Daniels Health Sciences, L.L.C. v. Vascular Health Sciences, L.L.C.

Case: 12-20599 Document: 00512164302 Page: 1 Date Filed: 03/05/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 5, 2013
No. 12-20599 Lyle W. Cayce
Clerk
DANIELS HEALTH SCIENCES, L.L.C.,
Plaintiff - Appellee
v.
VASCULAR HEALTH SCIENCES, L.L.C.,
Defendant - Appellant
Appeals from the United States District Court
for the Southern District of Texas
Before WIENER, CLEMENT, and PRADO, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge:
This dispute arises from the marketing and sale of the cardiovascular
health drug Arterosil. Daniels Health Sciences (“DHS”) engaged Vascular
Health Sciences (“VHS”) to market and sell the drug Provasca. After that
relationship ended, VHS began to manufacture, market, and sell Arterosil, a
product similar in many respects to Provasca. DHS sued VHS for
misappropriation of trade secrets, breach of contract, and trademark violations.
The district court first granted a temporary restraining order on the grounds
that DHS would likely succeed on its breach of contract and misappropriation
of trade secrets claims. It later granted a preliminary injunction on the same
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grounds, also finding a substantial threat of irreparable injury absent an
injunction, that the balance of hardships favored the plaintiff, and that the
public interest would not be disserved by a grant of injunctive relief. VHS filed
a motion in this court requesting a stay of the injunction, which was granted,
and now appeals the grant of the preliminary injunction and its scope. We
AFFIRM the preliminary injunction, lift the stay, and remand to the district
court with instructions to expedite trial and to attempt to narrow its preliminary
injunction.
FACTUAL AND PROCEDURAL BACKGROUND
In 2007, a dietary supplement company called Endomatrix filed for
bankruptcy. One of its researchers, Dr. Daniels, purchased Endomatrix’s
intellectual property out of the bankruptcy estate. This property included the
trademark for a dietary supplement named Provasca and the leftover inventory
and raw materials for the supplement. Dr. Daniels approached his brother,
David, and a marketing executive, Robert Long, in 2010 to help him secure
funding for further research and marketing of Provasca. They formed two
entities in 2011: DHS to research Provasca and VHS to market the supplement.
Dr. Daniels compiled a distilled version of the science and research behind
Provasca into a PowerPoint presentation titled “The Path to Provasca” to
educate David Daniels and Long on the supplement and help them communicate
its potential to investors. Dr. Daniels required that VHS receive his approval
before it presented potential investors with information on the supplement,
including The Path to Provasca, and also that VHS have them sign a
Confidentiality and Non-Disclosure Agreement (“CNDA”) prior to the
presentation. He also prohibited VHS from presenting information on the
supplement to venture capital groups and others that might seek to use it
independently. Moreover, according to DHS’s complaint, before sharing
information with VHS, “Dr. Daniels made it clear that the information he was
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sharing needed to be kept confidential.” If VHS principals had not agreed to
those terms, “Dr. Daniels wouldn’t have shared [the information] with them.”
A year after assembling The Path to Provasca, Dr. Daniels also had VHS
sign a CNDA. DHS was less successful, however, in reaching a licensing
agreement with VHS, and in February 2012, VHS called off the deal. Despite
severing its ties with DHS, VHS continued to attempt to secure investors for a
supplement. It also developed a rival product, Arterosil. Provasca and Arterosil
both contain the same seaweed extract alleged to help repair and maintain blood
vessel walls. But Provasca’s other ingredient is L-Arginine, an amino acid, while
Arterosil has a blend of fruit and vegetable extracts in addition to the seaweed
extract.
