelly’s previous Motion for Compel Arbitration, it had argued that the
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Stockade also contends that an arbitrator, not the Court, should determine whether Kelly’s claim for
attorney’s fees is subject to arbitration. Alternatively, Stockade argues that “[t]he Franchise
Agreements only allow fees to the prevailing plaintiff, not a prevailing defendant, and in any event
[Stockade] did not prevail.” Dkt. No. 98 at 6. Because the question of arbitrability determines
whether this Court has jurisdiction to even address the issue of attorneys’ fees, the Court must
address this issue first.
A.

Arbitration Issues
The parties’ Franchise Agreements contain the following arbitration clause:
21.01 Duty to Arbitrate. . . .[T]he parties agree that any and all controversies,
claims and disputes between them arising out of or related to this Agreement that
cannot be amicably settled shall be finally resolved by submitting such matter to the
American Arbitration Association (“AAA”) in either Denver, Colorado or Austin,
Texas, in Franchisor’s sole discretion, for binding arbitration under the AAA’s
Commercial Arbitration Rules . . .

Dkt. No. 7-2 at 45, § 21.01 (hereinafter “Arbitration Clause”). The next section of the clause,
however, states:
21.02 Franchisor’s Right to Seek Injunctive Relief. Notwithstanding any provision
contained in this Section 21, Franchisor may, at its sole option, institute an action or
actions for temporary or preliminary injunctive relief or seeking any other temporary
or permanent equitable relief against Franchisee that may be necessary to protect its
Proprietary Marks or other rights or property. . .
Id. at Sec. 21.02 (hereinafter “Exclusion Clause”).
The Court has already determined that Stockade’s claims in this lawsuit fall within the
Exclusion Clause of the Franchise Agreements. See Dkt. No. 20 at 8 (“Based upon the foregoing,
Stockade’s trademark infringement and false designation of origin and breach of non-competition

arbitration clause required Stockade to arbitrate the case and that the arbitrator had to determine the
issue of arbitrability. See Dkt. No. 7. Stockade had argued the opposite. See Dkt. No. 9. In the
instant Motion, the parties reverse these positions.
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covenant claims seeking preliminary injunctive relief fall within the Exclusion Clause of the
franchise agreements at issue in this lawsuit.”). The Court also previously ruled that there was not
“clear and unmistakable evidence that the parties agreed to arbitrate the question of arbitrability.”
Id. at 6. For the same reasons set out in that order, the Court similarly finds the Stockade has failed
to present clear and unmistakable evidence that the parties agreed to arbitrate the question of
arbitrability with regard to Kelly’s claim for attorney’s fees. The Court must therefore determine
whether the Court has jurisdiction to review the claim for attorney’s fees.
Because this Court has jurisdiction over the underlying claims in this case, it follows that it
has jurisdiction to review the instant claim for attorneys’ fees. As the Northern District of Texas has
reasoned:
This Court has the most intimate knowledge of the procedural history of this case and
is the most appropriate arbiter of the reasonableness of the fees incurred. To remand
this case to the arbitrator for determination of the reasonableness of fees incurred in
this forum would be unnecessarily costly, inefficient, and time consuming. Thus, the
Court concludes it has jurisdiction to award fees and costs incurred in this litigation.
Radiant Sys., Inc. v. Am. Scheduling, Inc., 2006 WL 2583266, at *3 (N.D. Tex. Sept. 7, 2006).
Moreover, “[i]t is well established that a federal court may consider collateral issues after an action
is no longer pending.” Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 395 (1990). Thus, courts
may award costs and attorneys’ fees after an action is dismissed for want of jurisdiction. See Id.
(“This Court has indicated that motions for costs or attorney’s fees are independent proceeding[s]
supplemental to the original proceeding and not a request for a modification of the original decree”)
(internal citations omitted). Based upon the foregoing, the Court finds that it has jurisdiction to
review the claim for attorneys’ fees in this case.

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B.

Attorney’s Fees
Kelly argues that it is the prevailing party under Rule 54(d)(1) and is thus entitled to

attorneys’ fees and costs under Section 19.11 of the Franchise Agreements, Section 134A.005 of the
Texas Civil Practices & Remedies Code and Federal Rule of Civil Procedure 41(d). Before
addressing whether Kelly is entitled to attorneys’ fees and costs under these statutes and rules, the
Court must first decide the threshold issue of whether Kelly is in fact the prevailing party in this case.
See Energy Intelligence Group, Inc. v. Kayne Anderson Capital Advisors, LLC, 2018 WL 2048896,
at *13 (S.D. Tex. May 2, 2018) (“Whether a party is the prevailing party is a threshold inquiry for
an award of costs and attorney’s fees.”).
1.

