Misappropriation of Trade Secret Injunctive Relief

October 7, 2013 / By Robert Wood

Misappropriation of trade secrets is a proper basis for a court to order a temporary injunction; however the language in the injunction must be limited to prevent it from becoming blanket prohibition on competition.

In Reliant Hosp. Partners, LLC v. Cornerstone Healthcare Group Holdings, Inc., 374 S.W.3d 488 (Tex. App.—Dallas 2012, pet. filed), Cornerstone Healthcare Group (“Cornerstone”) brought suit for misappropriation of trade secrets, breach of fiduciary duty, and tortuous interference against a group of former executives who left Cornerstone to purchase its competitor Reliant Hospital Partners, LCC (“Reliant”). The former executives (“the Group”) contacted a private equity firm, Nautic Partners, LLC (“Nautic”) and suggested Nautic purchase Reliant and hire the Group to run Reliant’s operations. Nautic did just that.

Cornerstone subsequently filed suit and applied for a temporary injunction against Nautic, Reliant, and all of the members of the Group (collectively as “Defendants”). As a basis for the temporary injunction, Cornerstone alleged various causes of action, to include misappropriation of trade secrets, tortuous interference, and Theft Liability Act violations. Id at 493. After a hearing, the district court issued a temporary injunction with various terms against the defendants. As for Nautic and the Group, the injunction prohibited them from:

(1) retaining any [trade secrets] obtained by any of [the Group] during their employment with Cornerstone, and such documents must be immediately returned to Plaintiff Cornerstone;

(2) using or disclosing Plaintiff Cornerstone’s confidential and/or proprietary information, including, but not limited to, [materials] developed by any of [the Group] during their respective periods of employment with Cornerstone; and

(3) engaging in, or attempting to engage in, the development, acquisition, merger, partnership, or joint or shared service with any post-acute care facility, information about which was presented or disclosed to [the Group] while employed at Cornerstone.”

Reliant Hosp. Partners, LLC, 374 S.W.3d at 493-94. Likewise, Reliant’s CEO and his personal contact at Nautic were prohibited from:

(1) retaining any [materials] obtained by any of [the Group] during their employment with Cornerstone, and such documents must be immediately returned to Plaintiff Cornerstone; and

(2) using or disclosing Plaintiff Cornerstone’s confidential and/or proprietary information, including, but not limited to, [materials] developed by any of [the Group] during their respective periods of employment with Cornerstone.

Id. at 494. Finally, Reliant’s owner was prohibited from:

(1) retaining any electronic documents, originals, or hard copies of materials, property, documents, data and any other information obtained by any of [the Group] during their employment with Cornerstone, and such documents must be immediately returned to Plaintiff Cornerstone, if any; and

(2) using or disclosing Plaintiff Cornerstone’s confidential information, limited to marketing materials and strategic planning information developed by [the Group] during their respective periods of employment with Cornerstone.

Id. The Defendants subsequently appealed the temporary injunction, arguing Cornerstone (1) had not demonstrated a probable right to relief, (2) failed to show any irreparable harm and the injunction was overbroad and (3) the Court did not balance the equities between the parties and the public in issuing the injunction. Finally, Reliant’s owner individually appealed on the basis that there was no evidence to issue an injunction against him.

The Court addressed the issue first that Reliant’s owner argued in his appeal. The court agreed that, while there were valid acts to enjoin the other Defendants from, there was no nexus between Reliant’s owner and any act to be restrained or the irreparable harm Cornerstone faced. As such the court voided the injunction against Reliant’s owner.

Before turning to the merits of the other Defendants’ issues, the Court addressed an argument by Cornerstone that the Defendants attempt to destroy the confidential information in their possession was prima facie evidence of Defendants’ liability in the case, thus warranting a presumption in favor of the injunction. The Court disagreed, rejecting the argument as not having a basis in Texas law.

The Court then addressed the underlying issue regarding the trade secret misappropriation and related torts. The Court first described the applicable law governing the parties arguments, to include discussing the fluid nature of determining what constitutes a trade secret. See, e.g., In re Bass, 113 S.W.3d at 739 (listing factors in finding trade secret status).

Based on the law, the Court concluded that the trial court did not abuse its discretion as to warrant reversing the injunction whole-cloth. Cornerstone’s information such as its market statistics, financial information, structure, and ownership, and bed need analysis contained in the materials met the tests for trade secret status. Cornerstone also faced irreparable harm required in granting a temporary injunction because the Defendants’ possession of the documents put them at a competitive disadvantage that could not be compensated by money damages.

The Court next turned to the Defendants’ argument that the injunction was overbroad because it prohibited Defendants from “trying to develop or pursue any acquisitions or other opportunities.” Id. at 502. (emphasis in original). The paragraph in question contained no language limiting the enjoined acts to those in connection with Defendants’ use of Cornerstone’s trade secrets. Id. The Court agreed that it was overbroad.

Rule 683 of the Texas Rules of Civil Procedure require an injunction be narrowly tailored to fit the improper acts. The language of the injunction instead prohibited competition altogether. Accordingly, the Dallas Court of Appeals modified the language to enjoin Defendants only from competing using Cornerstone’s trade secrets, and deleted the overbroad paragraph at issue. Cornerstone’s appeal is currently pending on merits briefs at the Texas Supreme Court.

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood