September 3, 2013
LES Insights
By John C. Paul; D. Brian Kacedon; Robert C. MacKichan III
Authored by Robert C. MacKichan III, D. Brian Kacedon, and John C. Paul
Obtaining a preliminary injunction typically requires showing that irreparable harm, i.e., harm that cannot be corrected through monetary compensation, will result if an injunction is not granted. In many jurisdictions, however, the concept of irreparable harm has evolved to cover a broader set of harms that could, at least theoretically, be corrected through monetary damages. In Core Laboratories LP v. Spectrum Tracer Services L.L.C.,1 the Federal Circuit applied Texas substantive law—under which irreparable harm can be presumed when the defendant possesses trade secrets and is in a position to use them—and reversed the district court's denial of a preliminary injunction.
Core Laboratories provides hydraulic fracturing ("fracking") services to oil-well operators. After two of its employees left to start a competing business, Spectrum Tracer Services, Core filed suit in the Western District of Texas, alleging misappropriation of its trade secrets. Although misappropriation of trade secrets is a state-law claim, the district court had jurisdiction over that claim through diversity of citizenship.
After Spectrum successfully got the case transferred to the Western District of Oklahoma for convenience, Core amended its complaint to add patent infringement claims and requested a preliminary injunction against infringement of its patents. The district court denied the preliminary injunction on the grounds that Core had not made the required showing of irreparable harm, reasoning that "any harm that Core has suffered or may suffer as a result of defendants' unlawful use of Core's patent protected services can be adequately remedied through an award of monetary damages."
The case proceeded in the district court until Spectrum requested inter partes reexamination of both patents at issue, and the case was stayed pending the reexaminations. On the same day the case was stayed, a Spectrum employee contacted Core, alerting Core that he had been given Core-labeled documents and had been asked to recreate the same functionality described in the documents. The whistleblower employee also forwarded a copy of an Excel file created by Core, which contained twenty-five interactive worksheets used by Core to determine how to conduct its services for a particular customer, along with information about Core business procedures, customer lists, price lists, and other details of Core's tracing services.
After receiving this information from the whistleblower employee, Core filed an emergency motion with the district court requesting a preliminary injunction against Spectrum's use of the Core documents based on its claim of misappropriation of trade secrets and proprietary information. Core also requested that the stay on the nonpatent counts in the litigation be lifted. Spectrum did not dispute that it possessed the Core documents. Instead, Spectrum identified the whistleblower and submitted a declaration by him qualifying the statements he made to Core.
Through this declaration, the whistleblower explained that "Management at Spectrum has never instructed me to copy or reproduce any text, code, formulas, scripts or data obtained from or derived from Core Laboratories," and that he was merely asked "to review the [Core] Excel spreadsheets to incorporate field work functions into the CRM I was developing." He further stated that "At no time have I used any text, code, formulas, scripts or data obtained from or derived from Core Laboratories. . . ."
Core presented evidence on the value to its business of the disclosed documents and evidence that it had already lost $1 million worth of jobs to Spectrum.
The district court denied Core's emergency motion. Just as with Core's request for a preliminary injunction against infringement of its patents, the court found that Core had not shown irreparable injury from misappropriation of trade secrets and proprietary information. The district court reasoned that the new information provided by the whistleblower employee was merely additional evidence regarding the "alleged method by which defendants are allegedly misappropriating its patents, trade secrets and copyrighted material."
Core appealed the denial of its emergency motion, asking the Federal Circuit to review the denial of a preliminary injunction against use of Core's trade secrets and the district court's refusal to lift the stay of nonpatent issues.
The Federal Circuit first resolved a dispute over the applicable choice of law. The court applied well-settled principles in explaining that a federal court sitting in diversity applies the procedural law of the federal forum and substantive law of the state. And upon transfer of venue for convenience, the substantive law of the transferor state continues to apply to the plaintiff's state-law claims. Thus, the court found that Texas law governed the substantive legal questions underlying Core's request for a preliminary injunction based on the state law claim of misappropriation of trade secrets and proprietary information.
The Federal Circuit went on to decide whether the district court abused its discretion by denying a preliminary injunction against Spectrum's use of Core trade secrets. According to the court, under Texas law, "when a defendant possesses trade secrets and is in a position to use them, harm to the trade secret owner may be presumed." Because Spectrum conceded possession of Core's proprietary information, the district court erred in finding that Core did not establish irreparable injury. Further, the court ruled, even notwithstanding the presumption of Texas law, the facts "convincingly show irreparable harm for a preliminary injunction." The Federal Circuit cited the 1984 Supreme Court case Ruckelshaus v. Monsanto Co. for the proposition that, for trade secrets, "[t]he economic value of that property right lies in the competitive advantage over others that [the trade secret holder] enjoys by virtue of its exclusive access to the data, and disclosure or use by others of the data would destroy that competitive edge." The court pointed to evidence provided by Core that its competitive advantage had already been damaged by loss of customers to Spectrum and price erosion. The court also credited Core's argument that injunctive relief was necessary because damages adequate to compensate for Spectrum's use of Core's information would be difficult to calculate.
The Federal Circuit then addressed the remaining showings required to obtain a preliminary injunction: that there is a substantial likelihood of success on the merits; that the threatened injury to the movant outweighs the injury to the opponent; and that an injunction would not be adverse to the public interest. On the likelihood of success, the court found that "Texas law weighs heavily on Core's side." The court reasoned that Spectrum's only defense was its lack of use of the Core information based on the whistleblower-employee's statement that he never used any text or code from the Core documents. But the court found that under Texas law, use of a misappropriated secret does not require complete copying or implementation of every detail, but can be shown by "any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant . . . ." Thus, it was enough that the employee was directed to "review" and "incorporate" features of Core's software into Spectrum's software.
For the remaining required showings, the Federal Circuit found that Core showed that both the balance of harms and the public interest tilted in its favor. As a result, the Federal Circuit found that the district court abused its discretion in denying Core's motion for a preliminary injunction.
Finally, the Federal Circuit instructed the district court to consider how the preliminary injunction affected Core's request to sever the nonpatent issues, to litigate them while the patent issues remained stayed pending reexamination.
Although nonprecedential, the Core Labs opinion demonstrates how federal courts apply state law to trade-secret claims, even for preliminary injunctions. It also highlights how a plaintiff's original choice of forum and the law of that forum can affect a case even after it has been transferred to a different forum for convenience. Though limited to Texas law, Core Labs also shows how a presumption of irreparable harm under state law in a trade-secret case and the threat of irreparable damage to a company's competitive edge can help bolster the case for issuing a preliminary injunction.
1 The Federal Circuit opinion can be found at http://www.finnegan.com/files/Publication/e89a7059-dbfb-43d2-8121-09571702b4a3/Presentation/PublicationAttachment/c584f779-0949-4d50-ab31-0be7af180698/13-1263%208-7-13.pdf.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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