Fuzzy Language: The Specificity Requirement in Departing Employee Injunctions

Injunctions are common in trademark litigation. Suppose a global social media behemoth decides to use the name META. Suppose it doesn’t first do a trademark search to see who is already using META and for what kinds of products and services. Suppose it turns out there’s a small company already using META for arguably related products and services.

I know, it’s a crazy hypothetical, but stay with me.

The small company, the “senior” user, might get an injunction prohibiting the big company, the “junior” user, from using META as a trademark. That’s pretty obvious.

But what if the judge also orders the big company not to use “any trademark confusingly similar to META” or “any trademark that infringes on plaintiff’s META mark”?

There’s an obvious problem. Let’s say the big company decides to use BETA instead. Is that confusingly similar? Does it infringe? There’s no way to know for sure until a court rules on the issue.

Not only that, but “confusingly similar” is precisely the issue in dispute in a trademark lawsuit (typically).

So not only does the “confusingly similar” injunction require the defendant to guess whether a judge will find its new trademark is confusingly similar or not, that question will usually be a matter in dispute between the two parties.

For these very reasons, it is a general rule of trademark law that an injunction must specifically identify the trademark the defendant is not allowed to use, rather than relying on general language like “any mark confusingly similar to plaintiff’s mark.”

As trademark guru McCarthy explains in his treatise:

An injunction which merely forbids a defendant from performing “acts of unfair competition,” or from “infringing upon plaintiff’s trademarks and trade secrets” adds nothing to what the law already requires. If an injunction is so worded, then the factual elements of what exactly is “unfair competition” or “trademark infringement” must be re-hashed all over again in a contempt hearing.

5 McCarthy on Trademarks and Unfair Competition § 30:13 (4th ed.).

In short, an injunction that effectively just tells the defendant not to violate the law is not sufficiently specific.

The Specificity Requirement

The same kind of specificity problem often comes up in lawsuits involving non-competes, trade secrets, and other “departing employee” issues.

There are two big recurring issues:

1. Does an injunction that restricts the use or disclosure of confidential information need to specifically identify the restricted confidential information?

2. Does an injunction that restricts contact with customers need to specifically name the restricted customers?

The issue is essentially the same in any state, but I’ll look at Texas law as an example, because that’s where I practice.

First some general principles:

An injunction must be “specific in terms” and “describe in reasonable detail and not by reference to the complaint or any other document, the act or acts sought to be restrained.” Tex. R. Civ. P. 683.

An injunction “must be as definite, clear and precise as possible and when practicable it should inform the defendant of the acts he is restrained from doing, without calling on him for inferences or conclusions about which persons might well differ and without leaving anything for further hearing.” Villalobos v. Holguin, 208 S.W.2d 871, 875 (Tex. 1948); accord Hellenic Inv., Inc. v. Kroger Co., 766 S.W.2d 861, 866 (Tex. App.—Houston [1st Dist.] 1989, no writ).

Lack of specificity in the injunction cannot be cured by pointing to the defendant’s alleged knowledge outside the four corners of the injunction. Computek Computer & Office Supplies, Inc. v. Walton, 156 S.W.3d 217, 222-23 (Tex. App.—Dallas 2005, no pet.).

An injunction does not have to “specifically enumerate every possible act that might constitute and unauthorized practice.” Lasser v. Amistco Separation Products, Inc., No. 01-13-00690-CV, at *3 (Tex. App.—Houston [1st Dist.] Feb. 6, 2014, no pet.) (mem. op.). It should be broad enough to “prevent repetition of the evil sought to be stopped,” even if the conduct takes a “somewhat different form calculated to circumvent the injunction as written.” Id. (citing San Antonio Bar Ass’n v. Guardian Abstract & Title Co., 291 S.W.2d 697, 702 (Tex. 1956)).

But the injunction does need to “spell out the details of compliance in clear, specific and unambiguous terms so that [the defendant] will readily know exactly what duties or obligation are imposed upon him.” Drew v. Unauthorized Practice of Law Comm., 970 S.W.2d 152, 156 (Tex. App.—Austin 1998, pet. denied).

With these general principles in mind, let’s consider an injunction that orders an employee not to use or disclose the “confidential” or “proprietary” or “trade secrets” information of her former employer.

The Specificity Requirement Applied to Restricted Customers and Restricted Information

You can immediately see the problem. If the injunction does not specifically identify what the confidential information is, it may be difficult for the employee and her lawyer to figure out what information is covered.

A potential solution is to insert a definition of confidential information that tracks the definition in the employee’s employment agreement. But usually that won’t help much. Those definitions tend to be both overbroad and vague, i.e. they use broad terms and define virtually everything as confidential.

The problem is compounded by the fact that there is usually a dispute about what information is or is not confidential, or a trade secret.

For example, let’s say the former employer claims that its customer lists are trade secrets. The former employee has a list of her own customers (either an actual written list, or a list in her mind—in theory it doesn’t really matter which). The employee contends the list is not a trade secret because the names of the customers are readily available to competitors. The former employer disagrees.

This is not theoretical. I make these kind of arguments—on both sides—all the time in my practice.

In this situation, an injunction that does not define the confidential information or trade secrets specifically puts the employee in an untenable position: can she use her knowledge of her customer list or not?

Of course, she could just use it, and if the opposing party complains that she violated the injunction, she just says “no, there’s no violation because the injunction says trade secrets and that list is not a trade secret.” But what if the judge disagrees?

Would you believe the judge has the power to hold the employee in contempt of court?

You see the problem.

But let’s consider the issue from the former employer’s perspective as well. There are several good reasons for not trying to specifically define the confidential information or trade secrets.

First, the employer would argue, as a practical matter the parties to the lawsuit usually know what the disputed confidential information is. When the employee complains that she can’t tell from the injunction what the confidential information is, the former employer sometimes has a decent argument that the employee is just playing coy or feigning ignorance.

You don’t know what the confidential information is, the employer might say, how about we start with the hundred-page customer list you downloaded and emailed yourself on your last day of work?

Second, it’s difficult to draft a specific definition that will capture all of the employer’s confidential information, especially early in a lawsuit when the employer is still in the dark about what the employee has.

Third, there’s a practical problem with listing specific trade secrets in a court order. You’re spilling the secrets to the world! (But this is easily solved by referring to a list in a sealed exhibit.)

These are potentially valid points, depending on the facts, but overall I think the employee usually has the better argument. When an injunction prohibits the use of unspecified confidential information, it leaves the defendant to guess about one of the very issues on which the parties usually disagree.

Another common feature of a temporary injunction in a departing employee lawsuit is prohibiting the employee from soliciting or doing business with a certain category of customers. The category might be “customers of Employer,” or “customers of Employer the Employee serviced,” or “customers of Employer the Employee sold to in her last year of employment.”

This kind of injunction raises the same kind of specificity issues and arguments we’ve already covered as to confidential information.

Texas Case Law

So what does the Texas case law say about these issues? Does a temporary injunction need to define the restricted confidential information specifically? Does it have to identify the restricted customers specifically?

I’d say the “weight of authority” is on the specificity side, but admittedly, it’s a mixed bag.

There are Texas cases holding that an injunction that did not specifically identify the confidential information or trade secrets was not sufficiently specific.[1]

On the other hand, there are some Texas cases holding that an injunction that did not specifically identify the confidential information or trade secrets was still sufficiently specific.[2]

We find the same kind of split over naming the customers.

There are Texas cases holding held that an injunction that did not specifically identify the customers was not sufficiently specific.[3]

But some Texas cases have held that an injunction that did not specifically identify the customers was still sufficiently specific.[4]

As Yogi Berra said, it’s like déjà vu all over again.

So what gives? Is the difference in these cases due to differences in the facts, or differences in philosophy?

Probably some of both. Either way, if you represent the party asking for an injunction in a departing employee lawsuit, it’s probably better to draft a proposed injunction that specifically describes the restricted confidential information and names the restricted customers. Otherwise, you’re just giving the other party an issue to appeal.

Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.

[1] See, e.g., Retail Services WIS Corp. v. Crossmark, Inc., No. 05-20-00937-CV, 2021 WL 1747033, at *12 (Tex. App.—Dallas May 4, 2021, pet. denied) (mem. op.); Cooper Valves, LLC v. ValvTechnologies, Inc., No. 14-16-00879-CV, 2017 WL 3090159, at *9 (Tex. App.—Houston [14th Dist.] July 20, 2017, no pet.); Lasser v. Amistco Separation Products, Inc., No. 01-13-00690-CV, at *4-5 (Tex. App.—Houston [1st Dist.] Feb. 6, 2014, no pet.) (mem. op.); Ramirez v. Ignite Holdings, Ltd., No. 05-12-01024-CV, 2013 WL 4568365, at *2 (Tex. App.—Dallas Aug. 26, 2013) (mem. op.).

[2] See, e.g., IAC, Ltd. v. Bell Helicopter Textron, Inc., 160 S.W.3d 191, 201-2 (Tex. App.—Fort Worth 2005, no pet.); HMS Holdings Corp. v. Public Consulting Group, Inc., No. 05-15-00925-CV, 2016 WL 1179436, at *3-4 (Tex. App.—Dallas March 28, 2016, no pet.) (mem. op.).