DHS filed suit, asserting that VHS violated the CNDA by using
confidential information to develop and market Arterosil. It also alleged
misappropriation of trade secrets and trademark violations, among several other
claims. It requested and obtained a temporary restraining order to prevent VHS
from using DHS’s confidential information to research or sell Arterosil. It then
filed for a preliminary injunction. Following briefing, the district court heard
two days of testimony on the merits of the injunction. Three weeks later, the
court granted the injunction. The court concluded, based on its factual findings,
that DHS was substantially likely to succeed on its breach of contract and trade
secret misappropriation claims. It went on to determine that DHS faced a
substantial threat of irreparable injury absent an injunction, which outweighed
the harm that might result if the injunction was granted. Finally, it concluded
that an injunction would not disserve the public interest. VHS moved to clarify
the scope of the injunction, and the court denied the motion.
VHS appeals, arguing that this court should vacate the injunction because
DHS did not sustain its burden of proof, and because the injunction covered
activities that did not involve the use of DHS’s alleged confidential information.
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A panel of this court granted VHS’s motion to stay the preliminary injunction
pending appeal and expedited the appeal.
STANDARD OF REVIEW
Reviewing a district court’s grant of a preliminary injunction, this court
asks “whether the issuance of the injunction, in the light of the applicable
standard, constitutes an abuse of discretion.” Concerned Women for Am., Inc.
v. Lafayette Cnty., 883 F.2d 32, 34 (5th Cir. 1989) (citation and alterations
omitted). “[F]indings of fact that support the district court’s decision are
examined for clear error, whereas conclusions of law are reviewed de novo.”
Affiliated Prof’l Home Health Care Agency v. Shalala, 164 F.3d 282, 284–85 (5th
Cir. 1999).
DISCUSSION
VHS asks the court to vacate the district court’s preliminary injunction.
It contends that DHS did not offer proof that it met the standard for a
preliminary injunction. VHS also argues that the court did not limit the
injunction to use of DHS’s alleged confidential information.
I. The district court’s grant of the preliminary injunction
VHS first argues that the district court erred when it found that DHS
carried its burden of proof for each of the four requirements for a preliminary
injunction: substantial likelihood of success on the merits, substantial threat of
irreparable harm absent an injunction, a balance of hardships in DHS’s favor,
and no disservice to the public interest. Byrum v. Landreth, 566 F.3d 442, 445
(5th Cir. 2009). Because the district court found sufficient facts to support its
conclusion that the four requirements were met, however, it did not abuse its
discretion by granting the injunction.
A. Likelihood of success on the merits
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VHS argues that the district court erred in determining that DHS was
likely to succeed on its breach of contract and misappropriation of trade secrets
claims. To show a likelihood of success, the plaintiff must present a prima facie
case, but need not prove that he is entitled to summary judgment. See Janvey
v. Alguire, 647 F.3d 585, 595–96 (5th Cir. 2011). With respect to the contract
claim, VHS first contends that DHS did not show damages. It is true that the
court did not specifically discuss damages in the section of its opinion on the
merits of DHS’s contract claim. But it later expressly observed that VHS’s
alleged breach and misappropriation would impair Provasca’s chances at FDA
approval for medical use and make it difficult for DHS to secure research
funding for the drug. These findings are sufficient to support the court’s
conclusion that DHS likely will be able to prove damages at trial.
Next, VHS argues that the district court did not identify the confidential
information that VHS allegedly used in breach of its agreement with DHS. But
the court found that “Dr. Daniels disclosed [in meetings with VHS] new scientific
and clinical research, some of which he found in the public domain, but had
compiled and distilled.” It also found that “the compilation was not public
knowledge” and that Dr. Daniels “later expanded that compilation into a
presentation entitled ‘The Path to Provasca.’” The court went on to explain:
The evidence shows that after learning the science and reviewing
the compilation of research that Dr. Daniels generated and
produced for fundraising, [VHS] and its operatives set out to
delegitimatize Provasca and produce their own product, all without
notice or [DHS’s] permission. The CNDA prohibits this conduct;
hence, the Court is of the view that a factfinder will conclude that
[VHS] breached its agreement with [DHS].
