10th Circuit Affirms that Employer Failed to Show How Past Harm Signified Future Irreparable Harm in Support of Preliminary Injunction Request in Trade Secret Battle

by Seyfarth Shaw LLP
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On December 28, 2018, a three-judge panel of the Tenth Circuit Court of Appeals affirmed the holding by the U.S. District Court for the District of Colorado denying the plaintiff’s, DTC Energy Group, Inc. (“DTC Energy”), request for a preliminary injunction against a collective of defendants: former DTC Energy employees Adam Hirschfeld (“Hirschfeld”) and Joseph Galban (“Galban”) and Ally Consulting, LLC (“Ally Consulting”), Hirschfeld’s new employer and a DTC Energy competitor.  DTC Energy Grp., Inc. v. Hirschfeld, No. 18-1113, 2018 WL 6816903, at *1 (10th Cir. Dec. 28, 2018).  In a majority opinion written by the Honorable Mary Beck Briscoe, the Court held that the trial court did not abuse its discretion in determining that DTC Energy failed to present evidence in support of a preliminary injunction.  Id., at *5.  In particular, while DTC Energy proffered prior harm as a consequence of Hirschfeld’s past breaches of his employment contract and the individual defendants’ failure to uphold their duty of loyalty, it could show that neither the prior harm established a significant risk of future irreparable harm saddled by DTC Energy nor Hirschfeld currently breached his employment agreement.  Id.

Facts

Employed in 2013 by DTC Energy—a staffing agency for oil and gas companies—Hirschfeld subsequently became its business development manager.  Id., at *1.  At that point, he executed an employment agreement that required him to devote substantially all of his professional time to DTC Energy and to act in its best interests.  Id.  The agreement further prohibited him from (i) using confidential information for his and others’ benefit, (ii) diverting DTC Energy customers to a competitor, and (iii) encouraging DTC Energy employees to work for a competitor.  Id.  The latter two restrictions survived their relationship for one year unless the impetus for Hirschfeld’s departure was “a change in the current equity ownership of” DTC Energy.  Id.  No one else, including Galban (DTC Enery’s former accountant), executed an employment agreement.  Id.

Thereafter, in January 2016, DTC Energy and Ally entered into an agreement whereby Ally (another staffing agency but a much smaller competitor given its work exclusively for directional drillers) paid a fee to DTC Energy for its administrative services.  Id., at *2.  Ally, however, soon became partially owned by Hirschfeld’s father, which Hirschfeld failed to disclose to DTC Energy.  Id.  Despite this apparent conflict, Hirschfeld began to use DTC Energy employees and trade secrets (particularly its repository of customer resumes, which it kept in a password-protected Dropbox folder) to steer business away from DTC Energy to Ally.  Id.

Although the relationship between DTC Energy and Ally ended in July 2016, Hirschfeld continued his ways: he utilized his relationship with DTC Energy employees for Ally’s benefit.  Id.  This stratagem, though, did not go unnoticed; Bob Sylar and Luke Clausen, the owners of DTC Energy, soon discovered and inquired about Hirschfeld’s efforts.  Id.  Hirschfeld’s response was tepid and technically misleading—he simply indicated that he did not own Ally and that, with no direct compensation from Ally, his salary exclusively came from DTC Energy.  Id.  And so Hirschfeld’s purportedly disloyal efforts continued, and DTC Energy exacted no punishment on Hirschfeld despite its discovery.  Id.

In May 2017, Hirschfeld resigned from DTC Energy but not before Clausen purchased Sylar’s interest in DTC Energy during the previous month.  Id.  In his resignation letter, Hirschfeld cited this change in equity as the catalyst for his resignation.  Id.  The day after his resignation, he officially started his role as the director of business development for Ally and continued to solicit DTC Energy customers.  Id.

Four months later, DTC Energy filed an amended complaint against Hirschfeld, Ally, and Galban, who had also allegedly steered business to Ally while employed at DTC Energy.  Id.  The complaint further averred that, upon his departure, Hirschfeld transferred DTC Energy’s confidential information and trade secrets into a flash drive currently in his possession and kept a DTC Energy laptop with access to its Dropbox folder.  Id.  Ally, nevertheless, provided the flash drive and laptop to a third-party forensics company in July or August 2017 as part of a litigation hold.  Id.

Among other claims, DTC Energy contended that (1) Hirschfeld breached his employment agreement, (2) Hirschfeld and Galban breached their duty of loyalty to DTC Energy, (3) each defendant misappropriated its trade secrets in violation of the Defend Trade Secrets Act (“DTSA”) and the Colorado Uniform Trade Secrets Act (“CUTSA”), and (4) Ally unfairly competed against DTC Energy.  Id.  Relying on these four bases, DTC Energy sought an injunction requiring Ally to cease all business operations not related to directional drillers until a trial, prohibiting Hirschfeld and Galban from working for Ally, and enjoining each defendant from contacting or working with any DTC Energy client and from using its confidential information.  Id., at *3.  After holding an evidentiary hearing in January 2018, the lower court denied DTC Energy’s request for injunctive relief, and so this interlocutory appeal followed.  Id.