Is Kelly the Prevailing Party?

Kelly argues that it is the prevailing party in the case because Stockade voluntarily dismissed
this lawsuit to avoid an unfavorable judgment on the merits. Specifically, Kelly argues that Stockade
voluntarily dismissed the case after the District Court denied its Motion for Preliminary Injunction
and before the District Court had ruled on the Kelly’s Motion to Dismiss. Kelly argues that “[i]t is
clear based on timing alone that Stockade’s ‘voluntary’ dismissal was filed to avoid an unfavorable
merits ruling on its pending trade dress, trade secret and confidentiality claims.” Dkt. No. 96 at 2.
The Court disagrees.
In order for a litigant to be a prevailing party for purposes of attorneys’ fees, there must be
a “judicially sanctioned change in the legal relationship of the parties.” Buckhannon Bd. & Care
Home v. W.V. Dept. of Health & Human Res., 532 U.S. 598, 605 (2001). As the Supreme Court has
noted, “[n]o material alteration of the legal relationship between the parties occurs until” one of the
parties “becomes entitled to enforce a judgment, consent decree, or settlement against the [other].”
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Farrar v. Hobby, 506 U.S. 103, 113(1992). The Fifth Circuit has held that a defendant can be
considered a prevailing party if the plaintiff voluntarily dismisses a case with prejudice because “a
dismissal with prejudice gives the defendant the full relief to which he is legally entitled and is
tantamount to a judgment on the merits.” Schwarz v. Folloder, 767 F.2d 125, 130 (5th Cir. 1985);
see also, Fox v. Vice, 594 F.3d 423, 426 (5th Cir. 2010) (finding that defendant was prevailing party
where the district court had granted appellees’ motion for judgment on the pleadings and dismissed
plaintiff’s § 1983 claims with prejudice after plaintiff conceded that he had failed to state a federal
claim), vacated and remanded, 563 U.S. 826 (2011); Anthony v. Marion County Gen. Hosp., 617
F.2d 1164, 1169–70 (5th Cir. 1980) (dismissal of claims with prejudice is an adjudication on the
merits for purposes of res judicata, making defendant a prevailing party). In Dean v. Riser, 240 F.3d
505, 511 (5th Cir. 2001), the Fifth Circuit held that when a plaintiff voluntarily dismisses his claims
in a § 1983 action with prejudice, the defendant is not a “prevailing party” for attorneys’ fees
purposes “unless the defendant can demonstrate that the plaintiff withdrew to avoid a disfavorable
judgment on the merits.”
Kelly attempts to rely on this case law to argue that it should be considered the prevailing
party in this case. However, Stockade did not voluntarily dismiss this case with prejudice, but rather
did so without prejudice. See Dkt. No. 94 (ordering “Plaintiffs’ claims against all defendants in this
action be dismissed without prejudice” and that “all costs shall be taxed to the party incurring the
same.”). Under Fifth Circuit precedent, a defendant is generally not a prevailing party when the
plaintiff dismisses its claims without prejudice. See Haciendo Records, L.P. v. Ramos, 718 F. App’x
223, 236 (5th Cir. 2018) (holding that “prevailing-party status is not conferred through a party’s
voluntary dismissal without prejudice.”). This is so because “[t]he voluntary dismissal of a
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complaint, without prejudice, does not alter the legal relationship between [the parties].” Alief Indep.
Sch. Dist. v. C.C. ex rel. Kenneth C., 655 F.3d 412, 418 (5th Cir. 2011).2 Trial courts in this Circuit
thus generally hold that a defendant is not the prevailing party where the plaintiff voluntarily
dismissed the case without prejudice. See e.g., BHL Boresight, Inc. v. Geo-Steering Sols., Inc., 2017
WL 2730739, at *17 (S.D. Tex. June 26, 2017) (“[A] defendant who has the claims against him
resolved by voluntary dismissal without prejudice generally is not considered a prevailing party or
entitled to an award of attorney's fees.”); Traxxas, LP v. Dewitt, 2016 WL 6892819, * 2 (E.D. Tex.
Oct. 28, 2016) (“Because the dismissal of Defendant was without prejudice, the claims were not
adjudicated against him and he is not the prevailing party.”); Lightsource Analytics, LLC v. Great
Stuff, Inc., 2014 WL 4744789, * 5 (W.D. Tex. Sept. 23, 2014) (holding that defendants were not
prevailing parties where plaintiff’s case was dismissed without prejudice and there was not judicially
sanctioned change in the legal relationship of the parties).
Texas law, as expressed by the Texas Supreme Court, recognizes an exception to this general
rule when a plaintiff dismisses its claims in order “to circumvent unfavorable legal restrictions or
rulings.” Epps v. Fowler, 351 S.W.3d 862, 870 (Tex. 2011). In Epps, the Court held that “a
defendant may be a prevailing party when a plaintiff nonsuits without prejudice if the trial court
determines, on the defendant’s motion, that the nonsuit was taken to avoid an unfavorable ruling on

