Seize Them! One Year of Ex Parte Seizure Orders Under the Defend Trade Secrets Act

Seize Them! One Year of Ex Parte Seizure Orders Under the Defend Trade Secrets Act

Ok, Fivers. You’ve got 21 shopping days left before the one-year anniversary of the federal Defend Trade Secrets Act (DTSA), which was signed into law on May 11, 2016. Do you know what you’re getting me? I for one plan to celebrate by buying a new USB drive, plugging it into my MacBook, and transferring copies of my confidential client list.

But seriously, I do have some special plans for this occasion. On May 16, 2017, I will host a live webcast at 12:30 Central from Texas State Bar headquarters called “One Year of Defend Trade Secrets Act Litigation.” With special guests: Jason Sharp, who recently joined Gardere as Senior Attorney, and Leiza Dolghih, Shareholder with Godwin Bowman & Martinez and publisher of the excellent blog North Texas Legal News. Texas lawyers can find registration information here.

If you can’t watch the webcast, don’t worry. I’m also celebrating with special DTSA Anniversary editions of Five Minute Law over the next four weeks. This first installment tackles the part of the DTSA that attracted more attention than any other.

Did the federal trade secret statute’s new ex parte seizure remedy live up to the hype?

There was a lot of talk last May about the Defend Trade Secrets Act’s ex parte seizure provisions. The DTSA allows a federal judge in a trade secrets case to order federal marshals to seize a defendant’s property—usually a computer or smartphone—without notice to the defendant. Critics worried about the potential for abuse of this extraordinary remedy.

I worried too, but not that much. The statutory requirements for getting an ex parte seizure order are strict, and last May I predicted here that “most federal judges are going to set the bar very high for obtaining such unusual ex parte relief.”

Has the first year of litigation under the DTSA proven me right on this point? Well, yes. But honestly, it wasn’t that difficult a prediction.

I haven’t done any comprehensive survey, but trade secrets litigator Paul Mersino recently wrote a nice summary of all the ex parte seizure cases he could find. He only knew of two cases that granted an ex parte seizure remedy under the DTSA, and one of them was so secret, he’d have to kill you if he told you about it.

So, the only case I have read that granted ex parte seizure under the DTSA is Mission Capital Advisors v. Romaka from the Southern District of New York.[1] The court first issued an order requiring the defendant to appear at a hearing to show cause why he should not be restrained from accessing, disclosing, or copying the employer’s client and contacts lists. When the defendant failed to appear, the court found that a Rule 65 order would be inadequate and issued an order directing the U.S. Marshal to seize the defendant’s contacts list from his computer (by copying them to a storage medium and deleting them from defendant’s computer).

Is this it? Is this all you can conjure, Saruman? After all the hand-wringing about federal marshals busting down doors and seizing iPhones from renegade insurance salesmen, we only get one or two ex parte seizure orders in a year? What gives?

There are many reasons ex parte seizure orders have been rare, but the most fundamental reason is this: federal judges can already do a lot with an “ordinary” Temporary Restraining Order under Rule 65 of the Federal Rules of Civil Procedure, and the DTSA itself says that an ex parte seizure order is only allowed when a Rule 65 order would be inadequate. See 18 U.S.C. § 1836(b)(2)(A)(ii)(I). 

Most federal courts addressing ex parte seizure requests have found an ordinary extraordinary remedy would be adequate

Balearia Caribbean v. Calvo, a case in the Southern District of Florida, was one of the first to address an application for an ex parte seizure order under the Defend Trade Secrets Act.[2] A ferry company called BCL sued its former CEO, Calvo, claiming that he hijacked the company’s negotiations to provide ferry service to a Bahamas casino. Before leaving, Calvo allegedly bought a Mac laptop, had it reconfigured to access the company’s electronic information systems, and forwarded confidential emails to his private Gmail account.

Now, I’m all for using a MacBook (which I typed this post on) and a personal Gmail account (which I also have). But come on, man. You just can’t do that stuff.

BCL sued Calvo in federal court under the DTSA and sought ex parte seizure of Calvo’s Mac laptop so that a forensic expert retained by BCL could image the hard drive. But the court found that the risk of Calvo improperly using or destroying the confidential information was not the kind of “extraordinary circumstances” required for ex parte seizure. Instead, the court granted a TRO requiring Calvo to preserve evidence and to appear at a hearing where the court would appoint a special master to take temporary custody of the Mac to have a forensic expert image the hard drive.

Magnesita Refractories v. Mishra, a case in the Northern District of Indiana, was similar.[3] It was another case of a rogue employee with confidential information on his personal laptop (allegedly). Magnesita, the employer, presented emails suggesting that the employee, Mishra, was in talks with a competitor about pursuing potential business ventures in competition with Magnesita.

At the initial ex parte hearing, the judge considered several options to deal with the laptop:

  • Alow Magensita to confiscate the laptop and have it imaged
  • Send the U.S. Marhsal to seize the laptop to be placed in custody
  • Order Mishra not to disseminate or destroy any material on the laptop and to bring the laptop to a hearing a couple days later.

The judge found that Magnesita met the requirements for an ex parte TRO under Rule 65 but declined to order seizure under the DTSA. The judge wrote:

Rather than involve the U.S. Marshal Service, and the potential reputational damage caused by them seizing Mishra’s personal property at his place of employment, I ordered Mishra to turn over to Magnesita’s counsel his personal laptop, which Magnesita would immediately deliver to the Clerk of Court to be secured. To ensure the protection of Mishra’s privacy, I ordered that “Magnesita shall not review any of the contents of the laptop prior to delivering it to the Clerk of Court.” In order to provide Mishra a way to expeditiously address any issues regarding the ex parte TRO, discuss the disposition of the laptop and potential appointment of a Special Master to image the laptop, and set a date for a preliminary injunction, I ordered the parties to appear at an in person hearing two days after I issued the ex parte TRO.