[3] See, e.g., Arterberry v. Willowtax, LLC, No. 05-21-00238-CV, 2022 WL 472796, at *5 (Tex. App.—Dallas Feb. 16, 2022) (mem. op.); Retail Services WIS Corp. v. Crossmark, Inc., No. 05-20-00937-CV, 2021 WL 1747033, at *13 (Tex. App.—Dallas May 4, 2021, pet. denied) (mem. op.); Super Starr Int’l, LLC v. Fresh Tex Produce, LLC, 531 S.W.3d 829, 849-50 (Tex. App.—Corpus Christi 2017, no pet.); Computek Computer & Office Supplies, Inc. v. Walton, 156 S.W.3d 217, 222-23 (Tex. App.—Dallas 2005, no pet.).

[4] See, e.g., Thomas v. A*Med Management, Inc., No. 01-19-00564-CV, 2020 WL 5269412, at *6-7 (Tex. App.—Houston [1st Dist.] Sept. 3, 2020, no pet.) (mem. op.); Lockhart v. McCurley, No. 10-09-00240-CV, 2010 WL 966029, at *4-5 (Tex. App.—Waco March 10, 2010, no pet.) (mem. op.); Cottingham v. Engler, 178 S.W.2d 148, 151 (Tex. Civ. App.—Dallas 1944, no writ). See also Rugen v. Interactive Business Systems, Inc., 864 S.W.2d 548, 552-53 (Tex. App.—Dallas 1993, no writ) (injunction that referred to customers identified on two sealed exhibits was sufficiently specific).

Employee Hardship in Texas Non-Compete Litigation

You get the same sob story in most non-compete lawsuits. “Your Honor, if you enter an injunction enforcing this non-compete, my client won’t be able to make a living and support his family.”

You might think this sort of argument is inappropriate. The judge should decide whether to enter an injunction based on the law, not sympathy. If an employee agrees to a non-compete and gets compensated for it, she doesn’t get to avoid it just because she later decides it’s inconvenient. The “hardship” argument should be out of bounds, you might think.

But you would be wrong. An injunction is an “equitable” remedy, so it’s not just a question of “the law,” but a question of equity, or fairness.

The Balance of Equities Rule

This is the rule in Texas state court: “Because an injunction is an equitable remedy, a trial court weighs the respective conveniences and hardships of the parties and balances the equities.” Computek Computer & Office Supplies, Inc. v. Walton, 156 S.W.3d 217, 220 (Tex. App.—Dallas 2005, no pet.). See also NMTC Corp. v. Conarroe, 99 S.W.3d 865, 868 (Tex. App.—Beaumont 2003, no pet.) (“An application for injunction is a request that a court exercise its equitable jurisdiction, and in exercising that power the court balances competing equities”); Surko Enterprises, Inc. v. Borg-Warner Acceptance Corp., 782 S.W.2d 223, 225 (Tex. App.—Houston [1st Dist.] 1989, no writ) (“In determining whether to order a temporary injunction, the trial court balances the equities of the parties and the resulting conveniences and hardships”).

It’s a common-law rule, meaning a rule made by courts. Texas state courts balance the equities even though Rule 683 of the Texas Rules of Civil Procedure doesn’t say anything about that. See Reliant Hosp. Partners, LLC v. Cornerstone Healthcare Group Holdings, Inc., 374 S.W.3d 488, 503 (Tex. App.—Dallas 2012, pet. denied).

And for my Advanced readers, the Texas non-compete statute, which does not speak to the requirements for a temporary injunction, does not preempt this common-law rule. NMTC Corp. v. Conarroe, 99 S.W.3d 865, 868 (Tex. App.—Beaumont 2003, no pet.).

The rule is effectively the same in federal courts: to obtain a preliminary injunction, the plaintiff must show that “the threatened injury outweighs any damage that the injunction might cause the Defendant.” Yellowstone Landscape v. Fuentes, No. 4:20-1778, 2020 WL 4547150, at *3 (S.D. Tex. Aug. 8, 2020) (citing Nichols v. Alcatel USA, Inc., 532 F.3d 364, 372 (5th Cir. 2008)). That’s just another way of saying weigh the balance of equities or hardships.

Implicit in this rule is the idea that the court might deny an injunction based on the hardship on the employee, even if the employer would otherwise be entitled to an injunction.

Think about it. If the employer isn’t entitled to an injunction anyway, there’s no point in arguing about the balance of equities. Hardship on the employee only becomes a real issue if the employer satisfies the other elements required to get an injunction. Thus, the command to “balance the equities” raises the prospect that the hardship on the employee could be the decisive factor weighing against an injunction.

Does that actually happen in practice?

The short answer is no. In most cases the hardship factor is just an afterthought used to justify whatever decision the court has already made about the injunction. If the court wants to grant an injunction, it will say that the balance of equities weighs in favor of enforcing the non-compete. If the court doesn’t want to grant an injunction, it will cite the hardship on the employee as an additional factor against enforcement.

But we mustn’t be too cynical about the hardship issue. In close cases the hardship on the employee may be enough to tip the scales of justice towards denying the injunction. That means the lawyer for the employee who is seeking to avoid the injunction needs to offer evidence of the hardship, and the lawyer representing the employer trying to obtain an injunction needs to be prepared to counter such evidence. More about that later.

First let’s look at some examples of non-compete cases that “balance the equities” to see if they bear out my short answer.

Why It’s Hard to Appeal an Injunction Ruling

In NMTC Corp. v. Conarroe, 99 S.W.3d 865, 869 (Tex. App.—Beaumont 2003, no pet.), the trial court denied a non-compete injunction, and the Court of Appeals affirmed the trial court’s ruling, citing the hardship on the employee as “the determining factor” supporting the trial court’s ruling.

In O’Brien v. Rattikin Title Co., No. 2-05-238-CV, 2006 WL 417237, at *5-6 (Tex. App.—Fort Worth Feb. 23, 2006, no pet.), the trial court granted a non-compete injunction, and the Court of Appeals affirmed the trial court’s ruling, rejecting the argument that the hardship on the employee outweighed the employer’s business interests.

Notice a pattern?

Yes, of course. The appellate courts almost always uphold the trial court’s decision on an injunction, whether the decision is to grant or to deny.

I say “almost” because, of course, there are exceptions. There are some cases where the appellate court reverses the trial court’s decision on an injunction. But those cases are few and far between.

Why is that? Why doesn’t the hardship factor result in more reversals on appeal?

I think it’s a combination of three things.

First, it’s the standard of review. The court of appeals will only reverse if the trial court’s decision on the injunction was an “abuse of discretion.” That means even if the appellate court might have decided the injunction a different way, that’s not enough to reverse. The party challenging the ruling on appeal has to show the trial court didn’t just get it wrong, but really wrong. See, e.g., Univ. Health Servs., Inc. v. Thompson, 24 S.W.3d 570, 578-79 (Tex. App.—Austin 2000, no pet.) (emphasizing standard of review in affirming trial court’s balancing of equities).

Second, the balance of equities is just one factor. If the other requirements for an injunction—like whether the violation of the non-compete will cause irreparable injury to the employer—weigh heavily to one side, it is unlikely the hardship factor will be so strong that it shifts the scales in the other direction.

Third, the balance of equities is a one of those notorious “balancing” tests. The problem with a balancing test is that you can almost always come up with a reasonable argument going one way or the other. There are even memes about this.

So the bottom line is that you shouldn’t put too much stock in the balance of equities issue. Hardship on the employee is not likely to save the employee if the case for an injunction is otherwise strong, and vice versa.

And yet.

There’s always the chance that the hardship factor makes the difference. So you’ve got to be prepared for it.

And while most judicial opinions give short shrift to the balance of equities, there are some that dig a little deeper. Let’s look at some examples.

Cases Applying the Balance of Equities Rule

A good case to cite if you represent the employee, at least in Texas where I practice, is Yellowstone Landscape v. Fuentes, No. 4:20-1778, 2020 WL 4547150 (S.D. Tex. Aug. 8, 2020).

The employee in Yellowstone Landscape, Mr. Fuentes, was an account manager for commercial landscaping accounts, like Yellowstone’s contract with the Harris County Flood Control District for mowing and maintenance of flood control channels in Houston. Mr. Fuentes interacted with the customer to make sure the work was being done properly, but he was not involved in preparing or submitting bids. Id. at *1.

There were some “bad facts” for the employee. Mr. Fuentes resigned, falsely told his employer he was starting his own tree trimming business, and then violated his non-compete by going to work for a competitor, who had recently underbid Yellowstone on a project. Id. at *1-2.

But the balance of equities favored Mr. Fuentes. Yellowstone was the fifth-largest landscaping firm in the nation, with over $200 million in annual revenue. Mr. Fuentes made $75,000 and supported a family of five. An injunction would have caused him to lose his job in the middle of a pandemic. He paid for one child’s college tuition, and his wife needed surgery for a herniated disc. His lawyer was working pro bono. Id. at *8.

With those facts, I don’t even have to tell you what the court’s ruling was.

But of course, most cases don’t have hardship facts as sympathetic or well developed as in Yellow Landscape.

For example, in Accruent, LLC v. Short, No. 1:17-CV-858-RP, 2018 WL 297614 (W.D. Tex. Jan. 4, 2018), the federal district court held that the balance of equities favored an injunction where the employee did not offer “evidence of how much less he might earn in a different industry” or explain “what diminished earning would mean for his family.” Id. at *9. The court noted that under the agreement as reformed, the employee could still work in the same industry, just not in a role substantially similar to his role with the former employer. Id.

