IP Law Daily Injunction based on trade secret misappropriation under DTSA and Colorado law requires proof of irreparable harm
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Tuesday, October 31, 2017

Injunction based on trade secret misappropriation under DTSA and Colorado law requires proof of irreparable harm

By Edward L. Puzzo, J.D.

A preliminary injunction prohibiting the former employee of a financial services firm from soliciting the firm’s clients has been vacated by the U.S. Court of Appeals in Denver because an injunction based on misappropriation of trade secrets under federal or Colorado law requires the movant to establish the likelihood of irreparable harm absent injunctive relief. In 2016, the Eleventh Circuit clarified that courts may presume irreparable harm only when a party is seeking an injunction under a statute that mandates injunctive relief as a remedy for a violation of the statute; not when the underlying statute merely authorizes injunctive relief. Because the Defend Trade Secrets Act (DTSA) and the Colorado Uniform Trade Secrets Act (CUTSA) merely authorized injunctive relief and the district court in this case expressly found that money damages were quantifiable and adequate to make the financial services firm whole, the injunction was improper (First Western Capital Management Company v. Malamed, October 30, 2017, Matheson, S.).

Kenneth D. Malamed, founder of Financial Management Advisors (FMA), became an employee of First Western Capital Management when it acquired FMA in 2008. In 2016, after learning that First Western was considering being purchased by another company Malamed did not favor, Malamed allegedly had copies made of contact information for 5,000 First Western clients, including client names, the market value of their holdings, and fees charged them by First Western. Soon after Malamed's employment contract expired on September 1, 2016, First Western filed claims against Malamed in federal district court alleging, among other claims, misappropriation of trade secrets under both the federal Defend Trade Secrets Act of 2016 (DTSA), and the Colorado Uniform Trade Secrets Act (CUTSA). First Western sought a temporary restraining order and preliminary injunction barring Malamed from soliciting First Western's clients. The district court granted the preliminary injunction and Malamed appealed.

The appellate court observed that the district court, in its ruling, had excused First Western from demonstrating that it would suffer irreparable harm in the absence of an injunction, usually one of four required elements for a preliminary injunction: (1) a substantial likelihood of success on the merits, (2) irreparable injury in the absence of the injunction, (3) its threatened injury outweighs the harm to the opposing party under the injunction, and (4) the injunction is not adverse to the public interest.

The district court found that Malamed was misusing or threatening to misuse trade secrets regarding First Western's clients and therefore, under Star Fuel Marts, LLC v. Sam’s East, Inc., 362 F.3d 639 (10th Cir. 2004), irreparable harm was presumed to exist and need not be separately established by First Western.

The appellate court noted that, subsequent to the district court's ruling in this case, it had narrowed the applicability of the Star Fuel Marts presumption in Fish v. Kobach, 840 F.3d 710 (10th Cir. 2016). Under the revised rule, courts may presume irreparable harm only when a party is seeking an injunction under a statute that mandates injunctive relief as a remedy for a violation of the statute; not when a statute merely authorizes injunctive relief. DTSA and CUTSA authorize, but do not require, injunctive relief, the court noted. Therefore, in this matter, the appellate court ruled, First Western was not entitled to the presumption of irreparable harm.

Without the benefit of the presumption of irreparable harm, First Western could not meet the irreparable harm element for preliminary injunctions. That is because the district court, despite ruling that the presumption applied, also noted that, absent the presumption, it would have denied injunctive relief because money damages could be reasonably quantified and would have made First Western whole. Thus, the preliminary injunction was improper in this case and must be reversed.

Case numbers 16-1434, 16-1465 and 16-1502.

Attorneys: Timothy R. Beyer and Sarah L. Hartley (Bryan Cave LLP) for First Western Capital Management Company and First Western Financial, Inc. Kent B. Goss (Orrick Herrington & Sutcliffe LLP) and Paul H. Schwartz (Shoemaker Ghiselli & Schwartz, LLC) for Kenneth D. Malamed.

Companies: First Western Capital Management Company; First Western Financial, Inc.

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