Mishra appeared and testified at the hearing two days later, but the judge found his testimony “far from persuasive” and denied his motion to dissolve the injunction. Mishra would suffer no damages if it was found that his laptop was improperly seized or imaged, the judge found, because the laptop would be returned to him as soon as it was imaged.

Lessons learned from one year under the DTSA’s ex parte seizure provisions

So what can we learn from the cases in the last year addressing the ex parte seizure provisions of the Defend Trade Secrets Act?

First, lawyers seeking to preserve their client’s confidential information or prevent it from being disclosed should usually opt for seeking a Temporary Restraining Order under Rule 65. There is no need to take on the higher burden of obtaining an ex parte seizure order if a TRO would be adequate.

Second, most federal judges are rightly hesitant to order a defendant’s property seized without giving the defendant some chance to respond to the plaintiff’s allegations. A TRO issued without notice is still an extraordinary remedy, but when a judge enters an ex parte TRO requiring the defendant to come to a hearing to turn over his computer for imaging of the hard drive, the defendant at least has some opportunity to respond before turning over his property.

In contrast, when a federal marshal shows up at the defendant’s door and says “I have a court order to seize your MacBook,” the defendant doesn’t have a lot of options.

Of course, the disadvantage of serving the defendant with a TRO first is that the defendant—who presumably already violated some duty of confidentiality—will ignore the commands of the TRO and conceal, delete, or transmit confidential information before turning over his devices. But this risk can be mitigated. Conduct like that almost always leaves some electronic trail, and judges have options like spoliation sanctions for dealing with disobedient litigants.

Agree? Disagree? Post your comments here, and Texas lawyers be sure to register for our live webcast on May 16.

________________________________________________________________

head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands.

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] Mission Capital Advisors, LLC v. Ramaka, No. 1:16-cv-05878-LLS (S.D.N.Y. July 29, 2016).

[2] Balearia Caribbean v. Calvo, No. 16-23300 (S.D. Fla. Aug. 5, 2016).

[3] Magnesita Refractories Co. v. Mishra, No. 2:16-CV-524, 2017 WL 655860 (N.D. Ind. Feb. 17, 2017).

 

Book Review: The New Texas Pattern Jury Charge on Trade Secrets

Book Review: The New Texas Pattern Jury Charge on Trade Secrets

How well does the new Texas Pattern Jury Charge perform in a typical soft trade secrets case?

I recently received a mysterious package in the mail. After tearing open the cardboard, I saw a shiny new paperback in plastic shrink-wrap: the new Texas Pattern Jury Charges – Business, Consumer, Insurance & Employment (2016).

My heart raced. Yes, I already had the 2014 edition, but the 2016 edition has something new: questions and instructions on trade secret misappropriation. In the words of Joe Biden, this is a big f**ng deal!

You see, when I last tried a trade secret case to a jury, there were no Pattern Jury Charge questions for trade secrets, so we had to make up our own. That case was a typical “soft” trade secrets case.

“It’s a dirty story of a dirty man”

Soft trade secrets? Well, there are two paradigmatic types of “hard” trade secrets: secret technology and “secret sauce.” If your company develops new technology that allows you to drill for oil sideways at half the cost of your competitors, and you keep it secret, that’s a trade secret. If you have the secret formula for Coke, or the Colonel’s secret herbs and spices, those are trade secrets. Understanding why these things are trade secrets is not rocket science.

Soft trade secrets, on the other hand, are the type of information almost every business has: names and contact information for customers, information on what the customers buy, prices charged to the customers, names and contact information for vendors, prices charged by vendors, etc. The king of the soft trade secrets is the customer list, which may or may not be a trade secret, depending on the facts (see Customer List Confusion).

In the typical soft trade secrets case involving a departing employee, there are usually four key issues:

  1. Did the employee take information from the former employer?
  1. Was the information actually “trade secrets”?
  1. Did the employee actually use the information to compete with the former employer?
  1. What amount of damages did the employee cause the former employer by using the information to compete?

Experts on good writing may cringe at my repeated use of the intensifier “actually,” but it’s appropriate here. It’s a reminder to approach trade secrets claims with a healthy skepticism. As one federal judge said in a recent opinion, “Many plaintiffs allege trade secret misappropriation, but few prove it.”[1]

So how do the new Pattern Jury Charge (PJC) questions compare to these key issues in a typical soft trade secrets case?

“It took me years to write, would you take a look?”

Like other PJC sections, most of the new section on trade secrets consists of commentary on the applicable statute and case law. The questions themselves are quite short. They boil down to this:

  1. Did Paul Payne own a trade secret in the ___ listed below? [the jury answers separately for each thing alleged to be a trade secret]
  1. Did Don Davis misappropriate Paul Payne’s trade secret?
  1. What amount of damages . . . etc. [the standard damages question that applies to all kinds of claims]

This would be simple for a jury to understand but for one problem: How does the jury know what “trade secret” and “misappropriate” mean?

The PJC solves this problem with instructions. The question on ownership of a trade secret is followed by the statutory definition of a trade secret from the Texas Uniform Trade Secrets Act (affectionately known as “TUTSA”). The question on misappropriation is followed by the statutory definition of misappropriation.[2]

This sticks to the basic template for most PJC questions: ask a really simple question, then give detailed instructions that define the terms used in the question. The detailed instructions are, in effect, a mini-tutorial on the area of law at issue.

The questions tend to be broad, rather than focusing on specific facts. For example, in a breach of contract case, the PJC is going to ask “did Don Davis fail to perform the contract?” rather than “did Don Davis fail to deliver the truckload of bricks to the green house on Pecan Street on the date stated in the contract?”