And courts tend to be less sympathetic about hardship to the employee where the employee took the employer’s confidential information. See, e.g., ProofPoint, Inc. v. Boone, No. A-21-CV-667-LY, 2021 WL 5194724, at *6 (W.D. Tex. Sept. 21, 2021) (balance of equities favored employer where employee intentionally downloaded, retained, and disseminated files containing the employer’s confidential proprietary company information while he began working for a competitor).

A state court case that applies reasoning similar to Accruent is York v. Hair Club for Men, LLC, No. 01-09-00024-CV, 2009 WL 1840813 (Tex. App.—Houston [1st Dist.] June 24, 2009, no pet.) (mem. op.). In that case, the plaintiff’s key witness was not only the Hair Club’s president, he was also a client.

Sorry, I just had to get that in.

But seriously, in the Hair Club case there was evidence that the employees, who were licensed cosmetologists, had longstanding relationships with clients, and that 41 former Hair Club customers had followed the employees to a competitor. Id. at *6. The Court of Appeals reasoned that the balance of equities did not weight against the trial court’s injunction, where the injunction did not prevent the employees from working in the hair replacement industry generally and seeking new customers, but only enjoined them from soliciting Hair Club customers. Id.

There’s a key point we can derive from both Accruent and Hair Club: the hardship on the employee will be less of a factor when the injunction is narrowly tailored to protecting the employer’s goodwill with customers.

So, for example, an injunction that entirely bars an employee from working for a competitor is likely to impose too great a hardship. On the other hand, an injunction that only bars the employee from doing business with specific customers of the employer creates less of a hardship.

That means if the trial court does its job right, the burden on the employee should rarely be a decisive factor. A properly tailored injunction should already balance the employer’s interest in protecting its confidential information or goodwill against the employee’s right to use his general knowledge, skill, and experience in the industry.

So there’s our answer. If the court properly limits the scope of the injunction to preventing the employee from taking her customers with her, then the hardship on the employee becomes a non-issue. Right?

I wouldn’t go that far. To understand why, let’s take a little trip to Beaumont.

Why the Balance of Equities Inherently Favors the Employee

If you practice litigation in Texas, you know Beaumont is a fun venue. Maybe not quite as exciting as Hidalgo County, but it’s close.

And if you know anything about East Texas, you know the competition for sales of MATCO® hand tools is fierce in Hardin County. So when tool salesman Jule Conarroe left Matco Tools and went to work for competitor Cornwell Tools, you just knew, “this means war.”

And sure enough, Matco Tools filed suit to get an injunction. Conarroe admitted some of the customers he was selling Cornwell products to had also been customers in his territory at Matco, id. at 866, but the trial court judge found the equities weighed heavily in favor of denying the injunction. NMTC Corp. v. Conarroe, 99 S.W.3d 865, 869 (Tex. App.—Beaumont 2003, no pet.)

Specifically, the judge found that “if a temporary injunction issues, Mr. Conarroe will be put out of business.” The alternative was more equitable. “If a temporary injunction does not issue, Matco may lose some sales within the territory, but the ability to mitigate those losses is within Matco’s control and is subject to recoupment.” Id.

That’s some small-town Texas wisdom right there. And the Court of Appeals agreed. “In balancing the equites,” the court explained, “a trial court may consider whether the degree of injury to the applicant would be slight or significant if the temporary injunction were erroneously denied.” Id.

This really gets to the heart of the balance of hardship analysis for a temporary injunction in a non-compete case. The problem is that a ruling on a temporary injunction is not a final ruling on the merits, and the risk of getting it wrong is not evenly balanced.

Here’s what I mean, and what I think the Beaumont Court of Appeals was getting at. Suppose the trial court gets it wrong and denies an injunction enforcing the non-compete. That does impose a certain hardship on the employer, because it is probably going to lose some business that it should not have lost. But that’s a hardship that can be compensated, because the employer can seek damages for business it loses as a result of the employee breaching the non-compete (assuming the non-compete is enforceable).

The risk of getting it wrong and granting a temporary injunction is much greater. In that case, the employee has no remedy for the loss of income resulting from an erroneous temporary injunction enforcing the non-compete. I explained this problem in The Problem With Non-Competes.

No, the hardship argument should not be an automatic Get Out of Jail Free card that exempts an employee from a reasonably limited non-compete. But courts should take the employee hardship issue seriously. It shouldn’t be just an afterthought.

____________

Irreparable Injury, I presume?

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, 610 S.W.3d 763 (Tex. 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.

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.

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.

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.”

pikes-peak-highway-3799979_1920 — 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.

seattle-1619505_1920 — 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.

_______________________

Recent Case Illustrates Catch-22 for Texas Non-Compete Injunctions

They say the early bird gets the worm, but they also say all good things come to those who wait. In Texas non-compete litigation, both things can be true.

Let’s illustrate with a hypothetical. Dawn Davis leaves her sale job at Paula Payne Windows and goes to work for a fierce competitor, Real Cheap Windows. Company president Paula Payne calls her outside counsel and says, “Johnny, you’ve got to do something before Dawn takes her customers with her.”

“Have any of them left yet,” he asks. “No,” Paula says, “but it’s only a matter of time.” (#Hamilton)

“Here’s the problem,” Johnny says. “To get an injunction, I’ve got to show imminent harm, and the mere fact that she joined a competitor may not be enough.”

Paula Payne Windows reluctantly decides to wait. Then, over the next four weeks, half of Dawn’s customers stop ordering from Paula Payne and start buying their windows from Real Cheap.

Desperate to stop the bleeding, Paula Payne assigns a new sales guy, Eric Boonster, to the rest of Dawn’s accounts. But Eric doesn’t have Dawn’s experience, or her personal relationships with the customers. Two more customers jump to Real Cheap.

That’s the last straw. Paula Payne Windows sues Dawn and Real Cheap in Texas state court. Paula Payne asks the judge for a temporary injunction barring Dawn from doing business with any of the customers she serviced while working for Paula Payne.

At the hearing, Paula Payne Windows argues that its new sales guy can service Dawn’s customers, and that the customers will stick with Paula Payne Windows if the court orders Dawn to stop doing business with them. But on cross examination, Paula admits the customers are free to go to any company they want, and that she could quantify the amount of lost profits from any sales the company loses to Real Cheap.

Dawn doesn’t buy it. She gets on the stand and says, “I’ve known most of these customers for years, and there’s no way they will stay with Paula Payne if the court tells them they’re not allowed to keep buying from me.”

So, under Texas law, what is the correct ruling by the trial court judge?

(A) Grant a temporary injunction prohibiting Dawn from doing business with any of her former customers from Paula Payne Windows from that point forward. The loss of sales and customer goodwill establishes irreparable injury.

(B) Grant a temporary injunction prohibiting Dawn from soliciting or doing business with any of her former customers who have not yet left Paula Payne Windows, because there is insufficient evidence the customers who have already left would go back to Paula Payne Windows.

(C) Deny a temporary injunction. There is no evidence the customers at issue will buy from Paula Payne if they can’t buy from Dawn, and any sales Paula Payne loses can be adequately compensated with damages.

Personally, I tend to favor answer C, for reasons I explained in The Problem With Non-Competes. But to be fair, you can make a case for each one of these choices. You can find Texas cases to support any one of them.

In one recent case, the court chose answer B, the intermediate option. There is some logic to that choice, as we will see, but it results in a dilemma for the employer who is trying to enforce the non-compete and hold on to customers.

**The Gallagher Case**

In Gallagher Benefit Services v. Richardson, No. 6:19-cv-00427, 2020 WL 1435111 (E.D. Tex. March 24, 2020), Richardson admitted she was servicing over 60 former Gallagher insurance clients, despite her two-year non-compete. Gallagher sued Richardson for breach of non-compete and sought a preliminary injunction in federal court.

A preliminary injunction requires proof of a substantial threat of irreparable harm. The judge’s ruling on this element was mixed.

As to clients who were still doing business with Gallagher, the court found that Richardson’s admitted possession of a Gallagher producer report and servicing of former Gallagher clients established a threat of irreparable harm. Id. at *6.

But why would this harm be irreparable if Gallagher could obtain lost profits damages for the loss of client business?

“As to the violation of the noncompete clause,” the court said, “irreparable harm may be shown where future damages would require quantification estimates that can be avoided by an injunction that prevents the damages in the first place.” That harm could be avoided, and the status quo preserved, by enjoining Richardson from recruiting or working for any current Gallagher clients. Id.

If those clients leave Gallagher as a result of Richardon’s competition, the court acknowledged, Gallagher could attempt to quantify its damages. “But that quantification will involve estimates and thus potential undercompensation,” the court said. That irreparable harm can be avoided by an injunction against competition for current Gallagher clients, the court reasoned, noting that courts “routinely” enjoin prohibited competition in these circumstances. Id. (citing federal district court cases).

On the other hand, the court rejected Gallagher’s irreparable harm argument as to clients Richardson was already servicing. The court had specifically asked what evidence supported Gallagher’s argument that Richardson’s current clients would have stayed with Gallagher, id. at *2, and Gallagher argued that the court could “infer” that some of the clients would return to Gallagher if the court enjoined Richardson. Id. at *6. But the court said Gallagher did not prove sufficient facts to support that inference, including its capacity to service those clients.

