On October 30, 2017, the U.S. Court of Appeals for the Tenth Circuit held that a moving party is not excused from showing irreparable harm prior to the issuance of a preliminary injunction in a trade secret misappropriation case. First Western Capital Management Co. v. Malamed, Case Nos. 16-1434, 16-1465 & 16-1502 (10th Cir. Oct. 30, 2017).  The Tenth Circuit reversed a trial court’s decision that issued an injunction without a showing of irreparable harm, which was presumed based on a statutory violation.  Departing from prior Tenth Circuit precedent, the court found that the only circumstance where a trial court can excuse the moving party from demonstrating irreparable harm is where the statute calls for mandatory, not permissive, injunctive relief.  As a practical result, employers within the Tenth Circuit's jurisdiction must now prove that monetary relief is insufficient, and that only an injunction can provide adequate protection.¹

Background

A moving party may generally obtain a preliminary injunction where it shows: (1) a likelihood of success on the merits of the underlying claim; (2) danger of irreparable harm if the injunction is denied; (3) the movant’s threatened injury outweighs any potential injury to the opposing party under the proposed injunction; and (4) a favorable public interest in granting the injunction.²

To show “irreparable harm,” an injury must be certain, great, actual and not theoretical.³  However, in certain circumstances, a court may presume irreparable harm and grant injunctive relief.  In the employment context, cases involving trade secret misappropriation and noncompetition agreements are two common scenarios where this frequently occurred.

Prior case law held that irreparable harm was presumed where the relevant statute expressly provided for injunctive relief to prohibit a violation.  Both the federal Defend Trade Secrets Act of 2016 (DTSA) and the Colorado Uniform Trade Secrets Act (CUTSA)⁴ provide for injunctive relief and accordingly, courts have ruled that in those cases, irreparable harm is presumed.⁵ This was the holding, for example, in Engility Corporation v. Daniels, where the employer asserted that a former employee misappropriated its trade secrets in the days leading up to, and after, his final day with the employer.⁶  The employer sought a preliminary injunction against the employee to prevent misuse of its trade secrets pursuant to the DTSA and CUTSA.  The trial court granted the injunction without a showing of irreparable harm, finding that the Tenth Circuit “excuses the irreparable harm requirement” when the defendant is violating or will violate a statute that provides for injunctive relief.⁷ 

Irreparable harm has also traditionally been presumed in cases involving noncompetition agreements.  In Miller v. Kendall, the employer sued to enforce a noncompetition agreement in an accordion instructor’s contract that precluded him from teaching to any student enrolled with the employer during the two years after termination of the agreement.⁸  The employee terminated his employment and started his own school two days later. The Colorado Court of Appeals affirmed the lower court’s holding that issued an injunction prohibiting the employee from teaching former students of the employer despite the absence of any provable damages.  The court noted that “where there is a noncompetition agreement, breach is the controlling factor and injunctive relief follows almost as a matter of course” and concluded that “[d]amage is presumed to be irreparable.”⁹ 

Tenth Circuit Decision

In First Western Capital, the employer sought an injunction against its former employee for misappropriating trade secrets. The trial court concluded that the defendant had violated both the DTSA and CUTSA, such that a showing of irreparable harm was not required and issued the injunctive relief.  Further, the trial court found that had the employer not been excused from the irreparable harm showing, it would have denied the injunction because money damages could be reasonably quantified and could make the employer whole.

The Tenth Circuit analyzed whether case law concluding that the irreparable harm need not be shown where the defendant is engaged in or about to be engaged in “practices prohibited by a statute which provides for injunctive relief to prevent such violations”¹⁰ was consistent with later U.S. Supreme Court precedent—it answered in the negative and reversed the trial court.  The Tenth Circuit ruled that harm can only be presumed in cases where the statute requires injunctive relief such that the trial court need not analyze whether a showing of irreparable harm had been made.  Because injunctive relief under the DTSA and CUTSA is authorized but not mandatory, the court concluded it was error to presume irreparable harm.

Implications of First Western Capital

The Tenth Circuit’s opinion greatly reduces the number of cases where a trial court may presume irreparable harm prior to issuing a preliminary injunction and limits it only to cases involving statutes where injunctive relief is mandatory.  Neither the DTSA nor CUTSA provide for mandatory relief. In addition, the ruling may foreclose the ability for the trial court to presume damages in cases involving noncompetition agreements, since the statute governing covenants not to compete does not mandate the issuance of injunctive relief to enforce covenants not to compete.