Similarly, the PJC question on trade secret misappropriation asks “did Don Davis misappropriate Paul Payne’s trade secret?” rather than “did Don Davis email himself Paul Payne’s confidential customer list and use it to sell bricks to Paul Payne’s customers?”

IMG_1670

For my non-lawyer readers, this is part of what we call “broad-form” submission. Historically, the main reason for broad-form submission was to reduce the likelihood that the jury’s verdict would be reversed on appeal. There is a mountain of case law and articles on what broad-form submission means. It will suffice to say that the rule in Texas is this: broad-form submission is required, except when it isn’t.

“It could make a million for you overnight”

So what’s the alternative to the broadly stated trade secrets questions in the PJC? In the jury trial I mentioned above, we handled it differently. We submitted these questions (I’ve changed the names and the product):

  1. Was any of the information Dawn Davis obtained from Paula Payne trade secrets?
  1. Did Dawn Davis use Paula Payne’s trade secrets to make window sales at Real Cheap Windows?
  1. What sum of money . . . would fairly and reasonably compensate Paula Payne for her damages, if any, proximately caused by Dawn Davis’s use of Paula Payne’s trade secrets at Real Cheap Windows?

Like the PJC, the instructions included the statutory definition of “trade secret” taken straight from TUTSA.

Unlike the PJC, there was no question about “misappropriation,” because it was undisputed my clients had taken the information at issue. My argument was (1) the information wasn’t trade secrets, and (2) my clients didn’t use the information to make the sales. Those were the real issues in dispute, so I argued for submitting those specific questions, and the judge agreed.

I like my questions better than the PJC questions. They get right to the point and are easier for the jury to understand. They don’t require a jury to puzzle over a definition of “misappropriation.” But I admit the form of my questions won’t work in every case.

Why?

First, in my case there was no real dispute about what information was taken. I had asked the plaintiff in discovery to identify the alleged trade secrets, and it identified a specific stack of documents my clients admitted taking. The question was whether the information in those documents was trade secrets.

IMG_1671

Second, there was no dispute that my clients had sold products to customers of the first employer after leaving. The dispute was whether they made those sales by using the alleged trade secrets.

So the format we used for the trade secrets questions in that case may not work in your case. But that only proves my point. The PJC should only be a starting point. Judges and lawyers should not be afraid to adapt it to the specific facts of their case.

“It’s a thousand pages, give or take a few”

The new questions and instructions on trade secret misappropriation do what the Pattern Jury Charge is supposed to do. They provide a template for submitting trade secrets misappropriation questions that is consistent with Texas law and broad enough to apply to different kinds of cases.

But that’s all they do. There is a danger of rote use of the PJC questions when more specific questions tied to the facts of the case would be more appropriate and more understandable to the jury.

If the real issue is whether a customer list was a trade secret or not, then why not just ask the jury that? Or if the dispute is about whether the former employee used the employer’s customer list, why not just ask “did Don Davis use Paul Payne’s customer list?”

Of course, the problem is that there is usually a fight between the lawyers over the wording of the jury questions. When the parties don’t agree, the safer thing for the judge to do is to follow the PJC and submit a broad question, rather than a question tied to the specific facts in dispute. This is “safe” in the sense that it reduces the judge’s chance of getting reversed on appeal.

But the safe thing is not always the best thing. Actually.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. It’s a steady job, but he wants to be a paperback writer.

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] Kuryakyn Holdings, LLC v. Ciro, LLC, No. 15-cv-703-jdp, 2017 WL 1026025, at *7 (W.D. Wis. Mar. 15, 2017).

[2] The definitions are in Section 134A.002 of the Texas Civil Practice and Remedies Code.

Texas Jury Finds Damages Totaling $500 Million in Oculus Rift Case

Texas Jury Finds Damages Totaling $500 Million in Oculus Rift Case

On February 1, a jury in a Dallas federal court returned a verdict in ZeniMax v. Oculus, a high-stakes battle over who owns the technology used in the Oculus Rift virtual reality system. The jury found that Oculus and its co-founders caused damages totaling $500 million. That’s a lot of money in some circles, but the COO of Oculus’s owner said “the verdict is non-material to our business.”

You see, the owner of Oculus is a little company called Facebook.

But still, it’s not every day that a Texas jury finds damages of half a billion dollars in a case involving allegations of trade secret misappropriation, copyright infringement, breach of a non-disclosure agreement, trademark infringement, and spoliation of evidence. As a Texas litigator who deals with all of these issues, I was curious to see what lessons could be learned from the Oculus verdict.

The answer: not a whole lot. The problem is that you can read every word of the 90-page jury verdict and still have no idea what happened in the trial. And news reports about the verdict don’t add much. In fact, the Oculus case is a prime example study of how little the typical press coverage of a jury verdict tells you.

Of course, you can at least learn who the main players were:

  • Video game pioneer John Carmack worked for id Software, a subsidiary of ZeniMax.
  • Carmack came into contact with wiz kid Palmer Luckey, who was developing a virtual reality headset called the Rift.
  • Luckey founded Oculus to commercialize the Rift.
  • Carmack worked with Luckey on improving the Rift.
  • ZeniMax entered into a Non-Disclosure Agreement with Luckey and Oculus.
  • Carmack eventually left id Software and joined Oculus.
  • Brendan Iribe was the CEO of Oculus.
  • Facebook bought Oculus for $2 billion.

ZeniMax and id Software sued Carmack, Luckey, Iribe,  Oculus, and Facebook, claiming they misappropriated trade secrets and other intellectual property.

