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Fifth Circuit Spares Trade Secrets Suit, But Clarifies That Specific Evidence of Irreparable Harm Must Support Request for Preliminary Injunction | Seyfarth

in Direct Biologics LLC v. McQueen, et al.the US Court of Appeals for the Fifth Circuit vacated a lower court’s dismissal of a trade secret and restrictive covenants suit, but still stressed the need for movants seeking a preliminary injunction in trade secrets cases to provide specific evidence of the irreparable harm caused by both actual and potential disclosures of trade secrets, and also to prove the difficulty in quantifying damages in order to obtain injunctive relief.

On April 3, 2023, the Fifth Circuit, in an unanimous decision, vacated and remanded a lower court’s decision to deny the request by biotechnology company Direct Biologics, LLC for a preliminary injunction against its former senior executive Adam McQueen for misappropriation of the company’s most vital trade secrets for his current employer Vivex Biologics, Inc.

Direct Biologics is a biotechnology company which manufactures two pharmaceutical products, AmnioWrap, an allograft skin substitute for tissue repair, and ExoFlo, a proprietary extracellular vesicle (“EV”) used in the treatment of severe COVID-19. At the time of briefing to the Fifth Circuit, ExoFlo was undergoing the final phase of clinical trials to become the first of its kind EV to receive FDA approval for use in the United States. McQueen served as Executive Vice President for Direct Biologics during the development of ExoFlo and later joined Vivex, a direct competitor to Direct Biologics that also sells and markets allograft products and develops EV products. As alleged by Direct Biologics, “McQueen, as a high-level executive, was one of only a handful of individuals at [Direct Biologics] intimately involved with both the AmnioWrap and ExoFlo product lines, and who knows [Direct Biologics]’s most closely guarded secret: the formula and product specifications for its flagship technology, ExoFlo.”

Direct Biologics filed suit against McQueen for breach of his non-compete and non-disclosure agreements, and trade secret misappropriation under state and federal trade secrets law against both McQueen and Vivex. Direct Biologics then moved for a preliminary injunction to compel McQueen to comply with his non-compete agreement, preventing his employment with Vivex, and to prevent him from using any confidential and trade secret information that he had acquired from Direct Biologics. The Western District of Texas denied the preliminary injunction, finding that Direct Biologics had not demonstrated that it would suffer irreparable harm if injunctive relief was not granted. In doing so, the Court also refused to apply for a presumption of irreparable harm under Texas law where a “highly trained employee is continuing to breach a non-competition covenant.” The lower court then dismissed the remainder of Direct Biologics’ suit, finding that the remaining claims were subject to arbitration, and entered a final judgment disposing of the suit in its entirety.

The Fifth Circuit reversed the lower court’s order on appeal. The Court reviewed the presumption of irreparable harm under Texas law, and explained that in the absence of independent proof of harm, courts have discretion in declining to apply a presumption of irreparable harm. Next, the appellate court examined whether the lower court erred in finding that Direct Biologics had not presented sufficient evidence of irreparable harm when it demonstrated that McQueen had previously disclosed trade secret information to Vivex.

The Fifth Circuit found that the lower court failed to make an individualized assessment of whether disclosure was likely to occur during the pendency of the lawsuit, and failed to properly consider whether money damages would be easy or difficult to quantify. Therefore, the Fifth Circuit vacated the lower court’s order denying the preliminary injunction, and remanded the case with instructions to make particularized findings whether harm was likely to occur and whether money damages would be difficult to quantify.

In addition to vacating the order denying the preliminary injunction, the Fifth Circuit also vacated the lower court’s dismissal of Direct Biologics’ claims subject to arbitration. The Court noted that although there was no dispute that the claims must ultimately be submitted to arbitration, a potential preliminary injunction cannot be entered unless the final judgment dismissing the claims was also vacated.

Even though the Fifth Circuit ultimately gave the plaintiff another shot at proving its claims, the Direct Biologics the ruling is a reminder than when seeking a preliminary injunction or any injunctive relief, plaintiffs should put forth specific evidence of the harm that has already occurred and also the potential for injury during the pendency of the lawsuit. Equally important, a plaintiff must be able to show with specific evidence that, should disclosure of trade secrets occur, money damages would be difficult or impossible to quantify.