Third Circuit Reverses Injunction in Trade Secret Misappropriation Suit

Employment Law

The U.S. Circuit Court of Appeals for the Third Circuit took on the misappropriation of trade secrets recently, reversing a district court’s grant of a preliminary injunction halting competition by a company’s rival and two of the company’s former employees.

An established manufacturer of baking release agents (lubricants that allow baked goods to readily separate from the containers in which they are made), Mallet and Company, learned that a competitor, Bundy Baking Solutions, was launching a new subsidiary dubbed Synova to sell its own line of baking release agents.

Synova hired two of Mallet’s employees—both of whom had substantial access to Mallet’s proprietary information—and rapidly developed, marketed and sold release agents to Mallet’s customers.

Mallet sued. Were it not for the misappropriation of its trade secrets, such progress would have taken years to accomplish, the company told the court. The lawsuit included claims for trade secret misappropriation under both federal and state law, inevitable disclosure, conversion, and unfair competition against Synova, as well as breach of contract and breach of fiduciary duty claims against the former employees.

Based on these claims, Mallet filed a motion seeking to preliminarily enjoin all the defendants from engaging in any competition against it.

A district court judge determined that Mallet had demonstrated a likelihood of success on the merits for several of its claims, including its trade secret misappropriation claims, and entered an injunction against the former employees and Synova.

The court found that “[a]t least some of the Mallet information in question, possessed by defendants, satisfies the trade secret definition(s), including, ‘among other things, highly sensitive details about how Mallet produces, markets and sells its release agents.’”

Reasoning that the former employees were “actively working” for a direct competitor in high-level positions in which they used and disclosed Mallet’s trade secrets and that the actual and threatened misappropriation would irreparably harm Mallet, the court enjoined the defendants from a variety of activities, including “using Mallet’s confidential, proprietary and/or trade secret information in any respect,” “working in the industry of release agents and associated equipment … using Mallet’s protectable information,” and “directly or indirectly disseminating any marketing materials, client communications (written or verbal), or other documents comparing Bundy and/or Synova products to any Mallet products.”

In addition, the former employees were also prohibited from engaging in delineated activities, including working in any capacity for Bundy, Synova or any entity competitive with Mallet. The injunction order—which also featured a $500,000 bond posted by Mallet—did not elaborate on what information constitutes trade secrets.

The defendants appealed.

Finding the injunction “flawed,” the Third Circuit vacated the order and remanded the case for further consideration of what, if any, equitable relief was warranted and what sum Mallet should be required to post in a bond.

Federal Rule of Civil Procedure 65(d) mandates that every order granting an injunction must set forth the reasons why an injunction is warranted, state its terms specifically and articulate “in reasonable detail” the conduct it enjoins, the panel explained.

The degree of particularity required will depend on the nature of the subject matter, but these requirements serve to prevent uncertainty and confusion on the part of those faced with injunctive orders and to ensure that sufficient information is placed on the record for appellate review.

The order at issue failed to satisfy either of those requirements, the Third Circuit said.

“Because the District Court did not identify with specificity the information it found to be Mallet’s trade secrets, we are not in a position to make an informed decision as to whether Mallet is likely to prevail on its trade secret misappropriation claims,” the court wrote.

The panel took the time to outline considerations for the district court on remand.

For a preliminary injunction on a trade secret misappropriation claim, a plaintiff must show a reasonable chance of winning on three elements: the existence of a trade secret; that it is related to a product or service used in, or intended for use in, interstate or foreign commerce; and the misappropriation of that trade secret. Importantly, each of those elements is predicated on an adequate identification of what the plaintiff contends to be its trade secret.

A district court must first adequately identify the information to which it accords trade secret status, the panel wrote. “Otherwise, the injunction order lacks the foundation necessary for holding a plaintiff likely to prevail on its misappropriation claim. Without that information, the injunction order fails to comply with Rule 65(d), and it must be vacated.”

The district court’s order covered “highly sensitive details about how Mallet produces, markets and sells its release agents,” but absent from this “high-level description” were “any specifics of what those ‘highly sensitive details’ are,” the Third Circuit said. “The injunction order’s statement of protected material is better characterized as a list of general categories of business and technical information, a list that could be used to describe documents found in any number of corporations.”

This generic list failed against the standard for specifying a trade secret, as at a minimum, “the subject matter of the trade secret must be described ‘with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit the defendant to ascertain at least the boundaries within which the secret lies.’”

For example, Mallet recognized that its own patents publicly disclose some of its formulas. A formula publicly disclosed in a patent is, by definition, not a secret, the court said.

“While we recognize the difficulty inherent in articulating what trade secrets [the former employees] may have misappropriated—and it certainly appears they took things that may qualify as trade secrets … the [district court] did not identify which formulas it referred to, nor did it describe any characteristics or properties contributing specific competitive value to Mallet that could serve as a marker for separating Mallet’s formulas from publicly available information or generally known formulas in the industry,” the court wrote.

Therefore, the panel vacated the injunction and remanded to the district court. On remand, should the court decide that preliminary injunctive relief is warranted, the injunction must be sufficiently specific in its terms and narrowly tailored in its scope, the panel added, and the bond amount must be tied to the scope of the preliminary injunction and account for the factual circumstances of the case.

To read the opinion in Mallet and Company Inc. v. Lacayo, click here.

Why it matters: The Third Circuit acknowledged the challenges of crafting an order for preliminary injunctive relief in the context of a trade secret misappropriation case but was clear that the district court needed more specificity. “We appreciate the burden this places on district courts and ‘that with the advantage of hindsight it is much easier for [us] to find a deficiency in a decree than it would be to write a specific decree that does not offend the law when dealing with the somewhat nebulous field of trade secrets,’” the panel wrote. “Importantly, however, while it is a district court’s responsibility to adequately describe the trade secrets at issue in a case like this, it is first and foremost the plaintiff’s burden to specifically identify what it contends to be its trade secrets and to demonstrate with record evidence a ‘significantly better than negligible’ chance of establishing the existence of those trade secrets. If a plaintiff fails to meet that burden, the district court faces the same problem we now have on appeal, and a preliminary injunction for trade secret misappropriation ought not issue.”



pursuant to New York DR 2-101(f)

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