Direct Biologics v. McQueen ( 2023 )

Case: 22-50442 Document: 00516698574 Page: 1 Date Filed: 04/03/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
April 3, 2023
No. 22-50442
Lyle W. Cayce
Clerk
Direct Biologics, L.L.C.,
Plaintiff—Appellant,
versus
Adam McQueen; Vivex Biologics, Incorporated; Vivex
Biologics Group, Incorporated,
Defendants—Appellees.
Appeal from the United States District Court
for the Western District of Texas
USDC 1:22-CV-381
Before Davis, Dennis, and Higginson, Circuit Judges.
James L. Dennis, Circuit Judge:
Direct Biologics, LLC (“DB”) brought claims for breach of covenant
to not compete and misappropriation of trade secrets against Adam
McQueen, DB’s former employee, and Vivex Biologics, Inc. (“Vivex”),
McQueen’s new employer. After granting DB a temporary restraining order
based on its trade secret claims, the district court denied DB’s application for
a preliminary injunction. Finding that DB’s claims were subject to
arbitration, the district court also dismissed DB’s claims against McQueen
and Vivex and entered final judgment. For the following reasons, we
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VACATE the district court’s orders denying DB’s motion for a preliminary
injunction and dismissing DB’s claims, and REMAND for further
proceedings consistent with this opinion.
I.
A.
DB is a biotechnology company in the field of regenerative medicine,
which develops and manufactures pharmaceutical products derived from
biological sources. It offers two main product lines. The first, AmnioWrap, is
an allograft skin substitute used for tissue repair and regeneration, with
applications for slow-healing wounds, burn injury, and general surgery. The
second, ExoFlo, is a proprietary extracellular vesicle (“EV”) product similar
to stem cell therapy, with applications in the treatment of severe COVID-19.
Understanding how to navigate Food and Drug Administration (“FDA”)
regulatory channels is an important aspect of DB’s business. In 2021, DB had
to withdraw ExoFlo from the market after the FDA announced that EV
products had to undergo formal approval as “drugs and biological products”
under section 351 of the Public Health Service Act (“PHSA”). This spurred
a race among DB and its competitors to secure FDA approval for their
products. At the time this appeal was briefed, DB’s product was undergoing
the final phase of clinical trials to become the first purely biologic EV drug to
receive commercial approval for use in the United States.
DB hired McQueen as its third employee in 2018. During his four
years at DB, McQueen held various senior titles and became an equity
member of DB. McQueen served as an Executive Vice President at DB from
April 30, 2018, until March 28, 2022, when he resigned from DB.1 His
1
McQueen’s employment with DB was formally terminated for cause on March
29, 2022.
2
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responsibilities included participating in intellectual property and product
development, sales initiatives, operations, regulatory and compliance as well
as clinical aspects of DB’s business. McQueen’s wide-ranging
responsibilities and equity member status allowed him access to DB’s
confidential and trade secret information. DB alleges that McQueen, as a
high-level executive, was one of only a handful of individuals at the company
intimately involved with both the AmnioWrap and ExoFlo product lines, and
who knows the company’s most closely guarded secret: the formula and
production specifications for its flagship technology, ExoFlo.
B.
McQueen and DB are party to two key agreements: an Employment
Agreement, governed by Texas law, and an Operating Agreement, governed
by Wyoming law. Each agreement contains: (i) a non-competition covenant
temporarily prohibiting McQueen from accepting certain employment with
enterprises that compete with DB, and (ii) a confidentiality covenant
prohibiting McQueen from using or disclosing confidential information he
acquired from DB. The Employment Agreement’s non-compete provision is
narrower than that of the Operating Agreement. While the Employment
Agreement only prohibits McQueen from providing “services . . . similar to
that which [he] provided to [DB],” the Operating Agreement more broadly
prohibits any employment with a competitor.
The Employment Agreement also includes an arbitration provision
requiring McQueen and DB to arbitrate any “controversy or claim” arising
from the agreement, their employment relationship, or the termination of
such a relationship. While the provision requires arbitration of “all issues of
final relief,” it also includes a carve-out allowing either of the parties to seek
preliminary injunctive relief in federal court.
