Does misappropriation of trade secrets create a presumption of irreparable injury in Texas?

This is one of my best blog posts to come down the pike. It’s going to cement my blog’s status as one of the best sources for new developments in Texas trade secrets law. But maybe I’m being too presumptuous.

I’m guessing my Fivers don’t obsess over every new Texas trade secrets case like I do. So you may not realize the Texas Supreme Court made a big change to Texas trade secrets law on Juneteenth 2020.

The opinion, Pike v. Texas EMC Management, LLC, __ S.W.3d __, 2020 WL 3405812 (Tex. June 19, 2020), sparked a huge debate on law Twitter. One camp says that when Justice Brett Busby writes an opinion pouring out a multi-million-dollar jury verdict, it’s a “Buzz-burn.” The other faction says it’s a “Buzz-kill.”

But the change I’m talking about may have flown under the radar. Justice Busby’s opinion covered a lot of legal ground. So you may not have noticed that Pike overruled a line of Texas cases that say irreparable injury is presumed when a defendant misappropriates trade secrets.

At least I think it did.

Let’s drill down into the Pike case to understand why, and then I’ll explain why it’s important.

The secret sauce in Pike was a new kind of cement developed by EMC Cement. Pike was the President. When concrete cratered, a new company called VHSC bought the EMC Cement plant at a foreclosure sale and hired President Pike. See id. at *1-3.

The jury found that VHSC and Pike misappropriated EMC Cement’s trade secrets, and the trial court entered a judgment for millions in damages, including $1.5 million for misappropriation of trade secrets. Id. at *4. The Texas Supreme Court reversed the damage award on the kind of procedural and evidentiary grounds only an appellate lawyer could love. See id. at *12-13.

EMC Cement had also asked for a permanent injunction to stop VHSC and Pike from continuing to use the trade secrets. The trial court denied that request. Id. at *22.

But if the jury found that the defendants misappropriated the trade secrets, why didn’t that finding entitle EMC Cement to a permanent injunction against future use of its trade secrets?

The Court of Appeals presumed imminent and irreparable injury

That’s what the Waco Court of Appeals wanted to know. The Court of Appeals first said that the misappropriation of trade secrets established a presumption of imminent harm. Pike v. Texas EMC Mgm’t, LLC, 579 S.W.3d 390, 427 (Tex. App.—Waco 2017). Pike and VHSC “were in possession of EMC Cement’s trade-secret information and were in a position to use it,” the court said, so “imminent harm is presumed.” Id.

But imminent harm is not the same as irreparable harm, as I explained in Injunction Junction, What’s Your Function? Imminent means something is about to happen. Irreparable means you can’t compensate for that thing with damages. Those are two different things.

It’s easy to see why misappropriation of trade secrets would establish a presumption of imminent harm. If the defendant takes the plaintiff’s trade secrets and is in a position to use them, it’s not a big stretch to say harm is about to happen.

But irreparable? I don’t see how possession of the plaintiff’s trade secrets by a defendant in a position to use them proves that damages would be inadequate to compensate for the use of the trade secrets. That’s a non sequitur. I suspect this notion started with courts confusing imminent and irreparable. Plus, courts may have been looking for an easy rationale for affirming injunctions, even where there was really no evidence of irreparable injury.

However it came about, there is a line of Texas cases suggesting a presumption of irreparable injury arises when a defendant is in a position to misuse the plaintiff’s confidential information or trade secrets, and the Court of Appeals in Pike cited some of those cases. Id. at 428.

For example, in Williams v. Compressor Engineering Corp., 704 S.W.2d 469, 470 (Tex. App.—Houston [14th Dist.] 1986, writ ref’d n.r.e.), the court said a finding of irreparable injury is unnecessary where a former employee is working for a direct competitor.

In IAC, Ltd. v. Bell Helicopter Textron, Inc., 160 S.W.3d 191, 200 (Tex. App.—Fort Worth 2005, no pet.), the court said that “[w]hen a defendant possesses trade secrets and is in a position to use them, harm to the trade secret owner may be presumed,” and “[t]he threatened disclosure of trade secrets constitutes irreparable injury as a matter of law.”

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The Pike case went all the way to the peak of Texas courts

Based on the case law, the Court of Appeals held that the plaintiffs satisfied both the imminent harm and irreparable injury requirements, and it was therefore an abuse of discretion for the trial court to deny a permanent injunction. Pike, 579 S.W.3d at 428.

In other words, the Court of Appeals said the misappropriation of trade secrets established a presumption of irreparable injury, supporting an injunction. But what does that really mean?

What’s a “presumption” anyway?

Let’s camp out for a second on “presumption.” What does that really mean? There are two kinds of presumptions in the law. A conclusive presumption is a legal conclusion that arises from certain facts and cannot be disputed. A rebuttable presumption is a legal conclusion that arises from certain facts, but that conclusion can be rebutted with other facts. When the law just says “presumption,” that usually means a rebuttable presumption.

