Permanent Injunctions and The Erie Problem

God help us all!

I am discussing the Erie v. Tompkins case from 1938. This was like the fourth most annoying case from law school, and I thought I left it once and for all in Champaign, Illinois in 1997.

But it rears its head - fittingly so, perhaps - in the tragicomedy known as E.I. duPont v. Kolon Industries. The issue, though, is one that is likely to repeat, so if for no other reason than I feel an obligation to get this issue on the table, I have to discuss this. And it's somewhat surprising that I haven't seen it come up much before.

The issue, put simply, is this: does federal or state law apply to determining whether to issue a permanent injunction in a diversity case for violation of the trade secrets act?

Why is this issue important? For injunctions arising under federal law, courts apply the so-called eBay test that requires a court to examine four factors before awarding a permanent injunction: (1) irreparable injury, (2) inadequate remedy at law, (3) balance of hardships favoring the plaintiff, and (4) that the public interest is not disserved by issuing an injunction.

This differs from the state-law approach. In many states, courts have held that if a statute authorizes a court to issue an injunction, then a plaintiff need not prove irreparable harm. Demonstrating success on the merits is enough.

Trade secrets law is governed by state law. And every state that has adopted the Uniform Trade Secrets Act (47 states) allows for injunctions to issue in trade secrets cases.

So in Kolon Industries, the Eastern District of Virginia found that the Erie doctrine applies, and a federal court must apply state substative law to determine whether a permanent injunction remedy is appropriate in a trade secrets case. Erie basically says this: on a matter of substance, a federal court must apply the law of forum state. On procedural issues, federal law applies.

My problem is not so much with the Erie-based holding in Kolon Industries, because it is hard to see a permanent injunction order as anything other than substantive. But state laws that do not apply an eBay-like test, to me, make no sense. It should never follow that because a legislature has authorized an injunction for a violation of a state statute, that the injunction should automatically be entered.

This is particularly the case when the plaintiff has damages remedies available to it. In the Kolon Industries case, DuPoint obtained compensatory damages of $919.9 million. I can see where an injunction should automatically follow if the statutory violation does not allow for the recovery of damages, such as in the case of some deceptive trade practices statutes. Or in the case of a prophylactic law applicable to a regulated industry.

But when a damages remedy is available (and indeed has been awarded), it is short-sighted to rely on the fact that a statute has authorized injunctive relief to award injunctive relief. This is not to say, of course, that Kolon Industries was wrongly decided on DuPont's entitlement to an injunction, which was clearly warranted on the facts.