IP Law Daily, TRADE SECRETS—NDNY: Trade Secrets Misappropriation Does Not Automatically Amount to Irreparable Harm, (Nov 8, 2012)

By William Zale, J.D.

Although defense contractor Exelis established a likelihood of success on the merits of a trade secrets misappropriation claim against its competitor SRC, Exelis failed to show that it would be irreparably harmed by denial of a preliminary injunction, the federal district court in Syracuse has ruled (Exelis, Inc. v. SRC, Inc., November 7, 2012, Suddaby, G.). On a motion for a preliminary injunction, a showing that a competitor has misappropriated the movant’s trade secrets would not constitute an automatic showing of irreparable harm, the court held.

Destruction of Evidence

SRC and six of its employees allegedly misappropriated Exelis’s trade secrets in order to unfairly compete in bidding for defense work. The court found that, at the very least, two employees were negligent in their destruction of thumb drives and email messages, which is all that was required to establish culpability for spoliation of evidence. The court found also found that the destruction of the evidence in question was willful and in bad faith.

In support of its argument that stealing confidential information or trade secrets constitutes irreparable harm, Exelis sought an adverse inference due to spoliation of evidence. Although the finding of willfulness and bad faith excused Exelis from proving relevance, which the court noted Exelis would have some difficulty doing, the court retained wide discretion in determining an appropriate sanction.

A sanction in the form of an adverse inference is extreme and should not be imposed lightly, the court said, especially because an adverse inference instruction often ends litigation—it is too difficult a hurdle for the spoliator to overcome. The court declined to impose this sanction at this stage but found that the sanction that would be appropriate in an adverse-inference instruction to a jury, if and when this case is presented to a jury. At that time, the court said that it will consider against which parties the adverse inference should be drawn, as well as the possibility of additional sanctions, such as an order precluding the defendants from submitting certain evidence, asserting certain defenses, and/or imposing monetary sanctions (including attorney’s fees and costs).

Irreparable Harm

The more important issue was whether, on a motion for a preliminary injunction, a showing that a competitor has misappropriated the movant’s trade secrets constitutes an automatic showing of irreparable harm. The court answered in the negative. The Second Circuit has explained that, at most, a rebuttable presumption arises; and it does so only if “there is a danger that, unless enjoined, [the] misappropriator of trade secrets will disseminate those secrets to a wider audience or otherwise irreparably impair the value of those secrets,” in Faiveley Transp. Malmo AB v. Wabtec Corp., 559 F.3d 110, 118-19 (2d Cir. 2009).

The court found it difficult to imagine how SRC’s submission of a bid that uses Exelis’s trade secrets—as actionable and indeed as deplorable as that may be—can be characterized as a “dissemination [of those trade secrets] to a wider audience” under Faiveley, given the lack of any evidence (or even argument) that the trade secrets contained in the bid will at some point be made public. The court rejected Exelis’s “inevitable disclosure” and “loss-of-business and employee-layoff” arguments.

Likelihood of Success on Merits, Balance of Hardships

Based on the evidence adduced on its preliminary injunction motion, Exelis demonstrated a sufficiently serious question as to the merits of the case to make it a fair ground for litigation and a balance of hardships tipping decidedly in its favor. The defendants argued that denying the motion is consistent with the public interest in “free and fair competitive bidding … and the Government’s contractual needs.” The court, however, was not persuaded that permitting a company to misappropriate and potentially use its competitor’s confidential information fosters free and fair competition, nor that the government has a need for such “repugnant conduct.”

The case is Civil Action No. 5:12-CV-0858 (GTS/TWD).

Elizabeth Ann Wolford (Wolford Law Firm, LLP) for Exelis, Inc. Edward R. Conan (Bond, Schoeneck Law Firm) for SRC, Inc.

Cases: TradeSecrets NewYorkNews