Therefore, as to clients who had already left Gallagher for Richardson, the court found there was not enough risk to warrant disrupting the status quo with an injunction. Id. at *7.

“Without evidence of how many additional competitors Gallagher faces in the marketplace, or of Gallagher’s ability and realistic prospects of regaining any of the clients now with Richardson,” the court said, “Gallagher has not met its burden of showing more than this minimal extent [of] irreparable injury.” Id. at *8.

The court noted that “other courts have also been hesitant to eliminate a defendant’s book of business where the plaintiff has not offered sufficient evidence that the clients in question would return to the plaintiff.” Id. (citing First W. Capital Mgmt. Co. v. Malmed, No. 16-cv-1961-WJM-MJW, 2016 WL 8358549, at *11-12 (D. Colo. Sep. 30, 2016)).

Based on this reasoning, the court entered a preliminary injunction that prohibited Richardson from doing business with any Gallagher clients she serviced during her last two years at Gallagher, except for accounts she was already servicing as of the date of the injunction. Id. at *7.

**The Gallagher Dilemma**

Gallagher v. Richardson illustrates a Catch-22 facing an employer who wants to get an injunction to stop a former employee from taking customers with her. If the employer files suit and asks for an injunction before customers have left, it may be difficult to prove imminent harm, because the employee hasn’t violated the non-compete yet. But if the employer waits until after customers have left, the judge may take the Gallagher v. Richardson approach and say it’s too late to get an injunction to stop the employee from doing business with those customers.

So what is the employer with the non-compete to do?

Ideally, the employer would offer testimony that it has the ability to service the customers even without the ex-employee and that the customers are likely to continue doing business with it.

If the employer can get some of the customers to vouch for this, even better, but that’s usually hard to pull off. The last thing you want to do when you’re trying to hold on to customers is drag them into a lawsuit, especially when you’re asking them to testify against the sales person they like. And if the customer already wants to stay with you, why would you need an injunction?

So the employer may have trouble persuading the trial judge the customers will come back, and it may get stuck with the intermediate result of Gallagher v. Richardson. For that reason, some might say the lesson of the Gallagher case is that the employer should immediately file suit when the employee leaves to join a competitor.

That’s a plausible position, but it strikes me as too simplistic. What if you go to the temporary injunction hearing before any customer has left, and the employee testifies that she only plans to go after new customers? How are you going to show imminent harm? This approach strikes me as too hot.

Perhaps the “just right” approach is to monitor the situation closely and file suit as soon as two or three customers jump ship. Then you can point to those defections as evidence of imminent harm, but you can try to get an injunction to stop the employee from taking any other customers.

This still leaves the question of why damages would be inadequate. But the employer at least has cases it can cite on that issue—as the Gallagher opinion illustrates.

_______________________________________

Can a Non-Compete Grant an Injunction by Stipulation?

Listen. Do you want to know a secret? It doesn’t really matter whether a contractual stipulation to an injunction is binding on a court.

Still, most non-competes contain some kind of stipulation that a breach will cause the company irreparable injury, and the company is therefore entitled to an injunction in the event of a breach. Let’s call this an “ipso facto” clause.

There are essentially four ways courts can approach an ipso facto clause:

Find it enforceable and dispositive.
Consider it as a factor favoring an injunction.
Cite it as a factor, but without really giving it any weight.
Disregard it entirely.

In my personal opinion, no. 4 is the correct approach. I don’t think a judge should give this kind of stipulation any weight. We wouldn’t let private parties stipulate to their own rules of evidence or procedure. And it seems especially inappropriate for a temporary injunction, which is both an “extraordinary” remedy and, traditionally, an “equitable” remedy left to the discretion of the judge.

You might cite “freedom of contract.” Ok, but how much weight would you give a clause that says “in the event of any litigation between Company and Employee, the court shall declare Company the winner”?

No, I don’t think this is the kind of decision we let private parties dictate in advance, and that may explain why you won’t find many Texas cases saying an ipso facto clause is dispositive and binding on the court.

In Wright v. Sport Supply Group, Inc., 137 S.W.3d 289, 293-94 (Tex. App.—Beaumont 2004, no pet.), the court said it was unaware of any Texas case holding that an ipso facto clause alone establishes, for injunction purposes, that remedies at law will be inadequate. And in Shoreline Gas, Inc. v. McGaughey, No. 13-07-364-CV, 2008 WL 1747624, *11 (Tex. App.—Corpus Christi 2008, no pet.) (mem. op.), the court, citing Wright, said the employer cited no Texas case holding that an ipso facto clause proves there is irreparable injury or no adequate remedy at law.

Addressing an analogous issue, the court in Forum US, Inc. v. Musselwhite, No. 14-17-00708-CV, 2020 WL 4331442 (Tex. App.–Houston [14th Dist.] July 28, 2020, no pet. h.) (mem. op.), rejected the employer’s argument that the non-compete was reasonable because the agreement recited it was reasonable. “If the rule was otherwise,” the court explained, “every employer could require employees to sign an acknowledgement or reasonableness as a condition of employment and courts would be powerless to hold unreasonable covenants not to compete unenforceable as a violation of Texas public policy.” Id. at *10.

But Texas courts have sometimes cited ipso facto clauses as a factor to consider. In Wright, the court held that an ipso facto clause provided some “substantive and probative evidence” to support the trial court’s temporary injunction, citing the strong public policy of Texas favoring freedom of contract. Wright, 137 S.W.3d at 294.

This kind of “punting” seems to be the most common approach. See South Plains Sno, Inc. v. Eskimo Hut Worldwide, Ltd., No. 07-19-00003-CV, 2019 WL 1591994, at *6 (Tex. App.—Amarillo April 12, 2019, no pet.) (mem. op.) (citing ipso facto clause, in addition to evidence of irreparable injury, in support of affirming trial court’s temporary injunction); Poole v. U.S. Money Reserve, Inc., No. 09-08-137CV, 2008 WL 4735602, at *8 (Tex. App.—Beaumont Oct. 30, 2008, no pet.) (mem. op.) (citing ipso facto clause as “but one consideration in our analysis”). See also Allied Pipe, LLC v. Paulsen, No. 4:21-CV-1315, 2021 WL 6050729, at *3 (S.D. Tex. Dec. 21, 2021) (“Defendant, in his motion, is asking this Court to rule as a matter of law to set aside as unreasonable a clause that he contractually agreed was reasonable. This, the Court cannot—and will not—do. Nevertheless, out of an abundance of caution, the Court believes it appropriate to reform the Non-Competition Clause to provide a reasonable geographic restriction.”)

Citing the ipso facto clause as a non-dispositive factor is kind of an easy way out, so I get why courts would do it. But I wonder. In these cases where courts cited an ipso facto clause as a factor, did the clause actually make a difference? In other words, would the case have come out the same way if the agreement had no such clause?

I suspect the answer is yes, but of course there is no way to be sure.

I do know of at least one Texas case that seemed to find an ipso facto clause conclusive. In Henderson v. KRTS, Inc., 822 S.W.2d 769 (Tex. App.—Houston [1st Dist.] 1992, no writ), the buyer of a radio station obtained a temporary injunction prohibiting the seller from interfering with the buyer’s efforts to move the station. Id. at 771-73. On appeal, the seller argued the temporary injunction was improper because damages would be an adequate remedy. The Court of Appeals disagreed, citing the ipso facto clause. The court held that the seller, “by agreement, stipulated that [the buyer] could seek injunctive relief without the necessity of proof of actual damages.” Id. at 776. But the opinion simply decreed this without any analysis.

In a more recent case, the First Court of Appeals reached the opposite conclusion, without citing Henderson. In Malone v. PLH Group, Inc., No. 01-19-00016-CV, 2020 WL 1680058 (Tex. App.—Houston [1st Dist.] Apr. 7, 2020, no pet. h.) (mem. op.), the court said an ipso clause had no effect.

The employment agreement in Malone contained restrictive covenants prohibiting the employee from competing against the company, soliciting the company’s employees, and using or disclosing the company’s confidential information. Id. at *1. The agreement also contained an ipso facto clause, stating any breach of the restrictive covenants would cause “irreparable damage” to the company, and the company “will be entitled as a matter of right to equitable relief, including temporary or permanent injunction, to restrain such breach.” Id.

After a bench trial, the trial court found that the employee breached the confidentiality clause by forwarding a bid log report to his private email account, but the trial court also found the company failed to prove a “continuing violation” of the confidentiality provision, and it therefore denied equitable relief. Id. at *6.

On appeal, the company argued that it was entitled to an injunction under the ipso facto clause based on the breach of the confidentiality requirement. The Court of Appeals disagreed, for two reasons. First, there was sufficient evidence to support the trial court’s finding that there was no continuing violation. Second, the court said “a contracting party’s acknowledgment that the other contracting party has a right to equitable relief does not bind judicial actors or require a court to grant the equitable relief ultimately requested.” “Trial courts are afforded discretion in granting equitable relief,” the court explained, and the company “cannot remove that discretion by eliciting a contractual term from Malone authorizing injunctive relief.” Id. at *6 (citing Shoreline Gas).