For me, the most interesting nugget was ZeniMax accusing Carmack of stealing documents on a USB drive and wiping his computer to destroy evidence. Carmack denied these allegations in a Facebook post after the verdict, saying “I never tried to hide or wipe any evidence,” but if the jury heard evidence supporting these allegations, it must have colored their perception of other issues in the case.

carmack-facebook-excerpt

The defendants were able to claim a partial victory because the jury found that none of the defendants misappropriated ZeniMax’s trade secrets. But the jury found liability on other causes of action, and significant damages, against all defendants except Facebook:

  • $50 million against Oculus for copyright infringement
  • $200 million against Oculus for breach of the Non-Disclosure Agreement
  • $50 million against Oculus for false designation of origin
  • $50 million against Luckey for false designation of origin
  • $150 million against Iribe for false designation of origin

Add these up, and you get a headline like this: “Oculus lawsuit ends with half billion dollar judgment awarded to ZeniMax.” If you’re a litigator, that kind of headline makes you cringe. Not because of the amount of money, but because you know that a jury doesn’t award a “judgment” at all. The jury renders a verdict. Later, the judge enters a judgment based on the verdict.

Maybe it sounds nit-picky, but reporters make this mistake all the time. When a headline says “Oculus ordered to pay $500 million in ZeniMax lawsuit,” it is simply inaccurate. The jury doesn’t order anyone to pay anything. The jury just fills in a blank in response to a question. The judge decides whether to order the defendant to pay.

screen-shot-2017-02-04-at-8-38-27-am
   I don’t care who you are, that’s a lot of zeroes

The distinction can be important. In some cases, entering a judgment on the verdict is a routine, almost ministerial, act by the judge. But in any moderately complex case, you can bet there will be a battle of post-verdict motions over what to do with the verdict. This is usually the trial court judge’s last opportunity to rule on legal issues in the case before it goes up on appeal.

It’s possible that the judge in the Oculus case will simply render judgment ordering each defendant to pay the amount of damages the jury found that defendant caused, but I don’t expect it will be that simple. You can look at the complicated charge and the number of high-priced lawyers on the case and know there is going to be a battle over the judgment.

Expect the defendants to argue that there was insufficient evidence to support the jury’s answers on both liability and damages. I also wonder if there is an election of remedies issue. When the jury awards damages on several causes of action that arise from the same facts, the judge doesn’t necessarily add up all the dollar amounts and award the total to the plaintiff.

So the verdict is the climax, not the end of the story. We’ll have to wait and see whether the judgment actually awards $500 million (plus interest and maybe attorneys’ fees?), and whether the judge grants an injunction against sales of the Oculus Rift based on the jury’s finding of copyright infringement.

I tried to think of a good football analogy, but golf is better for this point. Discovery and pre-trial motions are the first 17 holes. The trial is getting the ball on the 18th green. The post-verdict motions and appeals are getting the ball in the hole to win the tournament. That’s why they say “trial lawyers drive for show, appellate lawyers putt for dough.”

It will be fun to watch ZeniMax’s lawyers putt for $500 million.

_____________________________________

head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

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.

From Russia with Love: A New Defend Trade Secrets Act Case

From Russia with Love: A New Defend Trade Secrets Act Case

Do Northern California federal courts have jurisdiction over every Gmail user who emails confidential information?

The answer is no, but give points for creativity to the plaintiff in OOO Brunswick Rail Management v. Sultanov, who at least made the argument.  More about that later.

If you like trade secrets cases, you’ve got to love the recent Brunswick case. It has everything. A Russian company. A renegade employee emailing confidential company documents to his personal Gmail account (allegedly). And something every trade secret litigation nerd has been waiting for: an application for an ex parte seizure order under the new federal Defend Trade Secrets Act.

Back in May 2016, then-President Obama signed the Defend Trade Secrets Act (DTSA). As I reported here, the chief practical effect of the DTSA was to give plaintiffs in trade secrets cases the option of suing in federal or state court. Unless you’re a trade secrets litigator like me, that’s pretty boring.

But the sexy part of the DTSA was the new ex parte seizure remedy. “Ex parte” is a Latin phrase that means “you don’t have to tell the judge how crappy your case is.” But seriously, it means only one side presents its case to the judge. The DTSA allows a judge to order federal marshals to seize a person’s property—typically we’re talking about a computer or smartphone—without notice to that person.

This caused some serious handwringing in the legal community. We have an “adversary” system of justice that guarantees due process—at least for now—so lawyers worried about potential abuse of the ex parte seizure remedy.

I agreed with critics who saw no real need for a federal trade secrets statute, but I wasn’t too concerned about a wave of ex parte seizure orders. The DTSA has strict requirements for such orders, and I predicted most federal judges would not grant such an extreme remedy when an ordinary temporary restraining order would do.

A test case for the DTSA’s ex parte seizure remedy

Brunswick is one of the first cases to test my theory. The complaint presented a fairly ordinary misappropriation of trade secrets case, but with a Russian twist:

  • Brunswick is a Russian company that leases railcars to large corporate clients in Russia. After beginning a process to restructure its debt, Brunswick sued its former CEO in a confidential arbitration.
  • A Russian-American named Sultanov went to work for Brunswick and signed a typical confidentiality agreement. Essentially, Sultanov agreed not to disclose Brunswick’s confidential information, that all of Brunswick’s internal information is confidential, and that he would return all Brunswick confidential information on request.
  • Sultanov started acting suspiciously: taking calls one floor up from his office, asking a lot of questions about the debt restructuring, and even coming to work on the weekends. (Big law firm associates take note.)
  • Sultanov emailed confidential Brunswick documents from his work email to his personal Gmail account. He then deleted the emails from his Brunswick account and emptied his “trash” folder. The emailed information could be highly damaging to Brunswick’s debt restructuring negotiations with its creditors.
  • Phone records showed Sultanov repeatedly calling a Brunswick creditor involved in the restructuring.
  • When confronted, Sultanov admitted sending the emails but refused to return his company-issued mobile phone and laptop.