These findings specifically identify the confidential information that VHS
misused and how it misused that information in breach of the CNDA. Although,
under VHS’s interpretation of the CNDA, the agreement does not cover this
information, the district court did not err in determining that the ultimate
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factfinder would likely agree with DHS that the information is covered. In
particular, the district court noted that the CNDA broadly includes “all
confidential or proprietary written, recorded, electronic or oral information . . .
(whether such confidentiality or proprietary status is indicated orally or,
whether or not the specific words ‘confidential’ or ‘proprietary’ are used).”
VHS also argues that DHS did not offer sufficient evidence for the district
court to conclude that DHS likely would succeed on its trade secrets claim. To
establish trade secret misappropriation in Texas, a plaintiff must show “(a) the
existence of a trade secret; (b) a breach of a confidential relationship or improper
discovery of the trade secret; (c) use of the trade secret; and (d) damages.” Taco
Cabana Int’l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1123 (5th Cir. 1991) (citation
omitted) aff’d sub nom. Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763
(1992). VHS contends that the first requirement was not met because neither
DHS nor the district court specifically identified the alleged trade secret, and,
in any event, DHS had no trade secrets because all of its research on the
cardiovascular benefits of seaweed extract was public knowledge. This
argument is largely repetitive of VHS’s charge that the confidential information
was not identified in the breach of contract claim because no such information
existed. But in this case, the court looks to the legal definition of a trade secret
rather than the broad contractual definition of “confidential information” in the
CNDA.
“A trade secret is any formula, pattern, device or compilation of
information used in one’s business, and which gives an opportunity to obtain an
advantage over competitors who do not know or use it.” Id. (citing Hyde Corp.
v. Huffines, 314 S.W.2d 763, 776 (Tex. 1958)) (emphasis added). Under Texas
law, this trade secret determination is made by weighing six factors: “(1) the
extent to which the information is known outside of the business; (2) the extent
to which it is known by employees and others involved in the business; (3) the
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extent of measures taken to guard the secrecy of the information; (4) the value
of the information to the business and to its competitors; (5) the amount of effort
or money expended in developing the information; (6) the ease or difficulty with
which the information could be properly acquired or duplicated by others.”
Tewari De–Ox Sys., Inc. v. Mountain States/Rosen, L.L.C., 637 F.3d 604, 610
(5th Cir. 2011) (quoting In re Union Pac. R.R. Co., 294 S.W.3d 589, 592 (Tex.
2009)). Although “[i]nformation that is public knowledge or that is generally
known in an industry cannot be a trade secret,” this court has “specifically
rejected the contention that a combination of disclosed technologies cannot itself
constitute a trade secret.” Id. at 611, 613 (citations and internal quotation
marks omitted).
As with the breach of contract claim, the district court specifically
identified Dr. Daniels’s “compilation [that] was not public knowledge” of “new
scientific and clinical research, some of which he found in the public domain,”
but which he had “compiled and distilled” and later expanded into The Path to
Provasca. The district court did not err when it concluded that this compilation
of information, consisting partially of disclosed technologies, nevertheless met
the standard for a trade secret under Texas’s six-factor test. Although it did not
analyze each factor, the court found that (1) the compilation “was not public
knowledge”; (2) the compilation consisted of “Dr. Daniels’ concept and his work
behind Provasca”; (3) “[b]efore sharing his confidential information with his
brother and others, Dr. Daniels insisted that the information that he shared
with them be kept confidential”; and (4) it had taken Dr. Daniels “many years
of scientific research” to develop the information. These findings are sufficient
to support the district court’s determination that the compilation is a trade
secret.