So the same Court of Appeals has reached the opposite conclusion on this issue? What gives?

Here’s a hint. In both cases, the Court of Appeals affirmed the trial court’s ruling. In Henderson, the trial court granted an injunction, and the Court of Appeals affirmed. In Malone, the trial court denied an injunction, and the Court of Appeals affirmed.

Similarly, in Shoreline Gas, the case cited in Malone, the trial court denied a temporary injunction, and the Court of Appeals affirmed.

You might deduce (or is it induce?) that the rule in non-compete injunction cases is that the party who wins in the trial court wins.

That would be pretty close to accurate, but the truth is a little more complicated. Here’s what I think the “real” rules are:

1. If the trial court grants a temporary injunction to enforce a non-compete, and there is some evidence to support it, the Court of Appeals will usually affirm the injunction and might cite the ipso facto clause as a factor supporting it (although it wouldn’t be necessary, because there would be some evidence to support it anyway).

2. If the trial court denies a temporary injunction, and had some reasonable basis to do so, the Court of Appeals will usually affirm the denial and either say the ipso facto clause had no effect (as in Malone), or say that it was just one factor to consider (as in Wright).

These two rules will apply in the vast majority of cases. And in both scenarios, the Court of Appeals can punt because it doesn’t really have to decide whether the ipso facto clause is dispositive.

In the rare case where the trial court grants an injunction and there is really zero evidence of irreparable injury, then the Court of Appeals might have to bite the bullet and decide whether the ipso facto clause establishes irreparable injury, despite the lack of any evidence. But that will be rare.

So should employers continue to include ipso facto clauses in their non-competes? Well, as much as I hate to include language that I personally think should have no effect, I do include an ipso facto clause in my form non-compete. See The Plain-Language Non-Compete.

For one thing, there’s no real harm in including it. And some judges might consider the clause as a factor, or even find it dispositive, although that would be a mistake.

There’s one more reason I like to include an ipso facto clause in my form non-compete. If I later have to go to court to try to get an injunction enforcing that non-compete, the employee’s stipulation to an injunction can be useful. Why?

Sorry, you can’t expect me to give away all my secrets.

________________________

Head First Into the Abbiss: Temporary Injunction Rulings in Texas Non-Compete Cases

Offer evidence of “imminent harm” and “irreparable injury,” even if judges don’t always require it

In a non-compete lawsuit, the temporary injunction hearing is often the key event, for two reasons. First, a reasonable time limit for the non-compete is usually around the same time that the case takes to go to trial. So, if the judge enters a temporary injunction enforcing the non-compete until trial, it can be practically the same as a permanent injunction.

Second, a temporary injunction puts the company in the driver’s seat in settlement negotiations. Most employees will have to make a deal with the company, because otherwise they won’t be able to make a living.

Conversely, if the judge denies a temporary injunction, then the company is probably never going to get any injunction. That means the company is limited to seeking damages. This is significant in a Texas non-compete case, because if the non-compete is overbroad as written, the company can’t get damages either.[1]

So the stakes are high at the temporary injunction hearing. That means the lawyers better be prepared to address the enforceability of the non-compete and the traditional requirements for a temporary injunction, because some judges still care about those things.

1. A temporary injunction should be denied if the employee has not competed in the geographic area he was responsible for at the first company

In Cameron International v. Abbiss, the judge denied a temporary injunction because the employee had not breached the non-compete as limited to a reasonable geographic area.[2]

Abbiss signed a one-year non-compete with his employer, Cameron. He later went to work for a competitor, FMC, as its General Manager for the Middle East. Cameron sued Abbiss in federal court and sought a preliminary injunction.

The court found the non-compete as written was overbroad. A reasonable geographic limit would be Oman and Yemen, the court said, because (1) those were the countries Abbiss was responsible for during his last two years of employment, and (2) the evidence did not support Cameron’s claim that Abbiss received confidential Cameron information regarding the entire Middle East. The court found that much of the information Abbiss received at the meeting at issue was either publicly available or was available to employees who did not have non-competes.

The question, then, was whether to enter a preliminary injunction barring Abiss from competing in Oman and Yemen, the reasonable geographic area. The court said no, because (1) there was no evidence Abbiss had competed or intended to compete in Oman or Yemen, and (2) the confidential information Abbiss obtained regarding bids in other Middle East countries was more than six months old and likely stale.

In short, the court in Abbiss denied a temporary injunction because there was no evidence the employee breached or intended to breach the non-compete within the geographic area the court found was reasonable.

2. Judges are not always strict about the “irreparable injury” requirement

In Fantastic Sams v. Mosley, Mosley opened a competing hair salon in violation of his two-year non-compete, which covered a five-mile radius from a Fantastic Sams franchise in Cypress (the Houston suburb, not the Mediterranean island).[3] After finding the non-compete was reasonable, the judge found that Mosley’s violation of the non-compete was likely to cause irreparable injury:

Fantastic Sams . . . argued the existence of Mosley’s nearby salon, which offers nearly identical hair care services to Fantastic Sams, prevents Fantastic Sams from licensing a new franchise in the area. The court also notes that the Agreement actually contains a provision that requires Mosley to concede that violations of the Agreement constitute irreparable harm to Fantastic Sams. The court agrees with Fantastic Sams that Mosley’s continued operations of a nearby salon, in violation of the Agreement, hurts other franchisees, poses a risk of loss of goodwill, and inhibits the opening of new Fantastic Sams franchises in the area. All of these injuries cause irreparable harm to Fantastic Sams as a whole, and that harm cannot be fully remedied with damages.

“Identical hair care services.” I love that part. I can only assume there was testimony that both salons offered a unique proprietary combination of shampooing, cutting, and blow drying. But I digress.

pexels-photo-163569 — Does this look like “irreparable injury”?

The passage above from Fantastic Sams is typical of cases granting a temporary injunction to enforce a non-compete. Judges often apply the “irreparable injury” requirement loosely, especially when there is a clear violation of the non-compete.

Yes, there was a contractual stipulation to irreparable harm, but surely that can’t be dispositive. Almost every non-compete has a clause like this, so allowing it to substitute for actual evidence of irreparable injury would effectively abolish the irreparable injury requirement in non-compete cases.

And I don’t read Fantastic Sams as saying that a contractual stipulation, by itself, is sufficient. My practical takeaway from the case, and others like it, is that it’s easier to clear the “irreparable injury” hurdle when the judge sees that the defendant is behaving badly by blatantly breaching a reasonably limited non-compete.

**3. Companies should present evidence of imminent harm, not just an argument about “inevitable disclosure”**

While courts don’t always apply the “irreparable injury” requirement strictly, DGM Services v. Figueroa shows that the company trying to obtain a temporary injunction still needs to offer evidence that harm has already happened or is about to happen.[4]

In that case, DGM’s president, Petillon, testified that Figueroa received confidential financial information on budgets, revenues, and costs while working for DGM. He expressed concern that Figueroa would use his knowledge to undercut DGM’s prices and gain an unfair advantage. But Petillon did not know if Figueroa had actually provided confidential information to his new employer, GCC, or whether DGM had lost any customers to GCC since Figueroa had left.

The trial court denied a temporary injunction, stating that DGM did not prove imminent harm. On appeal, DGM argued that proof of violation of a non-compete creates a presumption of probable, imminent, and irreparable harm.

The Houston Court of Appeals disagreed. Under recent Texas Supreme Court cases, the applicant for a temporary injunction has the burden to prove these elements to obtain a temporary injunction. Therefore, the Court of Appeals declined to hold that breach of a non-compete creates a presumption of harm that relieves the plaintiff of its burden to offer evidence. DGM only established a “fear of possible injury,” so the trial court was within its discretion to deny the injunction.

DGM also argued that the “inevitable disclosure doctrine” relieved it of the burden of offering evidence of imminent harm, citing state and federal cases applying various versions of it. The Court of Appeals disagreed, finding that Texas courts have not adopted the doctrine, and that it is not a blanket rule applicable to all nondisclosure agreements. DGM was still required to offer evidence of imminent harm.

You can find a lot of articles (like this one) on the inevitable disclosure doctrine, so I won’t go into great detail. Essentially, it is the idea that a court can enjoin a company’s former employee from working for a competitor, even if the employee hasn’t done anything wrong yet, on the theory that the employee will “inevitably” disclose his knowledge of the company’s confidential information to the competitor.

I don’t like the idea of an inevitable disclosure “doctrine.” These are fact-intensive cases that should be decided based on the evidence in each case. Talking about some general “doctrine” distracts from the real issues, which should be imminent harm and irreparable injury.

If the inevitable disclosure doctrine is merely the common-sense notion that a former employee who is working for a competitor is in a position to use the company’s confidential information, then it’s fine. But if the inevitable disclosure doctrine means that the company doesn’t have to offer any evidence of imminent harm, then it is wrong. The DGM case got this point right.

The recent BM Medical case was similar.[5] BM Medical argued that its former employee, Turner, had access to its confidential information such as client lists and prices, and that Turner would be able to use his knowledge to “undersell” BM Medical. But Turner testified that he did not access any confidential information after his termination, that he did not solicit any BM Medical clients, and that the only BM Medical client who became a client of his new company was a friend he knew before going to work for BM Medical.