And my favorite allegation from the complaint:

highlighted-brunswick-security-measures

“Extraordinary steps” including “locking its doors.” Wow. I knew Russia had nuclear weapons, but I didn’t realize it now has access to modern door-locking technology.[1]

So far, these facts present an interesting, but typical, trade secrets case against a former employee.[2] Emailing company files to your personal Gmail account on the sly? Come on, man! That’s so last decade. It’s more obvious than getting down on the floor and sticking a USB drive in your PC tower.

But if you’re Brunswick’s lawyer, where do you sue Sultanov? How can you get his computer and phone back quickly? And how can you do it without giving him a chance to tell his side of the story?

It’s time to get creative.

Recent trade secrets case tests two novel theories

First, a little background for my non-lawyer readers. To sue someone in federal court, you need both “subject matter” jurisdiction and “personal” jurisdiction. Subject matter jurisdiction means the court has jurisdiction to hear the type of claim you’re making. Personal jurisdiction means that the court has jurisdiction over the person you’re suing.

Personal jurisdiction is complicated, but in a trade secrets case, it boils down to this: you need to show that the person you’re suing took or received the alleged trade secrets in the state where you’re suing him (as I explained here).

Brunswick came up with the brilliant idea of suing Sultanov in federal court in California for violating the Defend Trade Secrets Act. Subject matter jurisdiction? Check.[3]

Personal jurisdiction? That was a little harder. Sultanov’s sneaky shenanigans all took place in Russia, right?

Not exactly. If you had Encyclopedia Brown on the case, he’d spot a detail you might have missed: Sultanov emailed Brunswick’s confidential information to his Gmail account. And where is his gmail account located? You guessed it: Google headquarters in Silicon Valley.

google-laptop-and-phone

Brunswick argued in its brief that Sultanov was subject to personal jurisdiction in the Northern District of California because he emailed the trade secrets at issue to his Gmail account hosted by Google. Not only that, Sultanov went to high school and college in California and “certainly would be aware that Google is based in California and that his intentional use of Gmail would have effects in California.”

Like I said, points for creativity.

Judge denies ex parte seizure order and rejects creative jurisdiction argument

Brunswick filed suit on January 4, 2017 asking for an ex parte seizure order against Sultanov under the Defend Trade Secrets Act. Two days later, U.S. District Judge Edward J. Avila issued this opinion denying a seizure order but granting a temporary restraining order (TRO).

Judge Davila cited the DTSA provision that a court can grant an ex parte seizure order only if it finds that another form of equitable relief would be inadequate. “Here, the Court finds that seizure under the DTSA is unnecessary because the Court will order that Sultanov must deliver these devices to the Court at the time of the hearing scheduled below, and in the meantime, the devices may not be accessed or modified.”

This seems like the sensible ruling, and the one you would expect most federal judges to make in this situation. It’s the reason I expected that granting an ex parte seizure order would be very rare.

So what happened when Sultanov’s lawyer got a chance to respond? If you’re a litigator, or if you’ve watched a lot of episodes of Law and Order, you know what’s coming.

First, would you believe there was another side to the story? Sultanov’s response painted a very different picture than Brunswick’s complaint. Far from a dishonest employee stealing the company’s trade secrets for personal gain, Sultanov portrayed himself as a conscientious whistleblower exposing corporate fraud, even against his own interest.

I would share more details, but most of Sultanov’s publicly available response looked like this:

sultanov-redacted

Second, Sultanov attacked Brunswick’s creative “Gmail” theory of personal jurisdiction. After hearing arguments from both sides on the personal jurisdiction issue, the judge issued this order siding with Sultanov and rejecting the Gmail theory:

brunswick-excerpt

As a lawyer who has read literally hundreds of personal jurisdiction cases, I can tell you the judge was on solid legal ground.[4] Plus, the Gmail argument would make the Northern District of California to trade secrets litigation what the Eastern District of Texas has been to patent litigation.

That would be bad. I’ve traveled to both Silicon Valley and the Eastern District of Texas for litigation matters. I had some great Korean food in Palo Alto, but California is just too expensive. Tyler and Marshall, on the other hand, are much cheaper and have better BBQ joints.

But I digress.

A lesson about the adversary system

The Brunswick case provides a great lesson about the adversary system, due process, and the reason people got so worked up about the ex parte seizure remedy in the Defend Trade Secrets Act.

First, even when the lawyer asking for an ex parte order is totally honest, he’s unlikely to volunteer any important reasons not to grant the relief. The judge is only going to get one side of the story.

A related problem is that when the judge only hears from one side, no one involved has a strong personal incentive to test the underlying assumptions of the lawsuit. For example, does the court even have personal jurisdiction over the defendant?

So, when the judge in Brunswick issued a 2000-word order granting a TRO against Sultanov, the word “jurisdiction” appeared exactly zero times.

I wasn’t there, but I’m guessing when Judge Davila issued the ex parte order two days after the suit was filed, there wasn’t a robust discussion about whether Sultanov was subject to personal jurisdiction. I’m wondering if the judge was a little ticked off when he later realized that the jurisdictional basis for the TRO he signed was the Gmail theory.

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_________________________________________________

head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

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] In fairness to Brunswick, the Complaint also alleged some pretty extensive additional efforts to protect confidential information.

[2] For simplicity, I’m leaving out facts about Brunswick’s claim against another employee, its former CEO Paul Ostling. Adding those facts would turn this into “Ten Minute Law.”