Finally, VHS challenges the district court’s conclusions that VHS and DHS
had a confidential relationship and that VHS used the alleged trade secret to
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develop and market Arterosil. VHS claims that it had no confidentiality
obligation when DHS disclosed The Path to Provasca because there was no oral
agreement on confidentiality in place at that time. However, under Texas law,
an agreement is not required to prove the existence of a confidential
relationship. “[A]n express agreement [is] not necessary where the actions of the
parties, the nature of their arrangement, the ‘whole picture’ of their relationship
established the existence of a confidential relationship.” Furr’s Inc. v. United
Specialty Adver. Co., 385 S.W.2d 456, 459 (Tex. App.—El Paso 1964, writ ref’d
n.r.e) (citing Huffines, 158 Tex. 566); see also H.E. Butt Grocery Co. v. Moody’s
Quality Meats, Inc., 951 S.W.2d 33, 35–36 (Tex. App.—Corpus Christi 1997).
There is sufficient evidence in the pleadings and exhibits to present a
prima facie case that VHS should have understood that the information DHS
provided was confidential. As stated above, the district court found that
“[b]efore sharing his confidential information with his brother and others, Dr.
Daniels insisted that the information that he shared with them be kept
confidential. At least, this was the agreement between Dr. Daniels, David
Daniels and Bob Long.” Whenever VHS sought presentation materials from Dr.
Daniels, he specified that presentations could only be made to potential investors
and not others who might use the information for their own ends. Further, Dr.
Daniels required VHS to obtain his approval before each use of the information,
and to have meeting attendees sign a nondisclosure agreement. Dr. Daniels’s
sharing of the information was contingent on VHS’s agreement with these
conditions. This evidence is sufficient to constitute a prima facie case that DHS
and VHS had established a confidential relationship—regardless of the absence
of an express agreement.
With regard to VHS’s use of the alleged confidential information, VHS
argues that it “independently” developed Arterosil, and, even if it did not, DHS
must show that VHS used the entire trade secret compilation, not merely pieces
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of publically available information within it. Despite these claims of
independence, the court found that “[w]ithin a few months” of breaking ties with
DHS, VHS was able to develop a “rival product” and “make the same essential
claims [about it] that were attributed to Provasca.” Furthermore, in its view,
“[t]he evidence shows that after learning the science and reviewing the
compilation of research that Dr. Daniels generated and produced for fundraising,
[VHS] and its operatives set out to delegitimatize Provasca and produce their
own product, all without notice or [DHS’s] permission.” These findings, although
weaker, are still enough to support the court’s conclusion that VHS used the
compilation itself to develop Arterosil. Because DHS need only present a prima
facie case, rather than meet the standard for summary judgment, to establish
a likelihood of success on the merits, the district court’s findings are sufficient.
It did not err when it determined that DHS satisfied this element of the
preliminary injunction test.
B. Irreparable harm
To satisfy this prong of the preliminary injunction test, DHS must show
that it is “likely to suffer irreparable harm,” that is, harm for which there is no
adequate remedy at law. Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7,
20 (2008); see Janvey, 647 F.3d at 600. VHS’s only argument on this element of
the test is that DHS has not shown that irreparable harm is likely rather than
merely possible. VHS contends that the claim of reputational harm is
“speculative.” It is true that “[s]peculative injury is not sufficient; there must be
more than an unfounded fear on the part of the applicant.” Holland Am. Ins. Co.
v. Succession of Roy, 777 F.2d 992, 997 (5th Cir. 1985). But Dr. Daniels testified
that other scientists in the field were familiar with his work and that a poor
knock-off would be associated with him to his reputational detriment. The
district court did not err when it credited this unrebutted testimony and
concluded that such harm was likely. VHS also argues that DHS presented no
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evidence that VHS’s alleged knock-off supplement would threaten funding
opportunities for DHS’s Provasca. As with the issue of reputational harm,
however, the court heard testimony that an ill-conceived or even unsafe knock-
off likely would damage DHS’s funding chances. Crediting that testimony was
not erroneous.
C. Balance of hardships
Against these harms, the court weighed the money that VHS has spent to
market and sell Arterosil. It observed that these damages were compensable,
that the market for the supplement would not go away, and that there was no
evidence of substantial contracts between VHS and supplement vendors. In
light of these findings, the court did not err when it concluded that these harms
did not outweigh the likely irreparable injury to DHS absent an injunction.