3
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C.
Following his resignation from DB in March 2022, McQueen joined
Vivex as Vice President of Product Strategy. Vivex is a direct competitor of
DB that sells and markets allograft products and develops EV products. DB
contends that Vivex is one of only a few companies with the “resources,
infrastructure, and commercial motive in place to immediately and
wrongfully exploit” the confidential DB information that McQueen carried
over with him to Vivex. In addition, DB alleges that as a senior manager at
Vivex, McQueen is well-positioned to help Vivex compete with DB’s
AmnioWrap product line and guide Vivex through accelerated development
and FDA approval of new EV products.
DB further alleges that after McQueen began working for Vivex, DB
discovered that while McQueen was still working for DB, he had linked his
personal Dropbox2 account to DB’s online accounts. DB contends that
McQueen, using Dropbox, deliberately misappropriated to his personal
control numerous documents containing DB’s confidential information and
trade secrets, including some of the company’s most sensitive proprietary
information. DB asserts that it never authorized McQueen to link his
personal Dropbox account to its cloud-based corporate accounts or place
company documents or information on his personal cloud storage account,
and that conduct violates express company policy. DB further alleges that
McQueen has shared this confidential trade secret information with Vivex to
2
“Dropbox is a company that hosts an off-site virtual storage application . . . [a]fter
creating an account, users may place items in a Dropbox folder and then access them
remotely through the application[.]” United States v. Rivenbark, 748 F. App’x 948, 950
(11th Cir. 2018).
4
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“destroy [DB’s] hard-earned competitive advantage” in the allograft and EV
technology spaces.
McQueen contends that he has complied with his contractually agreed
covenants and works for Vivex in a non-competitive role. McQueen also
denies that he has used or disclosed DB’s confidential information and
asserts that he has “repeatedly sought to return all information and
documents to Plaintiff.” McQueen further claims that he began using a
personal Dropbox account when he first started working for DB because DB
had not yet given him a company-owned computer or access to a company-
controlled filesharing or storage platform. McQueen states that he has not
modified any DB document linked between his personal and company
Dropbox accounts since July 2, 2021. While Vivex’s Vice President for
Research and Development testified that McQueen does not work on any
“area[s] of competition” between DB and Vivex, McQueen testified that the
responsibilities of his new job included helping with the launch of “an
allograph tissue product” at Vivex.
D.
As relevant to this appeal, DB brought various causes of action3
against McQueen and Vivex: (1) state-law breach of contract based on the
non-compete covenants; (2) trade secret misappropriation under the federal
Defend Trade Secrets Act (DTSA), 18 U.S.C. § 1836 et seq.; (3) trade secret
misappropriation under the Texas Uniform Trade Secrets Act (TUTSA),
3
DB also brought state-law claims for breach of contract based on McQueen’s
alleged breaches of the non-solicitation covenants in the Employment Agreement and
Operating Agreement; breach of contract based on McQueen’s alleged breach of the duty
of loyalty under the Employment Agreement; breach of fiduciary duty; and tortious
interference with contract. These claims were unpreserved or abandoned as a basis for
obtaining a preliminary injunction.
5
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Tex. Civ. Prac. & Rem. Code §§ 134A; and (4) state-law breach of contract
based on McQueen’s confidentiality covenants.
On April 25, 2022, DB moved for a TRO to (1) compel McQueen to
comply with his noncompete covenants and (2) return and stop accessing,
using, or sharing DB’s “confidential and trade secret information.” DB
simultaneously moved for a preliminary injunction requesting the same
relief. The district court granted the requested TRO on May 4, 2022,
ordering McQueen to cease working for Vivex and to not use or disclose DB’s
confidential or trade secret information. See Direct Biologics, LLC v.
McQueen, No. 1:22-CV-381-SH, 2022 WL 1409984 (W.D. Tex. May 4,
2022) (“DB I”). However, on May 24, 2022, after an evidentiary hearing,
the court denied the requested preliminary injunction. See Direct Biologics,
LLC v. McQueen, No. 1:22-CV-381-SH, 2022 WL 1693995 (W.D. Tex. May
26, 2022) (“DB II”). The district court denied DB’s motion on the ground
that DB failed to demonstrate irreparable harm. See DB II, 2022 WL 1693995,
at *6.
