A Cautionary Tale of Taking the Preliminary Injunction Gambit with Unclear Trade Secrets
July 24, 2024 – Legal Alerts
Recently, the U.S. Court of Appeals for the Federal Circuit provided a cautionary tale for trade secret owners who seek preliminary relief against a competitor who hires its former employees but do not clearly articulate the trade secrets the owner seeks to protect.
In early 2023, Insulet Corp. sued EOFlow Co. in the District of Massachusetts for misappropriating trade secrets supposedly obtained from employees EOFlow hired away from Insulet years earlier.[i] Insulet promptly sought a preliminary injunction to stop the alleged misappropriation. The district court granted that request, ultimately prohibiting EOFlow from “manufacturing, marketing, or selling any product that was designed, developed, or manufactured, in whole or in part, using or relying on the Trade Secrets of Insulet.” [ii] The district court defined “Trade Secrets” broadly to include any and all “Confidential Information”—also defined to broadly include “(a) any and all information or materials that were marked ‘confidential’ by Insulet and (b) any and all CAD files, drawings, or specifications created by Insulet, whether or not they were marked ‘confidential.” [iii] EOFlow appealed the ruling.
The Federal Circuit reversed the decision, finding the injunction’s restrictions to be “severely overbroad,” particularly where Insulet failed to identify, and the district court failed to determine, what particular information was indeed a trade secret under the Defend Trade Secrets Act (DTSA).[iv] While Insulet identified broad categories of information it sought to protect, the Federal Circuit found those categories lacking, amounting merely to “a hazy grouping of information that the court did not probe with particularity to determine what, if anything, was deserving of trade secret protection.”[v]
The Federal Circuit further rejected the notion that the early stage of litigation excused a trade secret owner of identifying its trade secrets with particularity. Rather, it is necessary to assess whether a trade secret owner can show the fundamental element of a likelihood of success on the merits to support a preliminary injunction.[vi] Doing that requires a trade secret owner to show it indeed has specific information that meets the DTSA’s requirements—that the information derives independent economic value from its secrecy; that it is not readily ascertainable by others through proper means; and that the owner has taken reasonable steps to protect its secrecy.[vii] Only after that determination can the court decide whether a defendant misappropriated the particular protected information.[viii]
The Insulet case provides a stark illustration of the pitfalls of seeking preliminary injunctive relief in trade secret cases, particularly where the owner does not clarify what information a defendant supposedly misappropriated. Market competition and the prospect of losing sensitive information often make seeking a preliminary injunction enticing, and at times, necessary. However, trade secret owners and practitioners should ensure they can specifically identify the information they seek to protect, rather than just the files where the information might be located. Specificity allows the court to find that the information qualifies for trade secret protection and determine whether it was misappropriated.
Insulet also strongly suggests that suspicious timing between hired-away employees and competitive development may be supportive in showing misappropriation, but is likely not enough on its own. If the trade secret owner does not have additional facts that show a former employee has actually disclosed, or the new employer has actually used, the particular trade secret, it should carefully weigh the risks of seeking a preliminary injunction. Expedited discovery for a preliminary injunction is compressed to a short timeframe and often to a narrower scope than the normal discovery process. Therefore, more facts and evidence are potentially obtainable in the long run. As final judgments most often track results at the preliminary injunction phase, trade secret owners should avoid rushing into uncertain preliminary injunction proceedings where they can, lest they risk effectively losing a case before it really begins.
[i] See Insulet Corp. v. EOFlow Co., Ltd., No. 23011780-FDS (Dist. Mass.).
[ii] See Insulet Corp. v. EOFlow Co., Ltd., No. 23011780-FDS, 2023 U.S. Dist LEXIS 207019 (Dist. Mass. October 24, 2023).
[iii] Id. ¶ 4.
[iv] See Insulet Corp. v. EOFlow Co., Ltd., No. 2024-1137 (Fed Cir Jun. 17, 2024).
[v] Id. As an example, the Federal Circuit explained that Insulet’s attempt to generally protect any product drawings failed because Insulet failed to identify what particular information within those files constituted trade secrets.
[vi] Id. (“Compounding the harm of that inaccurate definition was the district court's position that ‘it would be unfair to require at this stage perfection as to the precise number and contours of the trade secrets at issue.’ We disagree. In order to secure a preliminary injunction, Insulet had to establish the likelihood of its success on the merits for at least one, specifically defined, trade secret.”)
[vii] Id. (18 U.S.C. § 1839(3)).
[viii] See id. (“Inherent in the definition of misappropriation is that there is a trade secret to be misappropriated. Because the court failed to identify any trade secret with sufficient particularity, its analysis of misappropriation necessarily also fails.” (internal citations omitted))
