It is well established that federal courts are empowered under the Federal Defend Trade Secrets Act (“DTSA”) to grant preliminary injunctive relief to prevent both actual and threatened trade secret misappropriation. Much less clear is the question of when misappropriation is “threatened.” In a recent decision, the U.S. Court of Appeals for the Fifth Circuit held that a threat of misappropriation may exist where one competitor hires another’s high-level executive and places him in a role where misappropriation is “likely” to occur. See Direct Biologics, LLC v. McQueen, 63 F.4th 1015 (5th Cir. 2023). The court’s ruling also illustrates that trade secret misappropriation between two competitors may cause harm that is difficult to quantify, justifying a finding of irreparable harm sufficient to support the entry of preliminary injunctive relief. 

Case Background

Plaintiff Direct Biologics, LLC (“DB”) develops and manufactures pharmaceutical products from biological sources. Its two main products are an allograft skin substitute (for slow-healing wounds and burn injuries) and a proprietary extracellular (“EV”) product (similar to stem cell therapy, with applications for treating severe COVID-19). 

Defendant Adam McQueen was DB’s third-ever employee. He held a wide range of senior management positions with the company, most recently as its Executive Vice President, and was involved in its intellectual property and product development, sales, operations, regulatory and compliance efforts and clinical work. DB claimed that McQueen knew and worked closely with DB’s confidential and trade secret information, and that he was one of a “handful” of employees that knew DB’s “most closely guarded secret” – the formula and product specifications for the EV product. McQueen was subject to confidentiality and non-compete obligations to DB by virtue of two separate agreements – i.e., his employment agreement as well as an operating agreement that he signed when he was granted equity in the company.

After resigning from DB, McQueen accepted a position as Vice President of Product Strategy for Defendant Vivex Biologics, Inc. (“Vivex”) – one of DB’s competitors. 

DB sued McQueen and Vivex for breach of contract and trade secret misappropriation under the Federal Defend Trade Secrets Act (“DTSA”) and the Texas Uniform Trade Secrets Act (“TUTSA”). DB also filed a motion for preliminary injunction seeking to prevent McQueen from working for Vivex and compelling him not to use DB’s “confidential and trade secret information.” As support for its requested relief, DB argued that Vivex was one of a few competitors with the “resources, infrastructure, and commercial motive in place to immediately and wrongfully exploit” the confidential DB information that McQueen carried over with him to Vivex. Further, DB argued that, as a senior manager at Vivex, McQueen was well-positioned to help Vivex compete with DB’s allograft products and guide Vivex through accelerated development and FDA approval of new, competitive EV products. Lastly, DB claimed that it had discovered that McQueen had linked his personal DropBox account to his DB account and saved to that personal account the company’s confidential and trade secret information. 

After an evidentiary hearing, the district court denied DB’s motion, reasoning that DB had failed to demonstrate irreparable harm. More specifically, the court refused to apply a presumption of irreparable harm under Texas law based on McQueen’s breach of his non-compete covenants, and the court found that DB had failed to proffer evidence to show that it would suffer irreparable harm in the absence of an injunction. See Direct Biologics, LLC v. McQueen, No. 1:22-CV-381-SH, 2022 WL 1693995, at **7-8 (W.D. Tex. May 26, 2022). Notably, McQueen testified during the hearing that he had set up his Dropbox account in the early days of his employment with DB (before the company had given him a computer or access to a file-sharing platform), and that he had not accessed any documents on his Dropbox for more than nine months prior to his resignation from DB.

The Fifth Circuit’s Decision

On appeal, the U.S. Court of Appeals for the Fifth Circuit reversed the district court’s ruling and remanded the case for further proceedings. The Fifth Circuit held that the district court had erred because (i) it did not make any findings as to whether it was likely that McQueen would use or disclose DB's confidential and trade secret information during the pendency of the lawsuit (finding only that there was no evidence that he already used or disclosed such information); and (ii) it did not make any assessment as to whether money damages would be easy or difficult to quantify. McQueen, 63 F.4th at 1015.

