The Labor & Employment Law Blog Focusing on legal trends in data security, cloud computing, data privacy, and anything E

Trade Secret Defendants Beware: The Danger of Stipulated Injunctions

Posted in Trade Secrets and Competition

The Cruel Lessons of Wanke, Industrial, Commercial, Residential, Inc. v. Keck  (2012) 209 Cal.App.4th 1151

By:      Charles L. Post

Defendants in trade secret and unfair competition cases often have fewer resources than the plaintiff companies that bring them.  This is often the case in “classic” trade secret misappropriation scenarios: former employees form a new company to compete against their former employer.  The former employer sues alleging that the new company is unfairly using the former employer’s customer information.  The former employer runs to court seeking injunctive relief and burdening the new company with enormous legal fees.   Faced with such a threat, many defendants are tempted to agree to almost anything to get rid of the lawyers.  Often those settlements include stipulated injunctions that prohibit the defendants from doing business with the former employer’s customers.  These are settlements that defendants can later come to regret.

In Wanke v. Keck, a water proofing systems company sued two former employees and their new company WP Solutions for misappropriation of trade secrets and unfair competition.  The defendant settled, agreeing to pay the plaintiff $38,000 and stipulating to the issuance of an injunction which prohibited the defendants from “contacting or soliciting any person, entity, project owner or representative” on a customer list attached to the stipulation.  The Court entered the injunctive relief order and the case settled.  Several years later, Wanke moved to enforce the settlement agreement and hold the defendant in contempt for violation of the stipulated injunction.  At the hearing on these applications in the trial court, Keck and the other defendants defended on the grounds that the stipulated injunction was invalid, constituting an invalid agreement not to compete in violation of California’s Business and Professions Code section 16600.  Keck had a point.  In California, except where based on use of trade secret information, agreements between competitors not to compete or solicit particular customers are generally invalid.  Based on that reasoning, the Court found that Keck and the other defendants were not in contempt of violating the stipulated injunction.

The Wanke case contains many interesting holdings (including a fascinating conclusion that a trial court’s “acquittal” of a person accused of criminal contempt can never be reviewed by a court of appeal without violating the U.S. Constitution’s prohibition against double jeopardy).  Most important, however, is the Court’s decision that a stipulated injunction will be binding absent a showing that the Court lacked jurisdiction to issue the injunction in the first instance.

Among other things, the Court held that a party may successfully defend against the enforcement of an injunction on the ground the injunction is invalid only in the narrow circumstance in which the party can demonstrate that the injunction was beyond the trial court’s jurisdiction to issue it.  Thus, even an injunction which is offensive to California law, when issued by force of the parties’ stipulation to its issuance, will remain enforceable unless the issuing court lacked subject matter jurisdiction to issue the injunction in the first place.  In plainer language, what this means is that if you stipulated to an injunction, even if that injunction is overbroad or subject to numerous legal challenges as to its scope and enforceability, those objections will be waived forever once the party stipulates to it.

Defendants eager to escape the costs and pressures of a trade secret misappropriation or unfair competition lawsuit should think carefully about entering into a stipulated injunction in order to end a lawsuit.  It is all too easy for a defendant in that circumstance to rapidly agree “not to use anything of theirs” without realizing that the issuance of a stipulated injunction is a hammer that the former employer may hold over the head of the former employee for the term of the injunction.  Defendants are well advised to think long and hard about giving their enemies such a weapon.