D. Disservice to the public interest
Finally, VHS argues that the injunction disserves the public interest by
barring public access to a supplement with significant potential health benefits
and prohibiting VHS from turning a profit that it could use for further health
research. But the district court found that the public had a greater interest in
the development of “a historical scientific breakthrough” if Dr. Daniels had the
chance to substantiate his early research. The odds of this breakthrough, in the
district court’s opinion, would be seriously harmed if VHS’s sale of Aterosil hurt
DHS’s funding chances. The district court also found that the public is served
when the law is followed. It did not err by placing more weight on these latter
public interests than on VHS’s proffered public interests.
The district court did not clearly err in any of its factual determinations,
and it correctly applied the legal standard for issuance of a preliminary
injunction to those facts. Therefore, it did not abuse its discretion in granting
the injunction.
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II. The scope of the district court’s preliminary injunction
VHS also argues that the preliminary injunction is overbroad because it
prohibits “the use, dissemination, destroying, selling, conveying, or distributing
of any information and/or intellectual property that [VHS] and operatives
received from [DHS].” (Emphasis added.) It also objects that enjoining it “from
marketing, selling, advertising, distributing, or conveying any product bearing
the word ‘Provasca’ or derivatives of that term; or product based on the science
received and reviewed” is too broad. VHS points out that this language would
prohibit it from disseminating copies of public third-party journal articles that
Dr. Daniels included when he compiled The Path to Provasca. In addition, VHS
alleges that the injunction bars it from marketing or selling drugs unrelated to
Provasca, such as cholesterol-lowering medications, if they are nevertheless
based on “the science received and reviewed” from DHS on general
cardiovascular health.
The district court’s order granting the injunction must “state its terms
specifically” and “describe in reasonable detail” the conduct restrained or
required. FED. R. CIV. P. 65(d). Furthermore, the court “must narrowly tailor an
injunction to remedy the specific action which gives rise to the order.” John Doe
#1 v. Veneman, 380 F.3d 807, 818 (5th Cir. 2004).
The issue of whether the injunction complies with Rule 65 presents a close
question. Even though VHS asked the district court to clarify the injunction,
VHS has never indicated its desire to disseminate third-party journal articles or
market cholesterol drugs. As the Supreme Court has noted,
If defendants enter upon transactions which raise doubts as to the
applicability of the injunction, they may petition the court granting
it for a modification or construction of the order. While such relief
would be in the sound discretion of the court, we think courts would
not be apt to withhold a clarification in the light of a concrete
situation that left parties . . . in the dark as to their duty toward the
court.
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Regal Knitwear Co. v. NLRB, 324 U.S. 9, 15 (1945) (emphasis added); cf. Gulf
King Shrimp Co. v. Wirtz, 407 F.2d 508, 517 (5th Cir. 1969) (“If for some reason
Gulf King had doubts about the meaning of any part of the injunction, it could
have sought district court clarification.”). VHS has not alleged an intent to enter
into such transactions. And it is impossible for courts to craft injunctions that
address all hypotheticals.1 Nevertheless, because the injunction is quite broad
relative to the “reasonably detailed and sufficiently specific to the underlying
action” standard, we instruct the district court on remand to try to narrow the
scope of its injunction.
CONCLUSION
The district court granted DHS’s request for a preliminary injunction after
making sufficient findings of fact to support each element of the analysis and
applying the correct legal standard to those facts. Therefore, we AFFIRM the
district court’s grant of a preliminary injunction in full and lift the stay of the
injunction. We further remand the case and direct the district court to expedite
trial on the permanent injunction and to attempt to narrow the breadth of its
preliminary injunction.
1
In its Emergency Motion to Clarify the Preliminary Injunction to the district court, VHS
alleged that the injunction was unclear as to whether VHS’s ongoing clinical trials of Arterosil were
enjoined. The district court’s refusal to clarify whether the injunction covered such trials may have been
erroneous, but VHS does not raise this issue on appeal.
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