In a separate part of its order, the court concluded that all of DB’s
claims were subject to the parties’ arbitration agreement. See id. at *9. The
court then dismissed the case, relying on Fifth Circuit precedent which holds
that where all the plaintiff’s claims must be arbitrated, dismissal rather than
a stay pending arbitration is appropriate. See id. (quoting Alford v. Dean
Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992)). This appeal
followed.
II.
A preliminary injunction is an “extraordinary and drastic remedy.”
Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 997 (5th Cir. 1985). A
party seeking a preliminary injunction “must establish [1] that he is likely to
succeed on the merits, [2] that he is likely to suffer irreparable harm in the
6
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absence of preliminary relief, [3] that the balance of equities tips in his favor,
and [4] that an injunction is in the public interest.” Winter v. Nat. Res. Defense
Council, Inc., 555 U.S. 7, 20 (2008). To issue such relief, a court “must
balance the competing claims of injury and must consider the effect on each
party of the granting or withholding of the requested relief.” Id. at 24(quoting Amoco Prod. Co. v. Vill. of Gambell, AK, 480 U.S. 531, 542 (1987)).
Only when the movant has “clearly carried the burden of persuasion” should
a court grant preliminary injunctive relief. Anderson, 556 F.3d at 360.
The ultimate decision for or against issuing a preliminary injunction is
reviewed under an abuse of discretion standard. Bluefield Water Ass’n, Inc. v.
City of Starkville, Miss., 577 F.3d 250, 253 (5th Cir. 2009) (quoting Guy
Carpenter & Co. v. Provenzale, 334 F.3d 459, 463 (5th Cir. 2003)). “The
district court abuses its discretion if it relies on clearly erroneous factual
findings in deciding whether to grant a preliminary injunction or relies on
‘erroneous conclusions of law.’” Atchafalaya Basinkeeper v. United States
Army Corps of Engineers, 894 F.3d 692, 696 (5th Cir. 2018). The factual
findings rendered by the district court must be left “undisturbed unless
clearly erroneous.” Bluefield, 577 F.3d at 253 (quoting Guy Carpenter, 334
F.3d at 463). Conclusions of law are reviewed de novo. See id.III.
The district court denied DB’s motion for a preliminary injunction
based on the absence of irreparable harm. DB argues on appeal that the
district court erred in declining to apply a Texas law presumption of
irreparable harm, and in finding that DB had not presented sufficient
evidence of irreparable harm because DB in fact demonstrated that McQueen
had already disclosed trade secret information to Vivex. McQueen and Vivex
respond that the district court properly denied the motion for preliminary
injunction because DB was not entitled to the Texas law presumption of
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irreparable harm, and in any event, did not adduce any evidence of irreparable
harm.
This appeal thus turns on (1) whether the district court should have
applied a presumption of irreparable harm under Texas law based on
McQueen’s ongoing breach of the non-compete covenants, and (2) assuming
the district court properly declined to apply the presumption, whether it
erred in holding that DB failed to demonstrate irreparable harm. Because the
parties acquiesced to Texas law before the district court, see DB I, 2022 WL
1409984, at *8 n.3, and before this court, we will apply Texas law in
evaluating the irreparable harm factor in connection with DB’s claims that
McQueen breached the non-compete and confidentiality covenants of the
Employment Agreement, as well as its claim under the TUTSA.
A.