Like the plaintiff in DGM Services, BM Medical argued that Turner had its confidential information, was working for a direct competitor, and intended to use the information. But like the court in DGM Services, the court in BM Medical disagreed. It held that the trial court was within its discretion to deny a temporary injunction based on the evidence that Turner had not used any confidential information and was not soliciting BM Medical clients.

Lessons from these Texas non-compete injunction cases

If you represent the company asking for a temporary injunction to enforce a non-compete, you can cite the contract’s stipulation that irreparable injury is presumed. You can cite the “inevitable disclosure” doctrine. You can cite cases that get confused and say that evidence of imminent harm shows that the injury is “irreparable.”

But ideally, you should come to the hearing prepared to offer actual evidence that the employee has already caused harm to the company or is about to do so, and that the harm cannot be adequately compensated by damages. That way, you don’t have to rely on debatable legal arguments the judge might not find persuasive.

The best way to show imminent harm in a non-compete case is to show that your client has already lost customers to the competitor the former employee is now working for. The best way to prove irreparable injury is to hope the judge doesn’t take the irreparable injury requirement too seriously.

*Update: For a good example of the deference Texas Courts of Appeal give the trial court’s temporary injunction ruling, check out Hernandez v. Combined Insurance Co. of America, No. 02-20-00225-CV, 2021 WL 520456 (Tex. App.—Fort Worth Feb. 11, 2021, no pet. h.) (mem. op.). The court said on a temporary injunction the plaintiff only has to show the non-compete is “arguably reasonable.” Id. at *7. The court gave the plaintiff a pass on proving the threatened injury was irreparable, citing the principle that the use of confidential information in a non-compete case is “the epitome of irreparable injury.” Id. at *21. But the case had to be remanded to the trial court because the injunction was too vague about critical details, including the customers the defendant was prohibited from contacting. Id. at *24-25.

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[1] See Tex. Bus. & Com. Code § 15.51(c) (stating that if the non-compete is not reasonably limited in time period, geographic area, and scope, then the court must reform the non-compete but may not award damages occurring prior to reformation).

[2] Cameron Int’l Corp. v. Abbiss, No. H-16-2117, 2016 WL 6216667 (S.D. Tex. Oct. 25, 2016).

[3] Fantastic Sams Franchise Corp. v. Mosley, No. H-16-2318, 2016 WL 7426403 (S.D. Tex. Dec. 23, 2016).

[4] DGM Servs., Inc. v. Figueroa, No. 01-16-00186-CV, 2016 WL 7473947 (Tex. App.—Houston [1st Dist.] Dec. 29, 2016, no pet.) (mem. op.).

[5] BM Med. Mgmt. Serv., LLC v. Turner, No. 05-16-00670-CV, 2017 WL 85423 (Tex. App.—Dallas Jan. 10, 2017, no pet. h.) (mem. op.).

Did You Get the Digits? Judge Grants Preliminary Injunction in Houston College of Law Trademark Litigation

Federal District Court finds that “Houston College of Law” Creates Likelihood of Initial-Interest Confusion with University of Houston

Meet Dave. Dave is a college student in Florida. He spent the first couple of years at school mostly partying, but lately he’s been working on getting his grades up, and he’s thinking about applying to law school. Dave doesn’t have any lawyers in his family, but he’s familiar with the University of Houston because he likes high-scoring college football teams. Dave saw an ad for Houston College of Law and, thinking it must be part of the University of Houston, he checked out its website.

Recognizing the red and white color scheme, Dave started clicking through the website to find out more. Pretty soon, Dave realized that Houston College of Law may not be part of the University of Houston. “Hey, Tony,” he said to his roommate, “is Houston College of Law the one you’re applying to?” “No, you dumb***,” Tony said. “That’s the one with the moot court teams. U of H has its own law school. It’s the one in the top 50.” “Oh,” Dave said sheepishly. “Well I’m going to check out this Houston College of Law anyway.”

Did actionable trademark infringement just happen here? That, essentially, is the difficult issue presented in Board of Regents of the University of Houston System v. Houston College of Law, which I first covered here. You can read the Houston Chronicle’s coverage here.

On October 14, Judge Keith Ellison issued this opinion and granted the University of Houston’s motion for a preliminary injunction to stop South Texas College of Law from changing its name to Houston College of Law, finding there was a substantial likelihood that prospective law students would confuse Houston College of Law with the University of Houston, at least initially, and that such “initial-interest confusion” is actionable in the Fifth Circuit.

Wow. That was a really long sentence. Let’s break this down.

What Issues Were Most Important to the Decision?

Like most trademark infringement opinions, Judge Ellison’s opinion walks through eight factors—the “digits”—to determine the likelihood of confusion. But the decision really came down to three key issues.

Houston College formerly — Would you think this school is part of the University of Houston?

First, there was the typical “Battle of Surveys” between two experts. UH’s expert did a survey that found a 25% net confusion rate. Houston College of Law’s expert’s survey found a 6% net confusion rate. “Thus,” Judge Ellison deadpanned, “as is so often the case in high-stakes litigation, highly qualified experts have presented dueling reports that reach significantly different results.”

The judge found that UH’s expert’s methodology was more reliable, and that was a major factor supporting the decision. The lesson for lawyers who handle trademark litigation is that it is important to work closely with the expert ahead of time to make sure the methodology is as defensible as possible. I know, easier said than done.

Second, UH benefitted from citing anecdotal examples of actual confusion, such as misdirected mail and email, including confusion by prospective law students. These instances of confusion were minor—and probably fleeting—but the cumulative effect was to bolster UH’s argument that people are likely to associate Houston College of Law with UH.

Third, UH won the legal argument on initial-interest confusion. I explained the concept of initial-interest confusion when I wrote about the preliminary injunction hearing: When a consumer walks into a bar called the “Velvet Elvis” thinking it is affiliated with Elvis Presley and then realizes it is not, initial-interest confusion has happened. Even though the consumer is not confused at the “point of sale,” the initial confusion has succeeded in getting him “in the door.”

space-shuttle-takeoff — Trademark surveys: they’re not rocket science

Houston College of Law’s lawyers argued the doctrine of initial-interest confusion doesn’t make sense when the product at issue is a three-year law degree. Even if Dave goes to the Houston College of Law website thinking it is affiliated with the University of Houston, they might say, Dave is eventually going to figure out the two institutions are not affiliated. No one is going to go to the wrong law school for three years by mistake. No harm, no foul.

But Judge Ellison disagreed. Even if the initial confusion only causes Dave to go to the Houston College of Law website, the judge would say, Houston College of Law has unfairly obtained some benefit from the goodwill built up by the University of Houston, and that is the kind of harm the Lanham Act is intended to remedy.

What Issues Were Less Important to the Decision?

Three issues received a lot of attention at the hearing but relatively less attention in the opinion.

First, the lawyers at the hearing spent a lot of time talking about Houston College of Law’s intent to cause confusion with the University of Houston, particularly the change in school colors from crimson and gold to “Cougar” red and white. You know it’s a trademark lawsuit when people get worked up arguing about different shades of red.

screen-shot-2016-10-16-at-2-45-08-pm — Modern art, or evidence of trademark infringement?

Judge Ellison did go over the evidence and arguments on intent in some detail, and he did find the change in school colors “troubling.” Ultimately, however, intent was not a major stated factor in his decision. He found the question of intent a “close call” that did not weigh in either side’s favor in the likelihood of confusion analysis.

Second, as I described when I first reported on the hearing, there was a lot of evidence and argument about whether the University of Houston still calls its law school “College of Law.” This was potentially important, because it is easier to confuse “Houston College of Law” with “College of Law” than with “Law Center.” But Judge Ellison sidestepped this issue by focusing on just two of the UH trademarks at issue: “University of Houston” and “University of Houston Law Center.” This meant he didn’t even have to address UH’s use vel non of “College of Law.”

Third, many hours were billed arguing about whether, after the Supreme Court’s eBay decision, trademark infringement creates a presumption of irreparable injury to support granting an injunction. At least one prescient commentator predicted that Judge Ellison would avoid the need to decide this issue:

If Judge Ellison issues an injunction, I expect he will say something to this effect: “It is unclear in the Fifth Circuit whether a showing of trademark infringement creates a presumption of irreparable harm, but in this case it is unnecessary to decide that issue because there is evidence of irreparable harm.”

Turns out that is essentially what Judge Ellison said: “Irrespective of the presumption, the Court concludes that monetary damages will not adequately compensate UH.”

And yes, you guessed it, the commentator quoted above was Five Minute Law.

Update: At a hearing on October 26, Houston College of Law’s lawyers agreed to stop using “Houston College of Law” and to adopt a new name. See Gabrielle Banks’ coverage in the Houston Chronicle here.

Overtime: The Way Opinions Should Be Written

At the risk of going over my five minutes, I have to note two things about the Board of Regents opinion that are a credit to Judge Ellison and—it must be said—a discredit to some other courts by comparison. First, there is the simple fact that Judge Ellison wrote his own opinion at all. Often, trial court judges simply sign an order that has been prepared by the winning side. To be fair, writing an opinion is a lot of work (and federal judges typically have more staff support than state court judges).