[3] Federal courts have original but not exclusive jurisdiction over DTSA claims. 18 U.S.C. § 1836(c).

[4] The judge also found that the evidence did not support Brunswick’s additional allegation that Sultanov maintained a personal residence in California. The judge cited Sultanov’s testimony that the address at issue was a family friend’s property that he sometimes used as a mailing address.

Do Lawyers Have an Ethical Duty to Disclose That Their Clients Took Confidential Information?

Do Lawyers Have an Ethical Duty to Disclose That Their Clients Took Confidential Information?

A typical customer list scenario illustrates the problem

On the first day of law school, they teach us that the answer to almost every legal question is “it depends.” (And I hear they teach the same lesson on the first day of Economist School.) Opinion 664 from the Texas Center for Legal Ethics takes 1,699 words to say the same thing. The issue: a lawyer’s ethical duty to disclose that he has the opposing party’s confidential or privileged information.

We’re talking lawyer ethics, so you know there’s going to be a hypothetical, right? Well here it is.

Paula Payne Windows sells windows, primarily for residential construction. Dawn Davis, one of Paula Payne’s top sales people, leaves Paula Payne and takes a job with Real Cheap Windows. Paula Payne sues Dawn Davis and Real Cheap for misappropriating confidential information and trade secrets.

Specifically, Paula claims that Dawn took a confidential customer list she compiled while working for Paula—specifically, the names and contact information for her customers stored on her iPhone contacts.

Dawn hires you to represent her in the lawsuit. She tells you she does indeed have the names and contact information for her 50-some-odd customers on her iPhone. Shortly after you file an answer, opposing counsel inadvertently copies you on a confidential email to his client in which he says, “I know it’s silly, but we need to claim that Dawn’s customer list is a trade secret.” The email attaches a memo outlining opposing counsel’s legal strategy.

Two questions: (1) do you have an ethical duty to disclose to opposing counsel that Dawn has the customer list? (2) do you have an ethical duty to disclose to opposing counsel that you received the confidential email?

A recent Texas ethics opinion weighs in on two issues

These two questions, in abstract form, are the subject of Texas Ethics Opinion 664. The answer? “Not necessarily.” Which is another way of saying, “it depends.”

The opinion is careful to distinguish between what a lawyer should do and what the Texas Disciplinary Rules of Professional Conduct require. A lawyer should aspire to inform opposing counsel of an inadvertent disclosure of confidential information, the opinion says, but failing to do so is not necessarily an ethical violation.

texas-bar-journal-cover-december-2016
Don’t miss the ethics opinion tucked away in the December 2016 Texas Bar Journal

In the words of the Opinion: “a Texas lawyer who fails to provide notice to opposing counsel upon receipt of an opposing party’s confidential information outside the normal course of discovery does not necessarily or automatically violate the Texas Disciplinary Rules. The answer is the same whether the information is obtained in an unauthorized manner or inadvertently.”

But the Opinion also notes that the use of the confidential information could violate the ethics rules depending on the circumstances, citing rules that bar lawyers from engaging in or assisting criminal, fraudulent, or dishonest conduct.

The “not necessarily” answer strikes me as basically correct, but not very helpful. To use a technical legal term, Ethics Opinion 664 is too wishy-washy.

A duty to disclose the other guy’s inadvertent disclosure of privileged information would make more sense

The root of the problem is that the opinion tries to address two significantly different questions at once. The opinion underappreciates the difference between the questions, particularly the difference between privileged information and confidential information. Instead of giving a wishy-washy answer that tries to cover both issues, the opinion could have given separate, more definitive answers.

I’ll use my hypothetical to explain what I mean. As Dawn Davis’s lawyer, would you have an ethical duty to disclose to opposing counsel that he inadvertently sent you a privileged memo outlining his legal strategy? I bet when you first read this question you said yes. That seems like the right answer to me as well.

And I’m not the only one. ABA Model Rule 4.4(b) says: “A lawyer who receives a document or electronically stored information relating to the representation of the lawyer’s client and knows or reasonably should know that the document or electronically stored information was inadvertently sent shall promptly notify the sender.”

This seems like a workable common sense rule. Like most good manners, it’s reciprocal: if you tell me when I send you something privileged by mistake, I’ll do the same for you.

One reason this rule would make sense is that in most cases it is obvious when opposing counsel has inadvertently sent you privileged material. The lawyer who receives the communication usually doesn’t have to make a difficult judgment call about whether it’s privileged or not.

A duty to disclose that your client has confidential information would make less sense

The second issue from the hypothetical is quite different. Do you have an ethical duty to disclose that your client Dawn Davis took Paula Payne Window’s confidential customer list? I bet when you read this question you said no, and I agree.

But why? First, it’s important that the confidential status of the customer list is an issue in dispute in the lawsuit. Keep in mind that a customer list can be—but is not necessarily—a trade secret (more about this issue here). If you represent Davis, you’re going to take the position that Davis’s list of her own customers is not a trade secret or even confidential information.

Now imagine that the ethics rules required you to volunteer that your client possesses that information if the information is actually confidential. Your ethical obligation would depend on a judgment call on an issue in dispute in the litigation. This would be unworkable.

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Ethic Opinion 664 isn’t necessarily wrong. But it could have been better.

Ethics Opinion 664 fails to address this problem. It simply assumes that the information is confidential.

But the problem goes beyond that. Even if we assume that the information held by the client is confidential information or a trade secret, it would be strange for trade secret cases to be subject to a special rule that a lawyer has an ethical duty to volunteer information to the other side about an issue in dispute in the litigation.

