In our last two posts, we identified best practices for ensuring that a company’s house is in order, including the use of narrowly tailored restrictive covenant agreements (Part I) and adopting a company culture and behaviors that protect its information (Part II). In this, our third blog post in the Watch Your Assets series, building on these best practices, we provide a high-level snapshot on using injunctive relief to protect a company’s trade secrets and confidential information.
Preservation of the Status Quo
An injunction, whether in the form of a temporary restraining order (TRO) or preliminary injunction, is a court order issued to preserve the positions of the parties while the case is pending. Typically in the employment context, a company is asking a court to stop a former employee or employees from working with a competitor, soliciting the company’s employees or customers, or using and disclosing the company’s confidential information until there is a trial on the merits. As we discuss below, companies also have to make a strategic decision about whether to seek an injunction against a subsequent employer that intends to hire or has hired an employee.
Unless dissolved sooner, a TRO usually remains in effect until a hearing on a preliminary injunction is held. Similarly, a preliminary injunction usually remains in effect through trial, where it is then replaced with a final trial order.
Typical Causes of Action That Permit Entry of an Injunction
There are numerous causes of action through which a party may seek injunctive relief. The “usual suspects” involve:
- trade secrets statutes
- restrictive covenant agreements
- tortious interference claims
- computer fraud claims
- unfair trade practices claims
Temporary Restraining Orders and Preliminary Injunctions in General
Preliminary injunctive relief is considered to be an extreme remedy. Therefore, there are strict standards a party must satisfy to obtain an injunction. These standards are essentially the same for a TRO and a preliminary injunction, except that a TRO has a heightened requirement to show a need for emergency relief. Another important difference is that a TRO hearing is generally decided on the complaint and supporting affidavits alone without any live testimony. A preliminary injunction hearing is typically based on an evidentiary hearing involving actual evidence and witness testimony and, for all practical purposes, proceeds as a quickie trial. The factors courts generally consider when deciding to issue an injunction include:
- Likelihood of Success on the Merits. The party requesting injunctive relief must demonstrate a likelihood of success on the merits of the claims for which it seeks injunctive relief. For example, if a restrictive covenant agreement is at issue, the party must generally show that it has a protectable interest that can be enforced by the agreement, that the restrictions are reasonably tailored as to time, place, and activity, and that the employee is threatening to or is actually violating the agreement. Success on non-contractual claims like tortious interference will require a showing that the requesting party can prove the prima facie elements of that claim (e.g., a protectable business relationship and improper interference with the relationship).
- In many jurisdictions, such as the state of Illinois and the Seventh Circuit Court of Appeals, which is the federal appellate circuit covering Illinois, Indiana, and Wisconsin, establishing a likelihood of success for a temporary injunction only requires a showing of a “fair question” that it will prevail on the merits of its claims rather than an assurance of ultimate success.
- Courts will also consider viable defenses on this point such as contract defenses at this stage (e.g., failure of consideration, reasonableness of the covenants, etc.).
- Irreparable Harm. Once a protectable interest is established, irreparable injury is oftentimes presumed. For example, courts generally will assume that if a company loses customers, vendors, employees, etc., it is unlikely that it will get them back in the near term or be able to accurately forecast what other business the company would have developed over time, or which of those customers would have referred new business to the company.
- Inadequate Remedy at Law. A party has an inadequate remedy at law when it cannot be fully compensated by monetary damages. This includes situations where monetary damages are difficult or impossible to calculate. For example, even if it were feasible to prove which customers the company has lost because of the wrongful conduct, it is almost impossible to prove lost profits resulting from the loss of that customer goodwill. Keep in mind that liquidated damages and monetary forfeiture provisions will cut against an inadequate remedy claim.
- Balance of Harms. An injunction that substantially harms either side will face strict scrutiny by a court. For example, it is easier to obtain an injunction prohibiting a former employee’s employment with a competitor before he or she starts working for a competitor, than it is once he or she has already started employment. On the other hand, if the employee has demonstrably taken, used, or disclosed confidential information, the greater harm will clearly be to the company seeking the injunction. Courts also evaluate the public interest, i.e. the public’s interest in seeing contracts honored, etc.
Stayed tuned for our next installment of the Watch Your Assets series where we’ll discuss key injunction strategies.