But the more disappointing reason many trial court judges don’t like to write their own opinions and orders is that their main concern is not getting reversed on appeal. They figure that signing a one-sided order prepared by the winning side is likely to maximize the chances of the order holding up on appeal. But should that be the judge’s greatest concern?

people-coffee-notes-tea-medium — Admittedly, it’s a lot of work for a judge to write his own opinion

The second thing that is impressive about Judge Ellison’s opinion is less obvious: it is not a one-sided opinion that pretends the decision is easy. For each sub-issue, Judge Ellison considered the best arguments made by each side and gave each side its due. For example, in deciding which expert survey was more persuasive, he explained the strengths and weaknesses of each, concluding that “neither survey is without flaw” but that the UH survey was “substantially stronger.” I don’t necessarily agree with the decision—I’m still a little skeptical about initial-interest confusion—but the important thing is that the process be fair and impartial.

If you don’t spend a lot of time reading court opinions, you might be thinking “what’s the big deal, isn’t that what judges are supposed to do?” The problem is that even when judges write their own opinions, they often do so as if they were writing a brief for the winning side. All of the losing arguments are absurd. The winning arguments are stated so strongly that the reader wonders how it could have come out any other way. When this style is employed, it is fairly obvious.

But I will let you in on a little secret that may not be so obvious: there is nothing to stop the judge from writing an opinion that simply ignores facts and arguments that do not support the decision. Believe me, it happens. Unless the reader was personally involved in the case or takes the time to read the briefs, he probably won’t even realize the judge has done this.

And that’s a shame.

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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation (and sometimes even trademark litigation) at Zach Wolfe Law Firm. Thomson Reuters named him a Texas Super Lawyer® for Business Litigation in 2020 and 2021.

Injunction Junction, What’s Your Function?

The Highland Capital case shows what it takes for a Texas trade secrets injunction to hold up on appeal

I previously wrote here about how not to enforce an injunction in a non-compete lawsuit. But when an employee takes your client’s confidential information or trade secrets, what evidence do you need to get an injunction in the first place?

Most lawyers can recite the buzzwords courts have used thousands of times: “imminent harm,” “irreparable injury,” “no adequate remedy at law.” But let’s face it. Courts have a hard time coherently explaining these concepts. The recent Texas case Daugherty v. Highland Capital Management is no exception.[1]

dangling-car — Imminent harm? Yes. Irreparable injury? Probably not.

Lawyers who handle these cases should understand that imminent harm and irreparable injury mean two different things:

“Imminent harm” means that harm is about to happen if the court doesn’t stop it. This has nothing to do with whether the harm is “irreparable.”

“Irreparable injury” means that awarding damages would be an inadequate remedy for the harm. This has nothing to do with whether the harm is about to happen or not.

Unfortunately, courts often confuse these two requirements. For example, a court will cite evidence that a competitor is in a position to use a company’s trade secrets as establishing “irreparable injury,” when that fact actually goes to the issue of “imminent harm.”[2]

Another recurring problem is that when courts cite evidence of “irreparable injury” in a trade secrets case, they often cite evidence that is either tautological or generic. In other words, they tend to cite evidence that is either (a) true by definition or (b) recited in virtually every trade secrets case. This renders the analysis less than satisfying.

Let’s use Highland Capital as an example. The basic facts were typical: Employee signs confidentiality agreement with Employer, Employee leaves Employer, Employer sues Employee for taking Confidential Stuff.

steam-locomotive-wreck — Imminent harm, or irreparable injury?

The jury verdict, on the other hand, was a little unusual. The jury found that Employee breached the confidentiality agreement, Employer’s damages were zero dollars, and Employer’s reasonable attorneys’ fees were $2.8 million. The judge awarded Employer the attorneys’ fees plus an injunction against retaining, using, or disclosing Employer’s confidential information.

This raises important questions. First, where can I find one of these clients who will pay $2.8 million to try a confidentiality agreement case? Second, what does Highland Capital teach us about what evidence is necessary for a trade secrets injunction to hold up on appeal?

Evidence of imminent harm?

Here are six things the Highland Capital court cited as evidence of imminent harm, followed by my questions:

1. The court said there was “evidence that [Employee] took, kept, and used confidential information.”

This is evidence that the employee breached his confidentiality agreement, but is it evidence of imminent harm?

2. The court cited “demands and protracted litigation.”

Saying the litigation was “protracted” reminds me of what Nathan Arizona said when the police asked if he had any disgruntled employees. “Hell, they’re all disgruntled . . .”

3. Employer’s expert testified: “this information goes to the core of what [Employer] does as a business and what [Employer] is in terms of its value.”

This is fairly generic. Believe me, every company thinks the information the employee took “goes to the core” of the company’s value.

4. Employer’s expert: the information’s “existence away from [Employer] harms [Employer] because there’s always the possibility that it can get into general distribution . . . or to a competitor.”

This seems tautological. By definition, doesn’t the fact that someone else has the confidential information create a “possibility” that it could become public or known by a competitor?

grand-central — Does the “possibility” of harm establish irreparable injury?

5. Employer’s expert: the harm “may not be immediate, but the harm may occur over a long period of time.”

Doesn’t the fact that the harm may occur over a long period of time suggest it is not imminent?

6. Employer’s expert testified “I cannot quantify the total harm,” and “it may be that I can’t measure the specific relationship of these documents to that harm. . . you can’t measure things that you don’t know have occurred.” Asked if he performed “any sort of statistical analysis to try to put a number to this harm,” the expert said, “We did not and could not.”

Do these statements go to whether the harm is imminent, or whether the harm is irreparable? It seems like the court put this evidence in the wrong section of the opinion.

Evidence of irreparable injury?

As for irreparable injury, the Highland Capital court cited these key points from the testimony of Employer’s co-founder:

1. “A specific document [Employee] took and failed to return revealed [Employer]’s current and prospective investment strategies.”

In other words, Defendant misappropriated confidential information. But does that make the injury irreparable?

2. There was “[a] particular document [Employee] failed to return in which one of [Employer]’s investors was identified as well as names of our other clients and the investment objectives which are confidential.”

Again, this is evidence of misappropriation of confidential information, but how is it evidence of irreparable injury?

train-time-lapse — The harm from losing confidential information can be difficult to quantify

3. “Some of the people in the marketplace can replicate our firm strategies and our investment objectives and form competing funds with these materials like marketing materials.”

This could be evidence of imminent harm, but how does it show that the harm could not be compensated by damages?

4. “If our investors see that we don’t have enough safeguards over our confidential information they would refuse to invest with us, we would be violating our agreements with them, we would be violating the law.”

Again, this is evidence of the possibility of injury, but how does it establish irreparable injury?

5. “Putting a dollar value is almost impossible. But it’s very valuable to us. It’s very, very important.”

Now we’re getting somewhere. This goes to the issue of irreparable injury. But this testimony seems generic. Very, very generic.

Based on this testimony, the court said there was “evidence of harm that could not be quantified,” and therefore, evidence of irreparable injury.

What did we learn today?

So what do you think? Does the analysis of imminent harm and irreparable injury in Highland Capital support my point that courts often get these two requirements confused? Does it show that courts often rely on tautological or generic statements to uphold an injunction?

train-stop-lights — Understand what you need to prove to stop the use of your client’s confidential information

The more practical lesson for litigators is this: If you are trying to get an injunction for your client, offer evidence showing that the defendant is going to use or disclose the confidential information soon if an injunction is not granted (imminent harm), and that damages would be an inadequate remedy because the harm is inherently difficult to quantify (irreparable injury). Even if courts get confused, don’t mix up these concepts in your own mind.

Irreparable injury can be tricky. You need to show that quantifying the damage is inherently difficult, but without conceding that the damage is speculative. This balancing act is especially difficult when, as in Highland Capital, you are also trying to persuade the jury to award lost profits or some other form of damages.

Don’t forget to prepare your witnesses to say the right “magic words,” like “putting a dollar value on this is almost impossible” (if that’s true). But take it a step further and have your witnesses explain why quantifying the damage is difficult. Because it’s not enough to have some generic testimony to uphold the injunction on appeal. It’s also important to persuade the trial court judge to grant the injunction in the first place.

*Update: If the plaintiff goes to trial on a trade secrets claim and presents expert testimony on actual damages, there is some risk the court will say that the damages evidence shows that there is an adequate remedy at law and therefore “irreparable injury.” This seems to be what happened in Pike v. Texas EMC Mgm’t, LLC, 610 S.W.3d 763 (Tex. 2020).

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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas Super Lawyer® for Business Litigation in 2020 and 2021.

[1] Daugherty v. Highland Capital Mgm’t, L.P., No. 05-14-01215-CV, 2016 WL 4446158 (Tex. App.—Dallas Aug. 22, 2016).

[2] For example, in Tranter, Inc. v. Liss, No. 02-13-00167-CV, 2014 WL 1257278 (Tex. App.—Fort Worth March 27, 2014, no pet.), the court said that “[a] highly trained employee’s continued breach of a noncompete agreement creates a rebuttable presumption that the employer is suffering an irreparable injury.” While the fact that an employee is competing in violation of his non-compete suggests imminent harm, it does not show that the harm is irreparable.

Lessons From the First Case Applying the Defend Trade Secrets Act

There is perhaps nothing more irritating than someone saying “I told you so.” And yet, it must be done.

Back in May, shortly after the new federal Defend Trade Secrets Act was signed into law, I said in a blog post:

People think of a shadowy foreign company smuggling sophisticated plans for the next iPhone out of the country. But the typical trade secrets lawsuit is more mundane. Given the fact that a “customer list” can be a trade secret, an employer can sue for misappropriation of trade secrets just about every time a low level sales employee leaves the company with the names and numbers of her customers on her smartphone.