2

See also, United States v. Milner, 583 F.3d 1174, 1196–97 (9th Cir. 2009) (“[A] dismissal
without prejudice does not materially alter the legal relationship of the parties, because the defendant
remains subject to the risk of re-filing.”), cert. denied, 130 S.Ct. 3273 (2010); United States v. Minh
Huynh, 334 F. App'x 636, 639 (5th Cir.) (“Nor does the Government's dismissal without prejudice
bestow prevailing party status on Plaintiffs because it effected no ‘change in the legal relationship
of the parties.’”), cert. denied, 558 U.S. 970 (2009); RFR Indus., Inc. v. Century Steps, Inc., 477 F.3d
1348, 1353 (Fed. Cir. 2007) (reasoning that voluntary dismissal that leaves the plaintiff free to refile
his claim effects no change in the parties' legal relationship).
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the merits.” Id. To make this determination, courts are directed to draw inferences “from the course
of events in the lawsuit.” Id. “A number of factors may support an inference that a plaintiff has
nonsuited in order to avoid an unfavorable ruling,” including the timing of the nonsuit, the plaintiff’s
failure to respond to discovery requests that could support an adverse judgment, or the existence of
procedural obstacles, such as the plaintiff's inability to join necessary parties. Id. at 870-71.
Kelly relies on Epps to insist that it is the prevailing party, arguing that Stockade dismissed
this case without prejudice to avoid an unfavorable ruling on the merits of Kelly’s Motion to
Dismiss. Kelly, however, has failed to carry its burden to demonstrate that Stockade’s dismissal was
taken to avoid an unfavorable ruling on the merits. Noting that the dismissal followed the district
judge denying Stockade’s request for a preliminary injunction, Kelly argues that “[i]t is clear based
on timing alone that Stockade’s ‘voluntary’ dismissal was filed to avoid an unfavorable merits ruling
on its pending trade dress, trade secret and confidentiality claims.” Dkt. No. 96 at p. 2. First, the fact
that the District Court denied Stockade’s Motions for Preliminary Injunctions does not necessarily
mean that the District Court would have granted Kelly’s Motion to Dismiss. See M-I, L.L.C. v.
Stelly, 2009 WL 7797235, at *1 (S.D. Tex. Sept. 2, 2009) (“[T]he Court would like to point out that
its ruling on Plaintiff's Motion for Preliminary Injunction does not necessarily reflect the Court's
opinion on the ultimate merits of Plaintiff's case.”); Curtiss-Wright Flow Control Corp. v. Velan,
Inc., 2005 WL 8156669, at *1 (W.D. Tex. May 18, 2005) (“[A]ny determination by the Court of
Appeals regarding Curtis-Wright's motion for preliminary-injunction will not be dispositive of all
issues of infringement in this case.”). As the Fifth Circuit has “cautioned repeatedly,” a preliminary
injunction is an “extraordinary remedy which should not be granted unless the party seeking it has
clearly carried the burden of persuasion on all four requirements.” Bluefield Water Ass’n, Inc. v. City
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of Starkville, Miss., 577 F.3d 250, 253 (5th Cir. 2009) (internal citations and quotations omitted).
In contrast, a party may defeat a motion to dismiss without demonstrating a substantial likelihood
of success on the merits. See Broadwell v. Municipality of San Juan, 312 F.Supp.2d 132, 137 (D.P.R.
2004) (“[T]he standard plaintiffs must surpass in order to succeed on their preliminary injunction
claim, likelihood of success on the merits, is higher than the one they must surpass to defeat
defendants’ motion to dismiss.”).
In addition, Stockade did not stop seeking relief on its claims after it voluntarily dismissed
this case; rather, Stockade chose to pursue those claims in arbitration. Stockade argues that it
voluntarily dismissed this lawsuit after the District Court denied its motions for preliminary
injunction because it “simply changed its mind about pursuing permanent injunctive relief in this
Court, determining (consistent with its contractual rights) that it was more sensible to consolidate
all claims in the arbitration.” Kelly has failed to demonstrate that Stockade’s proffered reason for
the voluntary dismissal was false.
In addition, contrary to Kelly’s representations, Kelly did not prevail on all of the issues in
