Tenth Circuit Will Not Presume Irreparable Harm in Trade Secret Cases

    Companies seeking to protect trade secrets from former employees’ misappropriation will have to show evidence of irreparable harm in order to obtain a preliminary injunction, based on a Tenth Circuit[1] decision disallowing courts from presuming such harm simply because the company brings claims under the Defend Trade Secrets Act (the “DTSA”) or the Colorado Uniform Trade Secrets Act (the “CUTSA”).[2] The First Western Capital Management Co. v. Malamed decision marks a significant change from previous Tenth Circuit law, and practically makes it harder for a party to get a preliminary injunction in trade secret misappropriation lawsuits.

    Irreparable harm, which is “not an easy burden to fulfill,” is one of several elements companies must prove to get an injunction in trade secret cases.[3] It requires the moving party to demonstrate a significant risk that the moving party will experience harm that cannot be compensated after the fact by money damages. Until last year, courts in the Tenth Circuit presumed a showing of irreparable harm (meaning that a moving party seeking a preliminary injunction did not have to actually prove that element) where the lawsuit was brought under a statute that allowed for an award of injunctive relief (such as the DTSA and the CUTSA).[4]

    In First Western, the Tenth Circuit held that a court may presume a showing of irreparable harm only where a statute requires injunctive relief—not when it merely allows for injunctive relief, as in the case of the DTSA and UTSA. Based on this reasoning, and on the fact that the district court in First Western explicitly held that the plaintiff could not demonstrate irreparable injury, the court dismissed a preliminary injunction against a former high-level employee who took financial and contact information for 5,000 company clients before being fired.

Practical Takeaways

    Companies can prove the “irreparable injury” element by showing that an award of money damages would be an insufficient remedy to make a company whole; however, this is a difficult showing because, in most cases, damages resulting from misappropriation are quantifiable based on the amount of business the former employee gained and the amount of business the company lost, as a result of the misappropriation. Companies may show loss of goodwill with customers or loss of business reputation that cannot be remedied monetarily; however, we predict the First Western decision likely will result in a marked decrease in preliminary injunctions being issued in trade secret misappropriation cases.

    The First Western decision signals that even in clear-cut cases of trade secret misappropriation, a company may not be able to enjoin misappropriation in advance of a final judgment, which can take well over a year to obtain. Companies can take steps to minimize the risk of misappropriation internally, such as by assessing whether internal protections and policies are sufficient to prevent misuse of a company’s confidential information. Additionally, companies may work with their employment counsel to draft language in confidentiality, noncompetition, and nonsolicitation agreements that may strengthen a claim of irreparable harm in the event a breach or misappropriation.

[1] The Tenth Circuit Court of Appeals hears appeals from federal courts in Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming.

[2] First Western Capital Management Co. v. Malamed, 874 F.3d 1136, 1142-43 (10th Cir. 2017).

[3] Id. (quoting Greater Yellowstone Coal. v. Flowers, 321 F.3d 1250, 1258 (10th Cir. 2003).

[4] See id. at 1142.