A few weeks later, the first court opinion citing the Defend Trade Secrets Act came out of the Northern District of California.[1] Litigators everywhere relished the chance to see how courts would apply this sweeping new federal statute that promised to move complex trade secrets lawsuits from provincial state courts to the lofty halls of the federal judiciary, where the majestic courtrooms look like a set from JFK rather than Night Court.

Curiosity raged. Would it be a case of foreign intrigue, cyber-hacking, and sophisticated corporate espionage in Cupertino? Would the judge use the controversial new ex parte seizure remedy to have federal marshals swoop in to intercept a shadowy Jason Bourne-like character riding a motorcycle over the Golden Gate Bridge—the wrong way—smuggling a tiny USB drive hidden in a fake shaving cream can?

Actually, what was notable about Henry Schein, Inc. v. Cook, the first court opinion I’m aware of that cites the Defend Trade Secrets Act, was how ordinary it was. This was a typical “soft” trade secrets case involving allegations that a sales employee took confidential customer information from the company to a competitor.

The employer’s business—and I don’t mean this as an insult—could not have been more ordinary: “marketing, distributing, and selling medical, dental and veterinary supplies and equipment, and other healthcare products, to medical, dental, and veterinary practitioners, and other healthcare professionals and organizations.”

Veterinary supplies! It’s good to know that Congress acted just in time to make sure the nation’s top-secret veterinary and dental technology does not fall into the wrong hands.

The basic facts were also fairly ordinary:

Henry Schein, Inc. (HSI) hired Cook to work in sales.
Cook signed a confidentiality agreement that required her to hold “in strictest confidence” any confidential information “concerning the products, processes, services, business, suppliers, and customers of HSI.”
Cook resigned from HSI and—get this—went to work for one of HSI’s competitors.
Shortly before leaving, Cook allegedly forwarded confidential files to her personal email and saved company files on her laptop.
Shortly after resigning, Cook allegedly accessed the HSI computer system using a web-based iPad app and her company credentials.

The relief HSI sought was also typical. HSI did not invoke the ex parte seizure provisions of the Defend Trade Secrets Act. Instead, it filed a typical application for TRO to bar Cook from using or disclosing confidential information or soliciting customers assigned to her while she was an HSI employee, which the court granted in large part.

What were the trade secrets that required this extraordinary relief? Again, the alleged trade secrets could not have been more ordinary:

“several comprehensive, confidential HSI customer practice reports that were produced using HSI’s proprietary software”
“numerous additional customer-related reports, including an equipment inventory report, price quotations for prospective customers, and equipment proposals on which HSI was working”
“information related to HSI’s customers, products, margins, profit percentages, credit profiles, preferences and markets, particularly with respect to the customers assigned to her”
“Customer information such as sales history and customer needs and preferences”

Don’t get me wrong. I’m not belittling this kind of typical case. I have represented clients in trade secrets cases involving “boring” industries like wholesale lumber and home and auto insurance. Even if the case wouldn’t make an exciting John Grisham novel, it is usually a very serious matter for the participants.

My point is that this first case citing the Defend Trade Secrets Act tends to support my view that the need for a federal trade secret cause of action in federal court was probably overstated, especially considering 48 states already had some version of the Uniform Trade Secrets Act.

At the same time, I think the new federal statute will probably not do much harm. As Henry Schein illustrates, the types of trade secrets cases that will be filed probably won’t change much. What will change is where they get filed, i.e. more of them will be in federal court.

You may object that I’m attaching too much significance to one little federal district court opinion, and you would have a point. Henry Schein, Inc. v. Cook is just one case, and it may tell us very little about what federal litigation under the Defend Trade Secrets Act is going to look like.

But I will make this prediction. A year from now when we look back at the cases filed in federal court under the Defend Trade Secrets Act, many more of them will be ordinary “customer list” cases like Henry Schein than complex schemes involving sophisticated secret technology. It will turn out that the first case applying the Defend Trade Secrets Act was the typical case. (Narrator from the future: this turned out to be true.)

And then it will be even more annoying when I say, “I hate to say I told you so . . .”

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[1] Henry Schein, Inc. v. Cook, 191 F.Supp.3d 1072 (N.D. Cal. 2016).

“Litigation Is Not a Game”: Texas Case Shows How Not to Enforce an Injunction in Non-Compete Litigation

In the non-compete case Orchestrate v. Trombetta,[1] a U.S. district court judge not only denied a motion for sanctions for an employee’s alleged violation of a temporary restraining order, the judge severely criticized the conduct of the employer’s counsel. “Litigation is not a game,” the exasperated judge wrote. “This has to and will stop. The jig is up!” The case provides a cautionary tale for lawyers who handle non-compete litigation—or any kind of litigation.[2]

Orchestrate was in many ways a typical non-compete case: Employee (Trombetta) signed a non-compete and confidentiality agreement with Employer (Orchestrate). Employee left Employer and joined Competitor (Borden-Perlman). Employer sued, claiming Employee breached the non-compete and that Competitor tortiously interfered with the non-compete. The court signed a Temporary Restraining Order barring Employee from pursuing certain clients.

Pretty typical so far, but somewhere things went south. Employee pursued certain clients, and Employer filed a motion for sanctions for violating the TRO. Employee admitted pursuing three clients but argued the TRO did not cover those clients. Employer argued the TRO did cover those clients.

This should have been pretty simple, right? The TRO must have listed the clients the Employee could not pursue, so all the judge had to do was to see if those three clients were on the list in the TRO. Right?

Of course it was not that simple. The relevant terms of the TRO were in three different documents: the TRO itself, a separate “Designated Client List” identifying the clients Employee could not pursue, and an “Addendum” that appeared to carve out 25 clients that Employee could pursue. (The actual facts were even more complicated than this.)

The root of the trouble was the need to consult and harmonize at least three different documents to determine what Employee was prohibited from doing. Employee initially testified in his deposition that he did not violate the TRO, but through aggressive questioning Employer’s counsel got Employee to admit that he repeatedly violated the TRO and committed perjury.

So what is wrong with aggressively questioning a witness until he admits he is not telling the truth? Isn’t that what a tough litigator is supposed to do?

The problem with Employer’s counsel’s approach was twofold. The first problem was one of substance. Employer’s counsel got Employee to admit he violated the TRO by refusing to show Employee the Addendum with the “carve out” of 25 clients. In addition, Employer’s counsel confused the witness by providing a “misleading” definition of perjury, “blurring the distinction between a false or incorrect statement and perjury.” As a result of these tactics, the judge said, the deposition transcript had “little utility for any purpose.”

The second problem was one of style. After reviewing the deposition, the judge found Employer’s counsel’s conduct “rude and unprofessional,” “condescending and patronizing,” and full of “unpleasantries.” He characterized the lawyer’s approach as “browbeating and intimidation.”

Despite the Employee “admitting” he violated the TRO and committed perjury, the district court denied Employer’s motion for sanctions. First, the motion failed for the simple reason that pursuing the three clients was not a violation of the TRO. The court ruled that reading the TRO, Designated Client List, and Addendum together, the documents unambiguously provided that Employee was allowed to pursue the 25 clients listed in the Addendum.

Second, the motion would fail anyway because the TRO failed to comply with Federal Rule of Civil Procedure 65(d)(1), which expressly requires the acts to be restrained to be stated in the injunction, not by reference to another document. The violation was not merely technical: the deposition of Employee showed that the reference to other documents in the TRO caused confusion and unnecessary litigation over the meaning of the TRO. The judge said all of this could have been avoided had the TRO complied with the rule.

So, Orchestrate v. Trombetta provides some helpful lessons for lawyers—and their clients—both in non-compete litigation and other litigation:

If you get an injunction or TRO, do state specifically in the injunction itself what the defendant is barred from doing; don’t have the injunction refer to other documents. (If the injunction must refer to a double-super-secret customer list, consider moving to file the injunction under seal, rather than referencing an extrinsic document.)

Don’t use an incomplete version of an injunction or agreement to mislead a witness into admitting he or she failed to comply with the injunction or agreement.

Don’t repeatedly accuse a witness of “perjury” for testimony that a judge is likely to view as simply mistaken or incorrect.

Don’t do things in a deposition or hearing that a judge is likely to view as “bullying tactics,” “beating down” a witness, “browbeating and intimidation,” “rude and unprofessional,” or “condescending and patronizing” to opposing counsel.

Of course, it’s not always easy to know where to draw the line in a deposition. Lawyers often must be firm and tenacious to deal with evasive witnesses—and their obstructive counsel—who refuse to admit facts they know to be true. But some lines are clear. Using deception or confusion to get a witness to admit a fact favorable to your position may feel good or impress your client in the moment, but ultimately it will backfire when the rest of the story comes to light.

[1] Orchestrate Hr, Inc. v. Trombetta, No. 3:13-CV-2110-L, 2016 WL 3179967 (N.D. Tex. June 6, 2016).

[2] Caveat: I was not personally involved in the case and therefore do not know if the opinion’s recitation of facts is accurate or fair to the employer’s counsel; I’m just taking the facts stated in the opinion at face value.

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Category: Injunctions