Keep in mind we’re talking about an ethical obligation to volunteer information, not the duty to respond to proper discovery requests. If the Court orders Dawn Davis to produce documents that contain customer names and information, then her lawyer’s obligation is clear. But that is not the question presented.

If I ran the zoo

It’s hard to find anything incorrect in Ethics Opinion 664. But the opinion could have provided better guidance. Rather than giving one generic answer to two different questions, the opinion could have drawn a sharper distinction between the questions and taken a stronger stand on each.

Generally, there should be an ethical duty to disclose to opposing counsel that he has inadvertently sent you privileged information. Generally, a lawyer should not have an ethical duty to disclose that his client has documents that the opposing party claims contain confidential information or trade secrets.

But why do I say “generally”? Well, you know. Because it depends.

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head-shot-photo-of-zach-wolfe

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

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.

The Key to Jurisdiction in Texas Trade Secrets Litigation

The Key to Jurisdiction in Texas Trade Secrets Litigation

Recent case illustrates when you can sue a non-Texas company in Texas for taking trade secrets from Texas

If you own a Texas company and a competitor outside of Texas takes your company’s trade secrets, can you sue the competitor in Texas? This was the issue in the recent case RSM Production Corp. v. Global Petroleum Group decided by the Houston Court of Appeals.[1]

The answer: You can sue a nonresident company in Texas if it established “minimum contacts” with Texas through “purposeful availment” of the benefits and protections of Texas law, your claim for misappropriation of trade secrets “arises out of or relates to” its contacts with Texas, and exercising jurisdiction would not conflict with “traditional notions of fair play and substantial justice.”

Simple, right?

If a law school graduate gave this answer on a bar exam, he would be absolutely right. But if a practicing litigator said this, it would tell you nothing. That’s because the legal rules for “personal” jurisdiction, like many legal rules, are too vague to give you a determinate answer. Lawyers need to know the right buzzwords to recite, but the buzzwords are not enough. Effective lawyers have to understand two other things: the rationale for the rules, and the sub-rules.

The sub-rules are the rules that emerge from decades of case law applying the general rules to specific factual situations. For example, if you’re a criminal defense lawyer arguing that the police illegally searched your client’s vehicle, it’s not enough to know that the police had to have “probable cause.” You need to know how courts have applied probable cause to your factual situation, such as “is there probable cause to search a tour bus if the police smell marijuana?”

The bad news is that there are literally hundreds of Texas cases on personal jurisdiction. The good news is that I spent five years of my life working on the defense of a group of foreign banks in a series of Texas lawsuits, and I have probably read most of those cases. From that experience, I’m going to share two things that will turn you into an instant authority on personal jurisdiction law, especially in trade secrets cases:

  1. A framework for how to think about personal jurisdiction that will help you make sense of the case law and guide your arguments.
  1. The specific sub-rule that applies to trade secrets cases.

The key to making sense of personal jurisdiction law

The thing you need to understand about personal jurisdiction law is that it is bipolar. I don’t mean that it’s crazy, but that there are two intersecting considerations. One is called “purposeful availment.” The other is called “relatedness.”

Purposeful availment is the idea that someone who deliberately seeks the “benefits and protections” of doing business in a particular state should reasonably expect he can be sued in that state. For example, if I sign a contract with a Louisiana company that has a clause saying that the contract will be governed by Louisiana law, that’s a good indication of my “purposeful availment” of the “privilege” of doing business in Louisiana. [Insert your own Louisiana joke here.]

Relatedness is entirely different. It is a question of whether the plaintiff’s claim against me “arises out of or relates to” my contacts with the state. Let’s say the Louisiana company is suing me in Louisiana for negligently crashing my car into one of their trucks in Nacogdoches. In that case the contract would reflect purposeful availment but not “relatedness,” because the negligence claim arises from the accident in Texas, not from the contract. (Nacogdoches is in Texas, y’all.)

Graphically, the interaction between purposeful availment and relatedness looks like this:

jurisdiction-graph

As the chart shows, high purposeful availment combined with high relatedness equals jurisdiction.

For example, let’s say a Russian company sends representatives to a meeting in Texas where they receive alleged trade secrets from a Texas oil and gas company. I know it’s hard to imagine Russia doing something like this—it would be like hacking into confidential emails to try to influence another country’s election—but stay with me.

The Texas company later sues the Russian company in Texas, claiming misappropriation of trade secrets. In that case, the meeting would reflect “purposeful availment” of the right to do business in Texas. There would also be “relatedness” because the claim for misappropriation of trade secrets arose directly from what happened at the meeting.

These were the basic facts in Moncrief Oil, where the Texas Supreme Court held that the Texas company could sue the Russian company in Texas for trade secret misappropriation.[2]

The case for jurisdiction is weaker when the alleged misappropriation of trade secrets happens outside of Texas. Suppose your client is an offshore company that sent a representative to meet with a Texas oil and gas company. The Texas company later sues your client, claiming trade secret misappropriation, and arguing the Texas meeting establishes “purposeful availment.” You respond that your client acquired and disclosed the alleged trade secrets outside Texas, and there was no discussion of the alleged trade secrets at the Texas meeting. Therefore there is no “relatedness” and no jurisdiction in Texas. This was basically the holding in the recent RSM Production case, and also in Bower v. American Lumber Co., a case I argued to the Waco Court of Appeals.[3]

Personal jurisdiction law does recognize that contacts with a state can occur through email and cyberspace. This is especially true with trade secrets, which can be sent across the globe with the click of a mouse. But the case law shows that where a communication physically occurs still matters in personal jurisdiction law. The idea is that when a nonresident physically attends a meeting in Texas, he should reasonably anticipate being sued in Texas for things that happen at that meeting. When he receives information from Texas on his computer in another part of the world, not so much.[4]

So, while the familiar buzzwords of personal jurisdiction law don’t give us the answer, from reading the cases we can state this sub-rule: a nonresident defendant who allegedly misappropriates trade secrets from a Texas company will usually be subject to jurisdiction in Texas if he was physically in Texas when he received or disclosed the alleged trade secrets.