The district court first analyzed DB’s invocation of a Texas doctrine4
providing that “proof that a highly trained employee is continuing to breach
a non-competition covenant gives rise to a rebuttable presumption that the
applicant is suffering irreparable injury.” DB II, 2022 WL 1693995, *6
(quoting Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230,
236 (Tex. App.—Houston [1st Dist.] 2003, not pet.)). In declining to apply
the presumption, the district court found insufficient evidence that: (1)
4
Though the parties did not provide a choice of law analysis, it is unclear whether
federal courts should apply a state-law ‘presumption of irreparable harm’ when
determining whether a preliminary injunction should issue in federal court. Compare Heil
Trailer Int’l. Co. v. Kula, 542 F. App’x 329, 336-38 (5th Cir. 2013) (vacating the denial of a
preliminary injunction in part on the basis that Texas courts presume irreparable harm
where trade secrets have been misappropriated) with Daniels Health Sciences, L.L.C. v.
Vascular Health Sciences, L.L.C., 710 F.3d 579, 585 (5th Cir. 2013) (citing only federal
authorities in finding no error in the district court’s conclusion that irreparable harm was
likely).
8
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McQueen actually “us[ed] the experience he acquired from DB to compete
with it,” such as by “market[ing] products in direct competition with DB,”
or (2) “McQueen has disclosed confidential or trade secret information to
Vivex.” Id. at *7. DB argues on appeal that it demonstrated that McQueen is
in violation of the non-compete covenants, and as such, DB was entitled to a
presumption of irreparable harm under Texas law.
The district court did not abuse its discretion5 by declining to presume
irreparable injury based on McQueen’s breach of his non-compete
covenants. As previously explained, the Employment Agreement broadly
prohibited him from providing “similar” services to Vivex that he provided
to DB. See DB II, 2022 WL 1693995, at *2. The Operating Agreement
covenant was even broader. See id. at *3. Thus, McQueen could have
breached these covenants even without actually using or disclosing DB’s
confidential information or trade secrets. But the district court found that DB
was still required to present some evidence of harm 6 apart from the breach
to merit a presumption of irreparable harm. DB II, 2022 WL 1693995, at *7.
In declining to apply the presumption, the district court found that
evidence did not “conclusively demonstrate that McQueen has disclosed
confidential or trade secret information.” DB II, 2022 WL 1693995, at *7. In
5
“The decision to grant or deny a temporary injunction lies within the trial court’s
sound discretion.” Communicon, Ltd. v. Guy Brown Fire & Safety, Inc., 2018 WL 1414837,
at *7 (Tex. App.—Fort Worth Mar. 22, 2018, no pet.).
6
DB also argues that “the district court erroneously required Direct Biologics to
‘conclusively demonstrate’ that it has already been injured by McQueen’s violation of his
noncompete obligations.” It suggests that the district court’s opinion was in tension with
the prospective nature of an injunction. DB is incorrect. As just discussed, the district court
merely held that DB must produce evidence of ongoing (and, therefore, past) harm in order
to obtain a presumption of irreparable injury should an injunction not issue. See DB II 2022
WL 1693995, at *7. Outside of that context, the district court did not require DB to show
past harm.
9
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fact, the court found that DB failed to produce “any evidence that McQueen
actually is . . . using the experience he acquired from DB to compete with it,”
such as by “market[ing] products in direct competition with DB.”7 Id.(emphasis added); see also Communicon, 2018 WL 1414837, at *7 (“employer-
movant for a temporary injunction in a suit to enforce a noncompete
agreement must come forward with evidence that the high-level employee is
actually breaching the noncompete agreement in order to trigger the
presumption”). Some Texas courts have declined to apply the presumption
in the absence of independent proof of harm. See, e.g., DGM Servs., Inc. v.
