August 21, 2019

Tenth Circuit: Despite Probability of Ongoing Harm, Business Failed to Show Former Employee’s Solicitation Violated Business Agreement

The Tenth Circuit Court of Appeals issued its opinion in DTC Energy Group, Inc. v. Hirschfeld on Friday, December 28, 2018.

The district court denied plaintiff DTC Energy Group’s motion for preliminary injunctive relief. On appeal, the Tenth Circuit Court of Appeals affirmed.

DTC is a staffing and consulting firm, and has sued two of its former employees—Adam Hirschfeld and Joseph Galban—as well as a competing firm, Ally Consulting, LLC, for using DTC’s trade secrets to divert business from DTC to Ally.

Hirschfeld worked for DTC as a business development manager, and had signed an employment agreement that included confidentiality, non-solicitation, and non-interference provisions.  The confidentiality provision prohibited Hirschfeld from using DTC’s confidential information for his own benefit or the benefit of another company. The non-solicitation and non-interference provisions prohibited Hirschfeld from encouraging DTC’s current customers to take their business to a competitor and from recruiting DTC’s employees to work for a competitor, for the duration of his employment with DTC and for a period of 1-year thereafter, unless he resigned due to a change in ownership.

While employed by DTC, Hirschfeld used DTC’s resources to win business for Ally, allegedly in violation of his duty of loyalty to DTC and his employment agreement. Hirschfeld resigned from DTC in May 2017, citing a change in ownership. Upon his resignation, Hirschfeld took a flash drive containing DTC’s confidential information, and also kept his laptop logged into DTC’s Dropbox account so he could continue accessing DTC’s confidential information after his departure. The day after leaving DTC, Hirschfeld began working at Ally as its director of business development.

In September 2017, DTC filed its amended complaint and moved for preliminary injunction based on its claims for breach of contract, breach of duty of loyalty, misappropriation of trade secrets in violation of the federal Defend Trade Secrets Act and Colorado’s Uniform Trade Secrets Act, and unfair competition. The district court denied the motion, finding the duty of loyalty owed by defendants to DTC and the non-solicitation clause of Hirschfeld’s employment agreement had expired, and that DTC was unable to show a significant risk of future misappropriation of trade secrets and unfair competition. The district court reasoned that because a majority of the conduct at issue had occurred before DTC moved for a preliminary injunction, the resulting harm to DTC was therefore identifiable and could be remedied by an award of damages.

On appeal, DTC argued that the district court’s finding that DTC had established a significant risk of irreparable harm based on defendants’ past misconduct was erroneous because it failed to take into consideration the harm DTC continues to suffer as a result of defendants’ past misconduct—specifically the harm to DTC’s goodwill and competitive market position.

In its review of the district court’s decision, the Tenth Circuit focused on the showing of irreparable injury in the absence of the issuance of a preliminary injunction. The district court had found that DTC had shown a probability of irreparable harm from Hirschfeld’s ongoing breach of his employment agreement, but not with respect to DTC’s other claims.

DTC’s trade secret claims did not establish a probability of irreparable harm because there was no evidence in the record that defendants retained access to DTC’s confidential information or trade secrets. While the federal Defend Trade Secrets Act and Colorado’s Uniform Trade Secrets Act authorize preliminary injunctive relief to prevent actual or threated misappropriation of a trade secret, the Tenth Circuit concluded that DTC had not offered sufficient evidence that defendants currently possessed DTC’s trade secrets or would be likely to regain access to DTC’s trade secrets.

DTC’s unfair competition claim did not establish a probability of future irreparable harm because DTC had offered no evidence that Ally continues to appropriate DTC’s name or resources to solicit business, nor was there any evidence demonstrating ongoing confusion within the industry as to the relation between the two companies.

DTC’s breach of duty of loyalty claim also did not give rise to a future of irreparable harm. Because DTC identified the 12 contracts that Hirschfeld diverted from DTC to Ally and had previously hired experts to value the company during the change of ownership, the Court of Appeals reasoned that both the prior loss of DTC’s customers and consultants and the general decline of DTC’s value of a business could be quantified in money damages.

While DTC had shown a probability of future irreparable harm from Hirschfeld’s ongoing solicitation of DTC’s customers and consultants, the district court still denied injunctive relief as DTC had not shown a likelihood of success on the merits of the claim. The district court found that Hirschfeld was not bound by his employment’s non-solicitation provision as the change in ownership clause provision had been triggered.

On appeal, DTC argued that the prior breach doctrine prevented Hirschfeld from relying on the change in ownership clause, stating that Hirschfeld could not claim the benefit of the contract’s change in ownership clause after he had already violated the contract by improperly diverting business to Ally prior to his resignation. The Tenth Circuit agreed with the district court’s finding that the prior breach doctrine was inapplicable, as this was not an instance where DTC was defending against a demand specific performance, and the text of the employment agreement itself did not prevent Hirschfeld from relying on the provision in instances of prior breach. The Circuit went on to say that Hirschfeld’s present solicitation of DTC’s customers and consultants would not support issuing a preliminary injunction because the injunction would exceed the 1-year durational scope of the non-solicitation (the agreement’s provisions had expired prior to the time of the appeal).

In his concurrence, Judge McHugh wrote that in some circumstances an injunction can supported by the irreparable harm caused by defendants’ legal actions that would not have been possible but for their past breaches, as courts will sometimes enjoin future legal conduct because it was made possible by prior illegal conduct and will cause irreparable harm to the plaintiff. However, DTC had not pointed to any evidence of future irreparable harm stemming from defendants’ past misconduct (e.g., evidentiary support that DTC’s goodwill and competitive market position continues to be harmed) in the record that should have been considered by the district court, therefore the district court’s denial should be affirmed.