Tenth Circuit Update: Statutory Violations Don’t Prove Irreparable Harm and "Bad Faith" Gives Rise to Misappropriation Claims

Last month, the Tenth Circuit issued two opinions of interest to trade-secret practitioners. First, the Tenth Circuit held that the Defend Trade Secrets Act (DTSA) has not done away with a moving party’s burden to show irreparable harm in order to obtain the “extraordinary remedy” of a preliminary injunction. First Western Capital Company v. Malamed. There, plaintiff First Western sued its former employee (defendant Malamed) under both the DTSA and Colorado’s version of the Uniform Trade Secrets Act (UTSA) for allegedly absconding with a confidential customer list and related information. After conducting an evidentiary hearing, the district court issued a preliminary injunction preventing Malamed from soliciting or accepting business from any First Western customers. Although First Western had not produced persuasive evidence of irreparable harm, the district court relied on previous Tenth Circuit precedent that waived the irreparable harm requirement when the evidence showed the defendant is or will soon be engaged in acts prohibited by statute, and that statute provides for injunctive relief. As both the DTSA and UTSA allow for such injunctive relief, the district court held that irreparable harm would be presumed.

Reversing, the Tenth Circuit found its previous precedent that presumed irreparable harm from statutory violations had been undermined by intervening Supreme Court decisions. As the Supreme Court made clear almost a decade ago, a “preliminary injunction is an extraordinary remedy never awarded as of right.” Winter v. Natural Res. Def. Council, 555 U.S. 7, 24 (2008). Under Rule 65 of the Federal Rules of Civil Procedure, a party seeking a preliminary injunction must show that (1) the party is likely to succeed on the merits; (2) the party will suffer irreparable injury if the injunction is denied; (3) the moving party’s threatened injury outweighs the injury the opposing party will suffer if enjoined; and (4) the injunction would not harm the public interest. But courts consistently find that a showing of probable irreparable harm is the most important factor. Joining at least the Seventh, Eighth, and Eleventh Circuits, the Tenth Circuit held that district 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.” Although the DTSA and UTSA both provide for injunctive relief as a remedy, neither statute mandates injunctive relief for violations. As succinctly summarized by the Tenth Circuit, “no showing of irreparable harm, no preliminary injunction.”

On the same day it issued the above decision, the Tenth Circuit also issued its decision in The SCO Group, Inc. v. International Business Machines, Inc. In this long-running litigation, which was filed almost 15 years ago, plaintiff SCO alleged generally that it partnered with IBM to develop an updated version of the UNIX operating system, and instead, IBM purloined portions of the code and repurposed it for IBM’s own ends to SCO’s detriment. The case does not involve an explicit trade secrets claim (perhaps because New York state has not adopted the UTSA). However, the contours of the claim should sound familiar.

To summarize the voluminous facts, in 1998, SCO entered into a Joint Development Agreement (JDA) with IBM to develop a variant of the UNIX software code. According to SCO, IBM shifted its focus a few years later to the competing LINUX software platform, and ultimately misappropriated portions of SCO’s proprietary code to use in IBM’s competing products. The district court eventually dismissed SCO’s misappropriation claim using New York’s “independent tort doctrine” (which is known in other jurisdictions as the “independent duty doctrine,” and often replaces or supplements the older “economic loss rule” as the dividing line between tort liability and contract liability). The district court concluded that IBM’s duties were purely contractual, such that IBM had no enforceable duties independent of the JDA.

The Tenth Circuit reversed, explaining:

To illustrate, consider a scenario where two parties reach an agreement that one shall not assault the other. If an assault occurs, we would not say that the victim is limited to a breach-of-contract remedy—of course he would also have a claim for tortious assault. That is because society imposes a duty not to assault others which is independent of the contractual promise made by the parties.
With this in mind, we turn to the misappropriation claim here. The district court held that the independent tort doctrine barred SCO’s claim, but in doing so the district court focused too narrowly on IBM’s allegedly wrongful conduct, observing that the same conduct would constitute both an unfair-competition claim and a breach of the JDA. But that analysis misses the point. What matters is not whether IBM’s “use of the code” violated the contract, but rather whether IBM violated some separate and independent non-contractual duty in using that code.
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[W]hile IBM and SCO may not have had a formal partnership or joint venture as a matter of law, they surely enjoyed a business relationship in which each reposed a degree of trust and confidence in the other. In that situation, there exists a duty not to take a business collaborator’s property in bad faith and without his consent in order to compete against that owner’s use of the same property. Because that duty is separate from the JDA, even though the JDA addresses the same topic, the independent tort doctrine does not bar SCO’s misappropriation claim.

The Tenth Circuit also found these misappropriation claims were not barred by the Copyright Act’s preemption provision, as misappropriation claims require the victim to demonstrate that the defendant acted with “bad faith.” That “extra element” took the misappropriation claim out of the copyright realm, and saved it from preemption.

Brian W. Esler is a partner with Miller Nash in Seattle, Washington.


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