First, the Fifth Circuit found that the district court failed to make an individualized assessment of whether disclosure of DB’s confidential or trade secret information was “likely to occur” between the date of the district court’s order and final judgment in the action, despite the existence of evidence that could support such a conclusion. A finding on that issue was necessary because under both the DTSA and TUTSA, a court may enjoin actual or threatened misappropriation of trade secrets and, according to the McQueen court, an injunction is appropriate upon a showing that the defendant was likely to disclose such protected information in the course of his employment with a competitor given the competitive overlap between the companies and the specific nature of the employee’s new role. See Direct Biologics, LLC v. McQueen, No. 1:22-CV-381-SH, 2022 WL 1409984, at *11 (W.D. Tex. May 4, 2022) (citations omitted).

Second, the Fifth Circuit found that the district court gave “short shrift” to “the fact that, if McQueen does misappropriate DB's trade secrets or confidential information during the pendency of the proceedings, any damages resulting therefrom would be difficult to quantify.” McQueen, 63 F.4th at 1015. In this respect, the court explained that a lost opportunity to “create or gain control of a new market” may result in losses for which there is no adequate remedy at law. 

It is also worth noting that the Fifth Circuit did not disagree with the district court’s decision declining to apply a presumption of irreparable harm. By way of additional background, Texas law provides that “proof that a highly trained employee is continuing to breach a non-competition covenant gives rise to a rebuttable presumption that the applicant is suffering irreparable injury.” In declining to apply the presumption, the district court found insufficient evidence that: (1) McQueen actually used the experience he acquired from DB to compete with DB, such as by marketing products in direct competition with DB, or (2) McQueen had disclosed confidential or trade secret information to Vivex. Nevertheless, the Fifth Circuit’s discussion makes clear that a presumption of irreparable harm may be made under appropriate circumstances.

Takeaways

The McQueen court made its ruling based on the specific circumstances before it. Further, the court’s decision is binding only in Texas as to the plaintiff’s state-law claims, and in Texas, Mississippi and Louisiana as to plaintiff’s DTSA claims. Nevertheless, the Fifth Circuit’s decision provides important guidance for companies looking to protect their trade secrets known by departing executives as well as for companies looking to hire high-level talent while minimizing the risk of a lawsuit from a former employer. It is also important to remember that trade secret misappropriation cases are inherently fact-specific, and their resolution will turn on jurisdiction-specific legal principles governing the dispute. 

From a practical perspective, an employer seldom has direct proof that a former employee has taken proprietary or trade secret information and disclosed it to their new employer. Far more often, the evidence is circumstantial in nature, such as where a high-level employee accepts a substantially similar position with a direct competitor in a setting where it is highly likely that they will be called upon to draw on their knowledge of a former employer’s trade secrets. Further, even where an employer discovers that a resigning employee has retained the employer’s trade secret information, there may not be proof that the information was actually used by the employee after their resignation.

Courts in different jurisdictions vary in how they evaluate preliminary injunction motions in those circumstances. But the Fifth Circuit’s opinion in McQueen makes clear that the DTSA (and most of its state-law counterparts) protects against both actual and threatened misappropriation of trade secrets, and courts are empowered to grant preliminary injunctive relief to prevent misappropriation under appropriate circumstances. For the McQueen court, a “threat” of misappropriation may not require “intent” by the former employee; there may be a sufficient threat of misappropriation where a senior-level executive with intimate working knowledge of his former employer’s proprietary information accepts a substantially similar role with a competitor. 

McQueen also serves as a reminder that a preliminary injunction motion – whether made on the basis of a breach of a non-competition covenant or trade secret misappropriation – must be supported by a finding of irreparable harm. In the context of a trade secret misappropriation claim, McQueen holds a movant can establish the existence of irreparable harm by demonstrating that its losses would be difficult to quantify, such as a lost opportunity to capitalize on a new market.