July 12, 2024

A Federal Circuit panel held in Insulet Corp. v. EOFlow Co., Ltd., Appeal No. 2024-1137, ---F.4th---, 2024 WL 3016208 (Fed. Cir. June 17, 2024), that the United States District Court for the District of Massachusetts erred in its analysis and granting of Insulet’s motion for a preliminary injunction in an action for, among other things, violations of the Defend Trade Secrets Act (“DTSA”).  Insulet’s DTSA claims were the basis for its preliminary injunction motion.  This opinion provides insight into the analysis for determining entitlement to a preliminary injunction in the context of a claim under the DTSA.  Some takeaways are:

 

1. A party seeking to establish entitlement to a preliminary injunction based on its trade secret misappropriation claim, including a claim under the DTSA, must show existence of the trade secret and misappropriation, in addition to satisfying the established factors (likelihood of success on the merits, irreparable harm, balance of harms, and public interest) justifying the grant of a preliminary injunction. 2024 WL 3016208, at *2.

 

1. An analysis of the likelihood of success on the merits prong in the context of a claim brought under the DTSA must consider whether that claim may be time barred under 18 U.S.C. § 1836(d) when a statute of limitations challenge is raised. 2024 WL 3016208, at *3.  This factor is “material” and “deserving of significant weight.” Id.  In this case, while EOFlow raised a statute of limitations challenge, the district court did not assess the statute of limitations in evaluating Insulet’s likelihood of success on the merits. Id.  The panel concluded that the district court “ignored a material factor deserving significant weight, which constitutes an abuse of discretion.” Id.  The panel explained, “Indeed, if the three-year statute of limitations for filing a DTSA claim had expired, Insulet’s claims would be time-barred and therefore would have no chance of success.” Id.

 

1. For a claim brought under the DTSA, it is an abuse of discretion to determine what constitutes a trade secret in a manner inconsistent with the DTSA’s definition provided in 18 U.S.C. § 1839(3)(A). 2024 WL 3016208, at *3-4.  Here, the panel found that the district court’s definition of a trade secret was “severely overbroad.” Id. 

 

1. Under § 1839(3)(A), one requirement for a trade secret is that the owner of the specific information alleged to be a trade secret took “reasonable measures” to keep that information secret. 2024 WL 3016208, at *3-4.  The panel explained that “to secure a preliminary injunction, Insulet had to establish the likelihood of its success on the merits for at least one, specifically defined, trade secret,” but failed to do so. Id.  Instead, Insulet advanced “a hazy grouping of information that the [district court] did not probe with particularity to determine what, if anything, was deserving of trade secret protection.” Id.  In this regard, the panel determined that the district court’s analysis in assessing whether Insulet satisfied the “reasonable measures” of protection requirement was too general to support the preliminary injunction. Id. (citing the district court’s findings that “at least to some substantial set of information, Insulet took reasonable steps to protect the information” and that “documents were marked confidential, employees were required to sign nondisclosure or confidentiality agreements, systems were password protected, and the like”).  The panel explained that “[f]inding that Insulet took measures to protect some unidentified ‘set of information’ is not the same as finding that Insulet took reasonable measures to protect specific information alleged to be a trade secret.” Id.

 

1. Section 1839(3)(A) also requires that the information alleged to be a trade secret “derive[] independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” 2024 WL 3016208, at *3.  Section 1839(6)(B) provides that proper means for ascertaining information that may otherwise constitute a trade secret include “reverse engineering, independent derivation, or any other lawful means of acquisition.” Id. at *4.  The panel concluded that the district court failed to adequately assess if the information Insulet sought to protect was generally known or reasonably ascertainable through proper means. Id. at *4-5.  Here, the district court acknowledged that the Insulet product associated with the alleged trade secrets could be broken down and to some extent reverse-engineered and evidence of record showed that at least portions of that product had been reverse-engineered. Id.  Nevertheless, the district court concluded that all depictions or descriptions of those components were trade secrets and held that “the mere possibility that something could be reverse engineered without more is not enough to defeat a trade secret claim.” Id. at *5.  The panel found that this holding misstated the effect that reverse engineering has on the ability of a party to assert a trade secret. Id.  It emphasized that “if information is ‘readily ascertainable through proper means’ such as reverse engineering, it is not eligible for trade secret protection.” Id.  The panel held that the district court erred by failing to consider in its likelihood of success on the merits analysis whether the alleged trade secrets would have been capable of being obtained through reverse engineering, particularly given the evidence of the public availability of the Insulet product, multiple tear down videos available on the Internet, and Insulet’s own publications providing “a look under the hood” that featured core components of that product. Id.

