Injunctions are a powerful deterrent against those who seek to misappropriate valuable trade secrets. And without preliminary injunctions — which typically last until the conclusion of a trial — trade secret owners can face irreparable and imminent losses and damage to their reputation throughout litigation. At the preliminary injunction hearing, the trial court typically evaluates the arguments of counsel, evidence presented, and the credibility of witnesses, often with much discretion.
But the trial court’s discretion has limits. Recently, the U.S. Court of Appeals for the 5th Circuit vacated a district court’s refusal to enter a preliminary injunction, remanding the case for further reconsideration.
Background
In 2022, Direct Biologics — which develops and manufactures pharmaceutical products — filed a trade secret lawsuit against its former senior executive, Adam McQueen, and his new employer, Vivex Biologics. Direct Biologics, L.L.C. v. McQueen, No. 1:22-CV-381, 2022 WL 1409984, at *1 (W.D. Tex. May 4, 2022). McQueen’s responsibilities at Direct Biologics allegedly had included participating in intellectual property and product development, sales initiatives, operations, regulatory and compliance. Alleging that McQueen’s employment with Vivex violated McQueen’s noncompetition obligations, Direct Biologics sought to enjoin McQueen from: (1) working for Vivex Biologics; and (2) using Direct Biologics’ confidential and trade secret information. The Western District of Texas denied Direct Biologics’ motion for preliminary injunction, finding that it did not present sufficient evidence of the essential element of irreparable harm.
5th Circuit Findings on Irreparable Harm
On April 3, 2023, the 5th Circuit ordered the trial court to reconsider its denial of the preliminary injunction. Direct Biologics, L.L.C. v. McQueen, 63 F.4th 1015, 1017 (5th Cir. 2023). The 5th Circuit found that the district court correctly refused to apply a presumption of irreparable harm where a “highly trained employee is continuing to breach a non-competition covenant.” Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 236 (Tex. App.—Houston [1st Dist.] 2003, no pet.). According to the court, the plaintiff needed to provide evidence of some harm, apart from McQueen’s breach of the restrictive covenants, to merit a presumption of irreparable harm.
However, the 5th Circuit also held that the district court erred by accepting, without particularized findings, that any harm could be remedied by monetary damages. According to the 5th Circuit, the lower court (1) “did not make any findings as to whether it was likely that McQueen would use or disclose DB’s confidential and trade secret information during the pendency of the lawsuit (finding only that there was no evidence that he already used or disclosed such information)”; and (2) “did not make any assessment as to whether money damages would be easy or difficult to quantify.” Thus, the 5th Circuit remanded the case with direction that the lower court “make particularized findings regarding irreparable harm,” including the likelihood of misuse of confidential information during the case and the difficulty of quantifying damages, should such misuse occur.
Practice Tips and Takeaways
As shown by Direct Biologics v. McQueen, trade secret plaintiffs cannot blindly rely on a presumption that a former employee’s noncompetition agreement will justify an injunction — especially without proof of direct competition or evidence of misappropriation. Plaintiffs should be prepared to identify the trade secrets and information the employee might possess or use in the employee’s new role that would cause imminent and irreparable harm.
In contrast, defendants should be prepared to show how a plaintiff has failed to demonstrate past, present and future misuse of information and the failure to show irreparable harm. Defendants also can prepare specific arguments on the potential quantification of plaintiff’s damages and prepare specific findings for the trial court to enter that will withstand appellate scrutiny.
Trade secret protection and enforcement will remain vital in this digital age to protect a company’s investments, especially given the Federal Trade Commission’s recent proposal to limit noncompetition agreements. While the FTC’s proposed rule is not yet in force, companies with valuable information should continue to focus on protecting and enforcing their trade secrets with reasonable safeguards and best practices.