The United States Court of Appeals for the Fifth Circuit, reversing a trial court’s refusal to enter an order enjoining disclosure of confidential information, recently held that the lower court erred when it (a) ruled that the moving party must satisfy all six trade secret balancing test factors, (b) rejected a party’s request for an evidentiary hearing with respect to a key factual dispute as to which the parties submitted conflicting affidavits, and (c) applied federal rather than state law in determining that the moving party’s potential injury from the alleged misappropriation could be adequately compensated with money.

Summary of the case.  While still employed by Heil Trailer International Company, Kula allegedly sent emails to Troxell, a Heil competitor.  The emails allegedly contained certain information relating to Heil’s business.  Thereafter, Kula went to work for Troxell.  Heil sued Kula, Troxell and others in a Texas federal court for, among other alleged wrongdoing, misappropriation of trade secrets.  Heil’s motion for a preliminary injunction was denied for three reasons: the lower court said the information Kula allegedly provided Heil could have been easily duplicated or acquired by others in the industry; any injuries Heil sustained could be adequately compensated by monetary damages; and the balance of hardships weighed in the defendants’ favor.  On interlocutory review, the Fifth Circuit reversed and remanded because of a variety of errors.  Heil Trailer Int’l Co. v. Kula, No. 13-10046 (5th Cir., Oct. 16, 2013) (unpublished per curiam opinion; limited precedent).

Errors held to have been made by the trial court 

            1.         Failure to conduct an evidentiary hearing with regard to trade secret issues.  Texas courts recognize a six-factor balancing test in determining whether misappropriated information qualifies as trade secret.  Here, Heil and Kula submitted directly conflicting affidavits concerning one of those factors: how difficult it would be for competitors to duplicate or acquire the information.  Heil requested an evidentiary hearing on the issue.  The trial court denied the request and, based solely on the affidavits, concluded that the information could have been easily duplicated or acquired by others in the industry.  The Fifth Circuit held that the difficulty of duplicating or acquiring information claimed by one party to be confidential “is relevant to that information’s status as a trade secret [but] by itself is unlikely to be dispositive.”  Further, quoting its own 1971 decision, the appellate tribunal stated that “where the parties’ affidavit testimony is in direct contradiction as to material questions of fact, ‘the propriety of proceeding upon affidavits becomes the most questionable.’ ”  Accordingly, an evidentiary hearing should have been held.

            2.         Failure to demonstrate irreparable harm.  The appeals court observed that, under Texas law, injury to goodwill and to competitive position presumptively is irreparable where trade secrets have been misappropriated.  Therefore, the trial court, which failed to articulate any facts or circumstances in support of its conclusion that Heil did not demonstrate irreparable harm, committed an error which must be remedied on remand.

            3.         Balance of hardships.  According to the Fifth Circuit, the district court must determine whether the balance of hardships favors Heil, the party seeking the injunction, or the defendants.  On remand, in the words of the U.S. Supreme Court, the trial court should identify and consider “‘the most serious possible injury’ that can be claimed by either party” if the injunction is granted or if it is denied. 

            4.         Other bases for an injunction.  In support of its motion for an injunction, Heil explicitly asserted both several common law bases, in addition to trade secret misappropriation, and some statutory provisions.  The Fifth Circuit stated that the trial court did not — but must on remand — consider all of those assertions, not just misappropriation.

Takeaways. Many courts would concur with the Fifth Circuit’s teaching that, on appeal from a decision with respect to a motion for a preliminary injunction in a case with allegations like those in Heil, a “clearly erroneous” standard applies to the findings of fact below while the conclusions of law are subject to de novo review.  In a diversity jurisdiction case such as Heil, state law determines whether information constitutes a trade secret for purposes of ruling on a motion for preliminary injunction.  A trial court making that determination based on Texas law must evaluate and weigh all of the relevant facts and circumstances, balancing the relative strength of the parties’ competing positions.  In the face of a demand for an evidentiary hearing, resolving a genuine dispute concerning material facts solely on a paper record is problematic.  Further, Texas courts hold that irreparable harm usually is presumed where there is a threat to disclose trade secrets.