this lawsuit. For example, this Court denied Kelly’s Motion to Compel Arbitration finding that
Kelly’s arguments regarding arbitration were “meritless and ignore the plain language of the contract
. . . .” Dkt. No. 20 at 6. In addition, on May 31, 2017, the District Court partially granted Stockade’s
first Motion for Preliminary Injunction. Dkt. No. 26. The Court granted Stockade’s request to
enjoin Kelly from infringing or otherwise using any of Stockade’s proprietary marks. In that order,
the Court directed Kelly to de-brand its Sirloin Stockade, Coyote Canyon and Montana Mikes’
franchise restaurants within 21 days, which Kelly subsequently did. And the District Court
subsequently granted Stockade’s Motion for Expedited Discovery in the case. Dkt. No. 50. Thus,
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while the District Court denied Stockade’s second and third motions for preliminary injunction,
Stockade was successful on other issues in the case.
Based upon the foregoing, Kelly has failed to demonstrate that it is the prevailing party in this
case. But even if Kelly had met the threshold requirement that it was the prevailing party under Rule
54, it would still not be entitled to attorneys’ fees under the specific statutes and Rules it relies on,
as explained below.
2. Section 19.11 of the Franchise Agreements
First, Kelly argues that it is entitled to attorneys’ fees under Section 19.11 of the Franchise
Agreements, which provides:
19.11 Attorneys Fees. Notwithstanding anything in this Agreement to the contrary,
if either party institutes a legal proceeding, including court proceeding or arbitration,
and prevails entirely or in part in any action at law or in equity against the other
party based entirely or in part on the terms of this Agreement, the prevailing party
shall be entitled to recover from the losing party, in addition to any judgment,
reasonable attorneys’ fees, court or arbitrators costs and all of the prevailing party’s
expenses in connection with any action at law.
Dkt. No. 1-2 at p. 48 (emphasis added). As clearly stated above, the Franchise Agreements only
allow a prevailing party to recover attorneys’ fees if that party “institute[d] the legal proceeding.”
Here, Kelly did not institute any proceedings in this Court and thus is ineligible for attorneys’ fees
under Section 19.11 of the Franchise Agreements.
3. Section 134A.005 of the Tex. Civ. Prac. & Rem. Code
Next, Kelly relies on the Texas Uniform Trade Secrets Act (“TUTSA”), TEX. CIV. PRAC. &
REM. CODE § 134A.005(1), for its request for fees, arguing that Stockade’s trade secret claim was
made in bad faith. Section 134A.005(1) of the TUTSA provides that a court “may award reasonable
attorney’s fees to the prevailing party if. . .a claim of misappropriation is made in bad faith.” The
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TUTSA does not define bad faith and the Texas Supreme Court has not addressed this issue.
However, courts interpreting other UTSA-based state statutes have found that bad faith requires
evidence that the claim was entirely baseless or specious and that the claim was taken in subjective
bad faith or for other improper purposes.3
Kelly has not made a persuasive case that there is clear evidence that Stockade’s trade secret
claim was entirely without merit and taken for any improper purpose. The fact that the District Court
denied Stockade’s Motion for Preliminary Injunction with regard to its trade secret claim does not
mean that the claim was brought in bad faith. Kelly has failed to provide the Court with sufficient
factual allegations to support a finding of bad faith in this case. See Wright's Well Control Servs.,
LLC v. Oceaneering Int'l, Inc., 2017 WL 5572616, at *3 (E.D. La. Nov. 20, 2017) (holding that
defendant’s counterclaim failed to state a claim for attorney's fees under the TUTSA because it failed
to allege sufficient factual allegations to support a finding of bad faith); McKesson Med.-Surgical
Inc. v. Micro Bio-Medics, Inc., 266 F. Supp. 2d 590, 597 (E.D. Mich. 2003) (denying defendants’
request for attorneys fees where they failed to persuade the Court that was clear evidence that the
action was entirely without color and taken for improper purposes amounting to bad faith).