Holding

Mootness

As an initial matter, the Tenth Circuit assessed the Defendants’ claim that the appeal was moot because the Complaint was meritless.  Id.  Finding this argument to be unpersuasive, the majority held that the “present determination of the issues offered will have some effect in the real world,” the standard for denying a claim of mootness.  Id. (quoting Fleming v. Gutierrez, 785 F.3d 442, 444-45 (10th Cir. 2015) (citation omitted)) (emphasis in original).  Here, there were immediate and palpable effects of the appeal:  the requested relief affected the Defendants’ continued solicitation of DTC Energy clients and the individual defendants’ prospects of working for Ally.  Id. (“This appeal is not moot because the preliminary injunction sought by DTC [Energy] would have immediate effects on Ally’s business, not to mention Hirschfeld’s and Galban’s professional opportunities.”).

Preliminary Injunction

The Tenth Circuit next reviewed whether the lower court abused its discretion in denying the Plaintiff’s requested relief.  Recognizing that this extraordinary relief is permitted only when monetary relief or other legal remedies are inadequate, the Court outlined the four elements DTC Energy had to meet:  (1) likelihood of success on the merits, (2) suffering of irreparable harm, (3) its harm outweighed the harm imposed on the Defendants, and (4) public interest is in its favor.  Id. (internal quotation and citations omitted).

Foregoing an analysis of the last two elements, the Court found that DTC Energy failed to satisfy the first two elements.  First, DTC Energy, though it could demonstrate past harm based on Hirschfeld’s and Galban’s behavior while employed by DTC Energy, neglected to establish a significant risk of future irreparable harm.  Id., at *4–5 (citations omitted).  This was so because it offered insufficient proof that this past harm inexorably meant future irreparable harm; in fact, monetary remedies were potentially available to compensate DTC Energy for this alleged past harm.  Id., at *5.  Additionally, there was no evidence that any defendant possessed DTC Energy’s trade secrets; rather, the record reflected the opposite:  Hirschfeld had turned over all DTC Energy information to Ally, which, in turn, passed these along to a forensics company.  Id.  Finally, DTC Energy’s offer of Ally’s unfair competition fell well short of showing irreparable harm.  Id., at *6.  Specifically, there was no demonstration of any confusion between the relationship of the two companies or that Ally had misappropriated DTC Energy’s name for its own benefit.  Id.

Second, given that Hirschfeld conceded that he continued to solicit DTC Energy clients, id., at *4, 6, the Court did consider whether DTC Energy’s evidence warranted a finding of likelihood of success on the merits.  It did not.  Applying Colorado law, the Court held that Hirschfeld hadn’t breached his employment agreement precisely because of his reliance on the equity exception to the restrictive covenants.  Id., at *6.  In response, DTC Energy argued the “prior breach” doctrine, i.e., that because Hirschfeld had breached his agreement before his resignation, he could not rely on any exception.  Id.  The Court was not persuaded.  That doctrine, ordinarily used as a shield by a defendant facing a specific-performance case to argue that the plaintiff was the first to breach, cannot be a sword by a plaintiff to create liability.  Id.  Furthermore, even assuming Hirschfeld could not avail himself of the equity exception, the restrictive covenants no longer applied since a year had lapsed since his relationship ended with DTC Energy.  Id., at *7.

As a consequence of these findings, the majority held that the lower court did not abuse its discretion in denying DTC Energy’s request for injunctive relief.

Concurrence

In her concurrence, Judge Carolyn B. McHugh emphasized her disagreement with the trial court’s conclusion that a defendant’s previous misconduct could not establish a significant risk of future harm.  Id.  (The majority, however, believed that Judge McHugh misread the lower court’s opinion and disagreed that the trial court had established this principle.  Id., at *5 n.6.)  Relying on case law from both the Seventh and Tenth Circuits, she held that “in some circumstances an injunction can be supported by the irreparable harm caused by the Defendants’ legal actions that would not have been possible but for their past breaches.”  Id., at *7–8 (summarizing Greater Yellowstone Coal. v. Flowers, 321 F.3d 1250 (10th Cir. 2003) & Foodcomm Int’l v. Barry, 328 F.3d 300 (7th Cir. 2003)).  And so while Plaintiff could conceptually establish “a future likelihood of irreparable harm stemming from past misconduct,” where it failed was in its proffering of insufficient evidence.  Id., at *8.  Consequently, Judge McHugh agreed with the ultimate finding by her colleagues and affirmed the district court’s holding.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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