 

Relatedly, the panel found further error by the district court in its failure to consider another “potential proper source for ascertaining information concerning Insulet’s product: patent disclosures.” 2024 WL 3016208, at *5.  The district court deemed the patent disclosures irrelevant because the case was not a patent case. Id.  The panel found that this type of analysis was an abuse of discretion, particularly when “[i]t is axiomatic that ‘matters of public knowledge or of general knowledge in an industry cannot be appropriated’ by an entity as a trade secret.” Id. (quoting Allstate Ins. Co. v. Fougere, 79 F.4th 172, 189 (1st Cir. 2023)).

 

1. The analysis under § 1839(3) also requires that the information alleged to be a trade secret have independent economic value. 2024 WL 3016208, at *3, 5.  While the district court found that the “value of a small number of secrets that solve critical problems can be greater than the sum of its parts,” it failed to sufficiently evaluate if the information asserted by Insulet as deserving of trade secret protection had independent economic value. Id.

 

1. A district court’s failure to identify any trade secret with sufficient particularity necessarily leads to the failure of its analysis of misappropriation. 2024 WL 3016208, at *5.

 

1. Further, a party seeking an injunction based on its trade secret claim must establish that the party accused of misappropriation “knowingly benefited from the full swath of information covered in the injunction.” 2024 WL 3016208, at *5.  The district court acknowledged that Insulet failed to show that EOFlow knowingly benefited from the full swath of information covered in the injunction. Id.  The district court also admitted that it could be true that EOFlow did not knowingly benefit from “some subset of information” and that it was “hard to tell” what subset of information was likely to have been misappropriated by EOFlow. Id.  The panel explained that even if the timing of EOFlow’s product development appeared suspiciously accelerated after it hired four former Insulet employees, this “does not obviate the need to prove the existence of trade secrets, or that the defendants knowingly benefited from them, or the full satisfaction of each of the four preliminary injunction factors.” Id.

 

1. The irreparable harm factor for a preliminary injunction is not satisfied merely because the evidence of likelihood of success on the merits is strong. 2024 WL 3016208, at *6.  The district court based its irreparable harm finding on its determination that the evidence of likelihood of success on the merits was strong. Id.  The panel found that the district court’s reasoning was based on an error of law and explained that a preliminary injunction can only be entered if the moving party further establishes that irreparable injury is likely in the absence of an injunction. Id.

 

1. Further, irreparable harm must be based on something more than conjecture, surmise, or a party’s unsubstantiated fears of what the future may hold. 2024 WL 3016208, at *6.  In this case, the timing of Insulet’s lawsuit coincided with publicized news that a major healthcare technology company started a due diligence process to acquire EOFlow. Id.  The district court found that the alleged harm deemed irreparable was a potential commercial transaction, as opposed to the acquisition, use, or disclosure of trade secrets. Id.  It reasoned that the acquiring company would be a source of capital for EOFlow, as well as a source for other things like regulatory, marketing, and manufacturing expertise, customer support networks, “the panopy of things that are required to be a real competitor.” Id.  The panel, though, explained that “neither a generalized fear of a larger competitor nor any theoretical sale that can be remedied with damages constitutes a cognizable irreparable harm.” Id.  Although the district court found that the relevant competitive harm was loss of market share and price undercutting by a competitor who did not have to spend the same time and money on R&D, it cited no evidence to support its finding. Id.  While the acquisition “may have” been expected to cause the harmful results identified by the district court or other harmful results, the record before the panel showed that the district court’s finding was “nothing more than mere conjecture.” Id.