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BFV Perspectives, Noncompete & Trade Secrets, | Nov 14, 2017

Tenth Circuit Weighs in on DTSA Injunctions

There have been a number district court opinions since the enactment of the Defend Trade Secrets Act (“DTSA”) that touch on a wide range of issues.  There have, not too surprisingly, been very few appellate decisions.  However, one very recent appellate decision, First Western Capital Management Company v. Malamed, 2017 WL 4872570 (10th Cir. Oct. 30, 2017), addresses a significant issue for trade secret practitioners: does a plaintiff seeking an injunction under the DTSA have to prove irreparable harm to show entitlement to injunctive relief?

The plaintiff in the case, First Western, is an investment management company.  When the defendant, Mr. Malamed, learned that First Western was considering selling to another company, he had his assistant print three copies of his client list.  That list contained client names, contact information, the market value of the clients’ assets under management, and the fees being charged by First Western. 

First Western filed suit against Mr. Malamed after terminating his employment.  First Western asserted claims against Mr. Malamed under the DTSA and also the Colorado Uniform Trade Secrets Act (“CUTSA”). 

First Western sought a preliminary injunction prohibiting him from soliciting its clients.  As part of the district court’s analysis, it considered whether First Western must show it would be irreparably harmed without an injunction.   The court found First Western was excused from showing irreparable harm, relying on case law holding that a plaintiff is not required to prove irreparable harm when the evidence shows that a defendant is or will soon be engaged in acts or practices prohibited by statute and that statute provides for injunctive relief to prevent such violations.  The district court noted that both the DTSA and the CUTSA provide for injunctive relief to prevent misuse of trade secrets.  Therefore, because Mr. Malamed was misusing or threatening to misuse trade secrets with respect to First Western’s clients, the district court found that irreparable harm presumptively existed and need not be separately established.  The district court observed that had First Western not been excused from showing irreparable harm, it would not have granted injunctive relief because First Western’s alleged damages could be reasonably quantified and would have adequately made it whole.

Mr. Malamed appealed the injunction.  The Tenth Circuit reversed, finding that the district court erroneously found that the irreparable harm requirement was excused.  The Tenth Circuit concluded that the irreparable harm requirement is only excused when a statute mandates injunctive relief for a violation.  Because the DTSA authorizes injunctive relief but does not mandate it, the DTSA does not provide for a presumption of irreparable harm.  The analysis was the same for the CUTSA.  Because the district court had specifically found that irreparable harm could not be established if First Western had to show irreparable harm, the Tenth Circuit concluded First Western was not entitled to injunctive relief and vacated the preliminary injunction. 

This case demonstrates that a plaintiff pursuing injunctive relief based on a federal trade secrets claim (and most, if not all, trade secrets claims brought under state law) must establish irreparable harm to obtain a preliminary injunction.  This is true no matter how egregious the defendant’s theft may be.  If a trade secrets defendant can show that the plaintiff can be made whole through money damages, a defendant may be able to defeat an injunction, notwithstanding the fact that he or she may have taken trade secrets from his or her employer.  Of course, where the defendant’s continued use of the trade secret is likely to destroy the trade secret status of the information, a plaintiff will likely be able to show irreparable harm.

BFV Perspectives, Noncompete & Trade Secrets, | Nov 14, 2017
Neal F. Weinrich
Neal F. Weinrich

Neal Weinrich knows noncompetes and trade secrets inside and out. A shareholder at Berman Fink Van Horn, Neal counsels clients in all industries on matters involving restrictive covenants, trade secrets and other competition-related issues.