So rebuttable presumptions are more common, and they essentially shift the burden of proof. Once a party offers evidence sufficient to create the presumption, the other party can rebut the presumption by offering some evidence—it doesn’t have to be a lot—that the presumption is wrong. At that point the presumption disappears. Poof! Then it’s up to the fact-finder to weigh the evidence and decide who is right.

So, for example, let’s say the cases cited by the Court of Appeals in Pike are correct that threatened misappropriation of trade secrets creates a presumption of irreparable injury. That means the burden then shifts to the defendant to offer evidence that the misappropriation will not cause irreparable injury. The defendant can rebut the presumption by offering evidence that the alleged harm can be adequately compensated by damages. Then the presumption should disappear.

That sounds pretty easy, right? You might even wonder why the presumption is such a big deal if it is so easily dispelled.

I’ll come back to that.

The question here is whether the Court of Appeals was right that the jury finding of misappropriation of trade secrets created a presumption of irreparable injury, which would entitle the plaintiffs to an injunction.

The Texas Supreme Court’s reasoning on irreparable injury

The Texas Supreme Court said no, the trial court was right and the Court of Appeals was wrong. Despite the jury’s finding of misappropriation of trade secrets, EMC Cement failed to show irreparable injury.

How can this be? What about the presumption?

Let’s remember what irreparable injury means: harm that cannot be adequately compensated by damages. As the Pike court recited:

“If there is a legal remedy (normally monetary damages), then a party cannot get an injunction too.” Pike, 2020 WL 3405812 at *24 (citing Schneider Nat’l Carriers, Inc. v. Bates, 147 S.W.3d 264, 284 (Tex. 2004)).

“[A] plaintiff can prove there is no adequate remedy at law where damages cannot be calculated.” Id. (citing Dresser-Rand Co. v. Virtual Automation Inc., 361 F.3d 831, 848 (5th Cir. 2004)).

“For purposes of injunctive relief, an adequate remedy at law exists when the situation sought to be enjoined is capable of being remedied by legally measurable damages.” Id. at *24 n. 38 (citing Dresser-Rand, 361 F.3d at 848).

So the question in Pike became whether damages for the future use of the trade secrets could be calculated in some legally measurable way. The Texas Supreme Court found that damages could be measured—and therefore there was no irreparable injury—where three factors were present:

(1) the plaintiffs themselves sought actual damages for misappropriation of the trade secrets,

(2) the plaintiffs presented expert testimony at trial that attempted to quantify the damages for the misappropriation of the trade secrets, and

(3) the damage calculation presented by the plaintiffs included damages attributable to future use of the trade secrets (not just past use).

See id. at *23.

In short, where the plaintiffs sought damages and presented expert testimony of damages partly attributable to future harm, the trial court did not abuse its discretion when it denied the plaintiffs a permanent injunction on the ground that they had an adequate remedy at law. Id. at *24.

You might be thinking this is no big deal for the plaintiffs in Pike because, hey, they still got to recover millions in damages, right? Well, no. Remember, the court poured out the trade secrets damage award.

But the fact that the plaintiffs failed to present sufficient expert testimony to support the damage award did not change the court’s conclusion that damages would have been adequate. “The failures of the EMC plaintiffs’ experts to take the necessary steps to connect their opinions to supporting data do not establish that no damages could be calculated.” Id.

Ouch. That does burn a little.

Pike teaches us that the plaintiff won’t be entitled to a trade secrets injunction where (1) the plaintiff seeks actual damages for trade secrets misappropriation, (2) the damages could be properly quantified, (3) the plaintiff presents expert testimony that tries to quantify future damages in some way, and (4) the trial court decides not to grant an injunction.

This tells us that just because there is misappropriation of trade secrets doesn’t mean there is irreparable injury. But it leaves many questions unanswered.

Questions left unanswered by Pike

First, don’t sleep on the standard of review. Technically, the holding in Pike was not that the trial court’s denial of an injunction was the right decision, but only that the trial court’s denial of an injunction was not an “abuse of discretion.” In theory, if the trial court judge had decided to grant an injunction, the court could have found that decision was also not an abuse of discretion (and I suspect that’s what would have happened).

But still, the standard of review is not the whole story. What happened to the presumption of irreparable injury? The Texas Supreme Court didn’t say it was overruling the cases that say misappropriation of trade secrets creates a presumption of irreparable injury. But it did say there was no irreparable injury, even where the jury found misappropriation of trade secrets. So how could the presumption still apply?

There are two ways to look at this. One is that Pike overruled the “presumption” line of cases sub silentio. “Sub silentio” is a Latin phrase that means “like a thief in the night.” You could interpret Pike as rejecting the presumption of irreparable injury without expressly saying so.

But another way to look at it is that, even assuming the evidence of misappropriation created a presumption of irreparable injury, there was other evidence that rebutted the presumption. Namely, the evidence that damages could be calculated. This is probably the better interpretation.

 

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It’s really not my place to tell you how to interpret Pike

The rest of the questions raised by Pike arise from the old trick of removing just one of the factors present in the case and asking if the result would change.

