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Trade secrets appropriation ruling overturned

Trade secrets appropriation ruling overturned

A U.S. District Court should have first required an investment management firm to demonstrate it would have suffered irreparable harm without a preliminary injunction against a former employee, before it issued that injunction, says a federal appeals court in overturning the lower court’s ruling in a trade secrets appropriation case.

Denver-based First Western Capital Management, a unit of First Western Financial Inc., acquired Financial Management Advisors L.L.C., an investment firm that Kenneth D. Malamed founded, in 2008, according to Monday’s ruling by the 10th U.S. Circuit Court of Appeals in Denver in First Western Capital Management Co. et al. v. Kenneth D. Malamed. Mr. Malamed then began working for First Western Capital.

In early 2016, after learning First Western Capital directors were considering selling the company, Mr. Malamed had his assistant print copies of his client book, which contained the names and contact information for about 5,000 First Western Capital contacts.

The printouts included client names, the market value of their holdings under management and the fees being charged. Mr. Malamed was fired by First Western on Sept. 1, 2016, shortly after his employment contract expired.

The same day, First Western served him with a complaint it had filed against him in U.S. District Court in Denver a month earlier, charging him with misappropriation of trade secrets under the federal Defend Trade Secret Acts of 2016 and the Colorado Uniform Trade Secrets Act, and breach of employment contract and fiduciary duty.

First Western also moved for a temporary injunction preventing Mr. Malamed from soliciting First Western Capital’s clients, which the court granted.

On appeal, the three-judge appeals court panel unanimously overturned the injunction. In its ruling, the District Court had excused First Western from demonstrating one of the standard requirements to obtain injunctive relief, which was to show there would be irreparable harm if it was not issued, said the ruling.

But a 10th Circuit ruling issued three weeks after the District Court ruling clarified that requirement could be waived only when the relevant statute mandated injunctive relief. The Defend Trade Act and the Colorado Trade Secrets Act only authorized, but did not mandate, injunctive relief, said the ruling.

As a result, the District Court should have taken into account whether First Western had demonstrated that not issuing the injunction would have caused irreparable harm.

That was not the case, the 10th Circuit panel said. “The District Court has already determined First Western cannot show irreparable harm,” said the ruling.

“The court found that if First Western ultimately succeeded on its claims against Mr. Malamed, money damages could be quantified” and make the company whole, said the panel, in reversing the District Court’s grant of a preliminary injunction.


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