3

See e.g., Gabriel Technologies Corp. v. Qualcomm Inc., 560 F. App’x 966, 973 (Fed. Cir.
2014) (finding that a party seeking fees under CUTSA must demonstrate that the trade secret claim
was objectively specious and was brought in bad faith or for an improper purpose); Hill v. Best
Medical Int’l Inc., 2011 WL 6749036, * 3 (W.D. Penn. Dec. 22, 2011) (finding that indications of
bad faith include evidence that claims were meritless or that hte motive for filing the suit was for an
improper purpose such as harassment); Contract Materials Processing, Inc. v. Kataleuna GmbH
Catalysts, 222 F. Supp. 2d 733, 744 (D. Md. 2002) (“To succeed on a request for attorney's fees
under the MUTSA, there must be “clear evidence that the action [was] entirely without color and
taken for other improper purposes amounting to bad faith.’”); JLM Formation, Inc. v. Form+PAC,
2004 WL 1858132, *1-2 (N.D. Cal. Aug. 19, 2004) (holding that in order state a claim for attorneys
fees under UTSA, the defendant must demonstrate claim was objectively specious and based on
subjective misconduct).
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4. Fed. R. Civ. P. 41(d)
Finally, Kelly argues that it is entitled to attorneys’ fees and costs under Rule 41(d), which
states:
If a plaintiff who previously dismissed an action in any court files an action based on
or including the same claim against the same defendant, the court:
(1) may order the plaintiff to pay all or part of the costs of that
previous action; and
(2) may stay the proceedings until the plaintiff has complied.
FED. R. CIV. P. 41(d) (emphasis added).4 The Court agrees with Stockade’s interpretation that a plain
reading of Rule 41(d) reveals that it applies only to two sequential lawsuits, not a lawsuit and (here)
an overlapping arbitration. The use of the “the court” in the Rule clearly applies to a subsequent
court. Thus, only the subsequent court, not a subsequent arbitrator, can impose costs under Rule
41(d).
Fifth Circuit precedent also dictates that Rule 41(d) only applies to two sequential lawsuits
in the same court. The Fifth Circuit “has repeatedly vacated sanctions that punish conduct that did
not occur in front of the district court.” Portillo, 872 F.3d at 740 n. 29. For example, in Positive
Software Sols., Inc. v. New Century Mortg. Corp., 619 F.3d 458, 463 (5th Cir. 2010), the Fifth
Circuit held that the district court had no power to sanction conduct that occurred in an arbitration
proceeding and pointed out that the defendant could have asked the American Arbitration
Association to re-open the proceedings so it could request that the arbitrator award sanctions.
Similarly, in FDIC v. Maxxam, Inc., 523 F.3d 566, 593–94 (5th Cir. 2008), the Fifth Circuit vacated
4

While there is a split among the Circuits as to whether attorneys’ fees incurred in the
previous action are recoverable as “costs” under Rule 41(d), the Fifth Circuit has recently held that
“[f]ee awards are permitted under Rule 41(d) only if the underlying statute defines ‘costs’ to include
fees.’” Portillo v. Cunningham, 872 F.3d 728, 739 (5th Cir. 2017).
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a fee award, in part because it sanctioned conduct that occurred in an administrative court
proceeding. It explained, “We are persuaded that in imposing the $50 million in sanctions for an
administrative proceeding in Washington, DC, the district court abused its discretion, and that only
the costs related to the district court proceedings are sustainable.” Id. at 593. Accordingly, it would
be improper for this Court to sanction conduct occurring before an arbitrator.
Based upon the foregoing, the Court does not find that Kelly is not entitled to attorneys’ fees
under Rule 41(d).
C.

Conclusion
As stated above, the Court finds that Kelly was not a “prevailing party” as meant by Rule

54(d)(1). Even if it were a prevailing party, Kelly has failed to demonstrate that it is entitled to
attorneys’ fees and costs under Section 19.11 of the Franchise Agreements, Section 134A.005 of the
Texas Civil Practices & Remedies Code or Federal Rule of Civil Procedure 41(d). Accordingly,
Kelly’s Opposed Motion for Attorneys’ Fees and Costs (Dkt. No. 96) is DENIED.
SIGNED this 15th day of June, 2018.

_____________________________________
ANDREW W. AUSTIN
UNITED STATES MAGISTRATE JUDGE

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