Let’s say the plaintiff presents expert testimony limited to past damages, without taking into account any future damages. Or let’s say the plaintiff doesn’t present any expert testimony whatsoever on damages. Would these differences change the result?

You could argue it shouldn’t make any difference. The question is not whether the plaintiff asked for damages or proved damages, but whether the plaintiff could have sought damages for the alleged misappropriation and reasonably quantified them.

So I think it comes down to whether anyone offers evidence that damages could or could not be calculated. And that leads to my practice tips.

Practice tips suggested by the Pike decision

Considering the importance of the irreparable injury requirement, you’d think lawyers on both sides of trade secrets injunction fights would routinely offer evidence to show that damages would or would not be adequate to compensate the plaintiff. But in practice, lawyers rarely do this, especially at the temporary injunction stage.

Why is that?

I think it’s mainly because the lawyers are focused on other issues. Litigators in these situations instinctively focus on whether the defendant did something wrong. Whether the resulting injury is “irreparable” is usually an afterthought.

And there is good reason for this instinct. In practice, trial court judges usually decide temporary injunctions based on how wrongful they think the defendant’s conduct was. See Does a Breach of a Texas Non-Compete Cause “Irreparable Injury”?  The judges don’t always think that hard about whether the threatened harm is irreparable.

And the trial court judges really don’t need to worry too much about it. A decision on a temporary injunction almost always holds up on appeal, because the Court of Appeals applies an “abuse of discretion” standard.

That’s not the only reason lawyers and judges don’t focus on irreparable injury. Even when they address the common-law requirements for an injunction, they tend to focus on whether the injury is imminent. But as I said, imminent and irreparable are two different things. Imminent means something is about to happen if the judge doesn’t stop it. That has nothing to do with whether damages would be adequate to compensate for the harm that is about to happen.

In many cases, you can get by focusing on whether the harm is imminent, but if you really want to bring your “A game” to a temporary injunction fight, you should actually offer evidence concerning the irreparable injury element. This isn’t my first temporary injunction rodeo, so I have some ideas on this, some of which I previously shared in Temporary Injunction Rulings in Texas Non-Compete Cases.

If you represent the plaintiff who is trying to get a temporary injunction in a trade secrets case, you want somebody to testify that it would be difficult to calculate the damages that would result from the defendant’s use of the trade secrets. Even better, you want that person to give specific reasons why calculating damages would be difficult.

Conversely, if you represent the defendant in a trade secrets injunction hearing, you want to offer evidence that the plaintiff could calculate the damages resulting from the use of the alleged trade secrets. This can be counter-intuitive, especially to your client. So you’ll want to explain in advance why it sounds like you’re offering evidence to prove damages for the plaintiff.

But what kind of evidence? One great way to get this evidence is on cross-examination of the plaintiff or plaintiff’s representative. “So Mr. CEO, it says in this Petition your company is claiming trade secrets damages in this case, correct?” Yes, the CEO will have to say. “But there’s no way you could calculate those damages with any reasonable certainty, is there?” You get the idea.

At the least, you can prepare your client to testify that “the plaintiff could calculate the damages that would result from my use of the alleged trade secrets.” That’s better than nothing. But that sounds a little conclusory, so it’s even better if your client can testify specifically about how damages could be calculated. If this makes you nervous, you can preface it by saying “we’re not agreeing to any claim for damages made by the plaintiff.”

But if you really want to show that damages would be adequate, consider expert testimony. You usually don’t have much time to prepare for a temporary injunction, but you probably have enough time to find and hire a qualified damages expert. The expert doesn’t have to do a whole damages calculation.

All you really need is for the expert to review the plaintiff’s pleadings, and maybe the depositions (if there are any), and then to testify that a qualified expert could calculate the amount of damages that would result from the use of the trade secrets alleged by the plaintiff. “I have calculated damages in dozens of cases like this one,” your damages expert can probably say. “It’s not necessarily easy, but it can be done with reasonable certainty, and it could be done in this case.”

Boom. You just rebutted any presumption of irreparable injury.

Now that’s a Buzz-burn.

_______________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

3 thoughts on “Irreparable Injury, I presume?

  1. After t reading the first two paragraphs of this post I read the Pike case before proceeding. My first reaction to the case was a near headache trying to understand the various business deals leading to the disputes. My first conclusion on this is my recurrent amazement at the task of trial lawyers guiding juries through such complex sets of facts. My second conclusion is again one of amazement, that the judges are able to come to grips with the interweaving threads of legal concepts regardless of their different findings ranging from trial court through to Supreme Court. However, I was most intrigued by Zach’s discussion of the presumption issue concerning trade secrets. His analysis shows how a lawyers approach to a problem can be a mental game of Jenga – removing or not removing a piece can cause the argument to fall one way or the other. He certainly provides a vivid lesson on an often ignored element when making a case during a trade secrets injunction hearing. What is so amazing is how we easily forget such a fundamental line of reasoning. To put this bluntly, this article is a great lesson for anyone preparing for a trade secret injunction hearing. For some of us, certainly for me, we needed Zach’s analysis of Pike to even appreciate the need to do so.

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