Figueroa, No. 01-16-00186-CV, 2016 WL 7473947, at *4 (Tex. App.—
Houston [1st Dist.] Dec. 29, 2016) (declining to apply presumption because
“well-settled Texas Supreme Court law makes clear an applicant bears the
burden to plead and adduce proof of probable, imminent, and irreparable
injury to obtain a temporary injunction”) (citing Butnaru v. Ford Motor Co.,
84 S.W.3d 198, 204 (Tex. 2002)).
Moreover, the district court could have found the presumption
rebutted by Vivex’s evidence that McQueen was not in fact competing with
DB through his work for Vivex. Vivex’s Vice President of Research and
Development testified that individuals can “work at Vivex effectively
without sharing information about any of Direct Biologics’ plans or
processes;” that “McQueen specifically [has] been precluded from working
in the area of competition between the two companies,” including
7
Different non-compete agreements may be geared towards protecting different
interests, which may factor into whether a district court chooses to infer irreparable harm
from the mere fact of a breach. EMSL Analytical, Inc. v. Younker, 154 S.W.3d 693, 697-98
& n.4 (Tex.App.—Houston [14th Dist.] 2004) (presumption did not apply where “the sole
purpose of the noncompete clause was to enforce the nondisclosure clause” and there was
no evidence that defendant “was currently violating the nondisclosure clause or that there
was any likelihood that she would in the future;” in the alternative, if the presumption
applied, it was rebutted).
10
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allographic products; and that McQueen “abided by that separation.”
Moreover, DB’s president conceded that he had no knowledge of improper
disclosure. To overcome the foregoing evidence, DB pointed to the job
description at Vivex that McQueen applied to, which states that the
individual selected will “[a]ssist in the further launch of ViaDisc,” an
“allograft product.” DB also highlighted testimony by McQueen in which he
is asked about this document, and answered affirmatively when asked
whether “you are expected to assist in the further launch of ViaDisc.” But
McQueen may have simply been confirming what the document said, and as
just noted, the court could have credited the testimony of Vivex’s Vice
President of Research and Development that McQueen was sequestered
from allographic products that compete with DB.
Thus, the district court did not abuse its discretion in declining to
apply a presumption of irreparable harm based on McQueen’s breach of the
non-compete agreement.
B.
After it determined that Texas’ presumption of irreparable harm did
not apply, the district court denied DB’s motion on the ground that it
“proffered no evidence to show that a monetary remedy would be inadequate
compensation for any injury allegedly incurred as a result of McQueen’s
alleged misconduct.” DB II, 2022 WL 1693995, at *8. However, the court:
(i) did not make any findings as to whether it was likely that McQueen would
use or disclose DB’s confidential and trade secret information during the
pendency of the lawsuit (finding only that there was no evidence that he
already used or disclosed such information); and (ii) did not make any
assessment as to whether money damages would be easy or difficult to
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quantify.8 See id. at *6-*8; Cardoni v. Prosperity Bank, 805 F.3d 573, 590 (5th
Cir. 2015) (applying Texas law and affirming district court’s denial of
preliminary injunction based on its “individualized assessment of whether
disclosure had occurred or was likely to occur in this case.”); Allied Mktg.
Grp., Inc. v. CDL Mktg., Inc., 878 F.2d 806, 810 n.1 (5th Cir. 1989) (“We
have recognized that a finding of irreparable harm is appropriate even where
economic rights are involved when the nature of those rights makes
establishment of the dollar value of the loss especially difficult or
speculative.”) (cleaned up).
The district court found insufficient evidence that use or disclosure of
DB’s confidential or trade secret information had occurred, DB II, 2022 WL
1693995, at *7, yet it did not make an “individualized assessment of whether
disclosure . . . [is] likely to occur” between now and final judgment. Cardoni,
805 F.3d at 590 (emphasis added). For instance, the court did not state
whether it credited testimony that McQueen was not involved in any allograft
work. And, as noted, there was some testimony from McQueen from which
a contrary inference could be made. Moreover, although the court noted
McQueen’s testimony that “he has sought to return DB’s confidential
information,” it did not say whether it credited that testimony. DB II, 2022
WL 1693995, at *7. DB, for its part, asserts that McQueen has not yet
returned the files and instead intends to delete the files without properly
preserving important metadata. The district court erred in failing to examine
“items of evidence in the record and articulate[] reasons that would explain”
its apparent conclusion that irreparable harm would be unlikely to occur
8
In addition, the court did not separately analyze DB’s claims under the non-
compete covenants, confidentiality covenants, DTSA, or TUTSA. DB II, 2022 WL
1693995, at *8.
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during the pendency of this litigation. Heil Trailer Intern. Co. v. Kula, 542 F.
App’x 329, 335 (5th Cir. 2013).