Harder Cases

Of course, facts don’t always fit into neat categories. What if an employee of a Texas company emails trade secrets from his Texas office to a company in California, and the Texas company sues the California company in Texas? There is less purposeful availment when the defendant is not physically present in Texas. Courts have repeatedly said that emails, phone calls, and other correspondence from outside the state do not weigh heavily on the purposeful availment scale. But if you represent the Texas company, you would argue that there is a high degree of relatedness, because your client’s claim is directly related to the email that transmitted the trade secrets.

This kind of case is harder. It is similar to the common fact pattern where a Texas resident sues a nonresident for fraud and the nonresident made the allegedly fraudulent statement in a phone call or other communication to the Texas resident. The outcome in that kind of case may depend on whether you are in state or federal court. There are federal cases in the Fifth Circuit holding that a fraudulent misrepresentation to a Texas resident is a sufficient basis for jurisdiction. But the Texas Supreme Court held in the landmark Michiana case that an alleged misrepresentation from outside Texas is insufficient to establish purposeful availment.[5]

It gets even more complicated when the plaintiff makes multiple claims arising from different events. For example, a company could be subject to jurisdiction for a trade secrets claim where its representative received trade secrets at a meeting in Texas, but not subject to jurisdiction in the same lawsuit for a tortious interference claim that arose from actions taken in California. This was the situation in Moncrief Oil. Now you’re earning your Ph.D. in personal jurisdiction law.

The Texas Supreme Court recently muddied the waters a little in Cornerstone Healthcare. In that case, a Texas company’s officers allegedly breached their fiduciary duties by helping a Rhode Island company usurp an opportunity to acquire a chain of Texas hospitals. The court said the Rhode Island company could be sued in Texas. Rather than focusing on what happened at the Texas meetings, the court emphasized that the Rhode Island company “specifically sought both a Texas seller and Texas assets,” and that the facts surrounding the “crux” of the contacts with Texas would be the focus of the claims at trial.[6]

But the general rule for tort cases, including trade secrets cases, is still this: if the defendant committed the alleged tortious activity in Texas, there is probably jurisdiction; if the defendant committed the alleged tortious activity outside Texas, there probably isn’t jurisdiction. This cheat sheet can help you keep the details straight.

Overtime: The Dragnet and The Escape Hatch

If you have a little extra time, there are two complications worth mentioning, although just barely: a “dragnet” called “general jurisdiction” and an “escape hatch” called “fair play and substantial justice.” The case law has evolved to the point where these concepts are almost extinct, but they do still exist.

The general jurisdiction dragnet applies when a defendant has such “continuous and systematic” contacts with the state that it is subject to jurisdiction even if the plaintiff’s claims are totally unrelated to those contacts. But in American Type Culture Collection, the Texas Supreme Court set the bar very high for general jurisdiction, essentially requiring an ongoing physical presence in the state. More recently, the U.S. Supreme Court moved the general jurisdiction bar even higher in Daimler Chrysler v. Bauman, holding that in most cases a corporation is only subject to general jurisdiction in the state where it is incorporated or has its principal place of business. As a result, cases of general jurisdiction are increasingly rare.

While general jurisdiction can snag a defendant who otherwise would not be subject to jurisdiction, “fair play and substantial justice” provides an escape hatch for a defendant who otherwise would be subject to jurisdiction. In effect, it says “regardless of purposeful availment and relatedness, there is no jurisdiction if exercising jurisdiction would be really unfair for some other reason.”

But don’t get too excited. Application of this escape hatch has also become increasingly rare. It is almost entirely limited to international defendants or individual defendants who would be highly burdened by the expense of litigating in a state where they do not reside. In a trade secrets case, this escape hatch probably won’t do much for a company that allegedly received or disclosed trade secrets in the state where it is sued.

Then the real fun will start: arguing about whether the information is a “trade secret” in the first place.

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head-shot-photo-of-zach-wolfe

Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands.

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] RSM Prod. Corp. v. Global Petroleum Group, Ltd., 2016 WL 6110913 (Tex. App.—Houston [1st Dist.] Oct. 20, 2016, no pet. h.).

[2] Moncrief Oil Int’l, Inc. v. OAO Gazprom, 414 S.W.3d 142 (Tex. 2013).

[3] Bower v. Am. Lumber Co., 2015 WL 1755311 (Tex. App.—Waco Apr. 16, 2015, no pet.).

[4] Searcy v. Parex Resources, Inc., 496 S.W.3d 58 (Tex. 2016), illustrates the distinction. The Canadian defendant was subject to jurisdiction in Texas for a fraud claim because it allegedly made the misrepresentation in Texas, but it was not subject to jurisdiction in Texas on a tortious interference claim that arose from the Canadian company’s communications from outside Texas. The dissent argued in vain that it should not matter that the Canadian company communicated with executives in Texas by emails and phone calls rather than in person.

[5] Michiana Easy Livin’ Country, Inc. v. Holten, 168 S.W.3d 777 (Tex. 2005).

[6] Cornerstone Healthcare Group Holding, Inc. v. Nautic Mgmt. VI, LP, 493 S.W.3d 65 (Tex. 2016).

Injunction Junction, What’s Your Function?

Injunction Junction, What’s Your Function?

TexasBarToday_TopTen_Badge_VectorGraphicA Recent 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?

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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.

Very, very important.

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cropped-head-shot-photo-of-zach-wolfe.jpg

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

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] 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.