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 recent 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.

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

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 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.[1] “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.[2] “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.”[3]

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 is a Texas trial lawyer who handles non-compete and trade secret litigation (and sometimes even trademark litigation). His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

[1] Guys sometimes talk like this to each other. Contrary to recent reports, however, they do not typically brag to each other about sexual assault.

[2] “Net” confusion is the percentage of respondents confused by an infringing mark after filtering out the percentage of people who were confused by a non-infringing “control” mark.

[3] I’ve been looking for an excuse to use “vel non.”

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.

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

[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.

Landmark Case Applying Defend Trade Secrets Act Ensures America’s Dental Trade Secrets Will Be Safe For Future Generations

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 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 . . .”

_________________________________________________________________

Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

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

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

In the recent 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.

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

[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