The district court also gave short shrift to the fact that, if McQueen
does misappropriate DB’s trade secrets or confidential information during
the pendency of the proceedings, any damages resulting therefrom would be
difficult to quantify. See DB II, 2022 WL 1693995; Sharma v. Vinmar Intern.,
Ltd., 231 S.W.3d 405, 427 (Tex.App.—Houston [14th Dist.] 2007, no pet.)
(“The misuse of trade secrets leading to the loss of an existing business is
another example of irreparable harm entitling an applicant to injunctive
relief.”). On appeal, McQueen notably does not defend the district court’s
position that any harm caused by McQueen’s violations of the non-compete
or misuse of trade secrets would be adequately compensable by monetary
damages, but rather asserts that the evidence showed that he was not likely
to cause competitive harm to DB or misuse such information. Given that
Texas courts have found that “[l]ost opportunity to create or gain control of
a new market may result in unquantifiable losses for which there is no
adequate remedy at law,” the district court erred in failing to analyze whether
the disclosure of DB’s trade secrets during the pendency of this dispute
would cause damages that are easily quantifiable. See, e.g., Allied Mktg. Grp.,
878 F.2d at 810 n.1; Garth v. Staktek Corp., 876 S.W.2d 545, 549 (Tex.
App.—Austin 1994, writ dism’d w.o.j.); T-N-T Motorsports, Inc. v. Hennessey
Motorsports, Inc., 965 S.W.2d 18, 24 (Tex. App.—Houston [1st Dist.] 1998,
pet. dism’d) (“The only effective relief available to appellee is to restrain
appellants’ use of its trade secrets and confidential information pending
trial.”).
Remand is thus proper to allow the district court to make
particularized findings regarding irreparable harm; specifically, the
likelihood of misuse of DB’s information, see Cardoni, 805 F.3d at 590, and
the difficulty of quantifying damages should such misuse occur, see Heil
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Trailer, 542 F. App’x at 335-37 (remanding denial of preliminary injunction
where “the district court examined no items of evidence in the record and
articulated no reasons that would explain this result”). Should the district
court determine that irreparable harm is likely, it should proceed to evaluate
the remaining preliminary injunction factors in the first instance. See Guy
Carpenter, 334 F.3d at 469 (remanding so district court could consider
additional preliminary injunction factors not decided below).
C.
Because we remand this case so that the district court can consider
whether a preliminary injunction should issue in this case, we must also
vacate the district court’s order dismissing DB’s claims against McQueen
and Vivex. The parties do not dispute that DB’s claims must ultimately be
submitted to arbitration, DB II, 2022 WL 1693995, at *9, or that the
arbitration provision contains a specific carve-out allowing courts to rule on
requests for preliminary injunctive relief. However, because the dismissal
below constituted a final judgment, a preliminary injunction cannot be
entered unless that judgment were vacated. See Auto Parts Mfg. Miss., Inc. v.
King Const. of Houston, L.L.C., 782 F.3d 186, 191 (5th Cir. 2015)
(“Permanent injunctions survive dismissal of the case; preliminary
injunctions do not.”). 9 We therefore vacate the district court’s dismissal of
DB’s claims and entry of final judgment.
9
Under the Federal Arbitration Act, a court “shall . . . stay” the proceedings upon
finding that any issue is arbitrable. 9 U.S.C. § 3. The statute makes no reference to
dismissal. Nevertheless, our precedent demonstrates that “dismissal is appropriate when
all of the issues raised in the district court must be submitted to arbitration.” Adam
Technologies Int’l S.A. de C.V. v. Sutherland Global Servs., Inc., 729 F.3d 443, 447 n.1 (5th
Cir. 2013). If, on remand, the district court determines that a preliminary injunction should
issue to preserve the status quo while the arbitration is pending, it should stay the
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IV.
Based on the foregoing, we VACATE the district court’s orders
denying DB’s motion for a preliminary injunction and dismissing DB’s
claims. We REMAND this case with instructions to conduct further
proceedings in accordance with this opinion.
proceedings in lieu of dismissal, 9 U.S.C. § 3, so as to preserve jurisdiction to enforce its
injunction.
15