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BFV Perspectives, Noncompete & Trade Secrets, | Feb 13, 2013

Validity of Trade Secrets Final Injunction May Hinge on Applicability of Erie Doctrine

In Autumn of 2012, a titanic worldwide 20-year final injunction prohibiting the production of Heracron, a competitor to Kevlar, sent shockwaves through the legal world.  E.I. DuPont de Nemours and Co. v. Kolon Industries, Inc., No. 3:09-cv-00058 (E.D. Va. August 30, 2012).  In DuPont, the jury found that Kolon Industries, Inc. (“Kolon”) had misappropriated the trade secrets of DuPont in seeking to make its competitive product and awarded more than $919 million in damages to DuPont.  Based on this jury verdict, the Court then entered the aforementioned injunction.  As noted, the injunction went well beyond barring Kolon from using DuPont’s trade secrets and instead prohibited Kolon from even making a competing product.

In the latest turn of events, the United States Court of Appeals for the Fourth Circuit stayed the injunction pending Kolon’s appeal.  Given the spectacular scope, breadth and duration of the injunction, this case is of particular interest to trade secrets practitioners. 

One issue in the appeal is the applicability of the Erie doctrine in the context of final injunctions.  Under Erie, when a federal court has jurisdiction over a case based on diversity of citizenship, it is to apply federal procedural law and the state substantive law of the forum state.  Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).  However, the substance/procedure distinction has grown problematic.  When Eriewas decided in 1938, federal courts understood “substance” and “procedure” to be wholly separate and discrete areas of the law.  With the courts’ move away from legal formalism and toward legal realism, though, it became generally acknowledged that procedural law invariably affects substantive rights. 

Over the years, the courts tried to rescue Erie’s distinction without difference.  InHanna, the Supreme Court held that any state law that is also directly addressed by the Federal Rules of Civil Procedure could be deemed “procedural” and, accordingly, should be eschewed by federal courts in favor of the relevant Federal Rule.  Hanna v. Plumer, 380 U.S. 460 (1965).

In DuPont, whether Kolon misappropriated DuPont’s trade secrets was to be decided based on Virginia’s substantive law.  The jury found a violation of the Virginia Uniform Trade Secrets Act (VUTSA), and the VUTSA authorized final injunctive relief. 

The Court then addressed whether it should look to federal law to determine whether final injunctive relief should be granted or whether it should look to Virginia law to assess the propriety of injunctive relief.  If federal law applied, DuPont would have to show that the traditional prerequisites for injunctive relief were met, including that it would suffer irreparable harm if an injunction did not issue and that the damages award that it obtained was not an adequate remedy of law.  (In eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), a patent case which thus arose under federal law, the Supreme Court held that the plaintiff must meet all of the prerequisites for injunctive relief even where a violation is established).  If, on the other hand, Virginia law applied, DuPont would not have needed to prove irreparable harm if a violation of the statute had been established. 

The district court found that, under existing Fourth Circuit precedent and consistent with Erie, in diversity cases, state law should govern the issuance of final injunctive relief where state law speaks directly to that point.  The district court therefore applied Virginia law and found that injunctive relief was appropriate.

The Fourth Circuit may use the DuPont case to clarify when the grant of a final injunction is “procedural” or “substantive” under its case law and, accordingly, whether districts courts within the Fourth Circuit should apply federal or state law to the grant of a final injunction where state law provides for injunctive relief. 

The Fourth Circuit’s ruling could lead the Supreme Court to consider the same question and, one hopes, lend some clarity to this issue.  Unless and until that point comes, whether and when the federal courts will apply state or federal law in deciding whether to grant a final injunction where state law provides for injunctive relief may vary from one federal court to the next.

BFV Perspectives, Noncompete & Trade Secrets, | Feb 13, 2013