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Attorney’s Fees Properly Awarded in Unsuccessful Trade Secret Misappropriation and Civil Theft Suit

The US Court of Appeals for the Fifth Circuit affirmed a take-nothing judgment and an attorney’s fees award against plaintiffs in a trade secret misappropriation and civil theft suit under Texas law, finding that the fee award did not need to be segregated to various claims. ATOM Instrument Corp. v. Petroleum Analyzer Co., L.P., Case Nos. 19-29151, -20371 (5th Cir. Aug. 7, 2020) (Southwick, J.). The Court also remanded for an additional award of appellate attorney’s fees.

Olstowski was a consultant for Petroleum Analyzer Co., L.P. (PAC), during which time he developed a krypton-chloride-based excimer lamp to detect sulfur with ultraviolet fluorescence. Although he developed the lamp independently, he used PAC resources to test the technology.  Olstowski and PAC negotiated but failed to agree on licensing. Olstowski founded ATOM Instrument to assist him in the licensing discussions. Subsequently, PAC filed a declaratory judgment action in Texas court alleging that it owned the lamp technology. The state court ordered the claim to arbitration. The arbitration panel declared Olstowski the owner of the technology and enjoined PAC from using it. The state court confirmed the arbitral award, and a Texas appellate court upheld the confirmation order.

PAC thereafter developed a new sulfur-detecting excimer lamp called MultiTek that also used krypton-chloride with UV fluorescence. Olstowski and ATOM filed in state court for contempt of the injunction, but the state court denied the contempt motion as moot because PAC had ceased selling MultiTek.

ATOM filed for bankruptcy the following year. Olstowski and ATOM initiated a district court proceeding against PAC alleging misappropriation of trade secrets, unfair competition and civil theft. After holding a bench trial, the court found that MultiTek did not practice Olstowski’s technology and therefore entered a take-nothing judgment in favor of PAC. The district court also awarded attorney’s fees to PAC under a provision of the Texas Theft Liability Act (TTLA) that awards fees to prevailing parties. Olstowski and ATOM appealed both issues, and PAC sought an award of its appellate attorney’s fees.

As to liability, ATOM argued that the district court erred in finding that the MultiTek lamp did not practice Olstowski’s technology. ATOM characterized the error as a legal one regarding interpretation of the arbitral award, but the Fifth Circuit held that “whether one company used another’s protected technology” is a factual question for which Olstowski and ATOM had failed to carry the burden of proof at trial. ATOM further argued that the district court had ignored the alleged law of the case in deviating from the scope of technology defined in the arbitral award, but the Court again rejected ATOM’s argument because the district court had explicitly stated that the description of Olstowski’s technology in the arbitral award remained in effect.

As to the award of attorney’s fees, ATOM argued that the district court had not appropriately segregated fees related to the TTLA claim from those related to other claims. Applying Texas law, the Fifth Circuit affirmed that the TTLA claim was sufficiently related to the other claims [...]

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Can’t Overturn Jury Verdicts Based on Reasonable Inferences, but Broad Injunction Is Nonstarter Even for Willfully Misappropriated Trade Secrets

In a rare appellate trade secret opinion, the US Court of Appeals for the Eleventh Circuit affirmed a district court’s denial of a defendant’s request for a new trial on liability and its refusal of the plaintiff’s requested injunction. It also reversed in part the district court’s denial of judgment as a matter of law (JMOL) on damages for clear error because the plaintiff failed to deduct marginal costs when calculating lost profits. Financial Information Technologies v. iControl Systems, Case No. 20-13368 (11th Cir. Dec. 22, 2021) (Jordan, Newsom, JJ., and Burke, Distr J.).

Competitors Financial Information Technologies (Fintech) and iControl Systems both sell software that processes alcohol sales invoices within 24 hours. Fintech was a lone operator for several years until iControl started servicing the alcohol industry and began selling a very similar product at a lower price point. After Fintech lost its vice president of operations (who was very involved in designing Fintech’s software), a sales representative and several customers to iControl, Fintech filed suit alleging misappropriation of trade secrets. The jury ruled in Fintech’s favor and awarded compensatory and punitive damages. iControl sought a new trial on liability, contending that Fintech’s alleged trade secrets were readily ascertainable and not “secret,” and JMOL on damages since Fintech hadn’t proved lost profits because it hadn’t deducted fixed and marginal costs from its lost revenue calculations. Fintech sought a permanent injunction prohibiting iControl from using either company’s software. The district court denied all three motions, and both parties appealed.

As to the jury verdict, the Eleventh Circuit noted that jury liability findings are generally difficult to overturn, and that the verdict was general and nonspecific regarding which of the seven alleged trade secrets iControl had misappropriated, so Fintech only needed to show evidence under the Florida Uniform Trade Secrets Act (FUTSA) of misappropriation as to one. iControl also did not move for JMOL on liability, and therefore, under the abuse-of-discretion standard of review, the Court could only overturn if “there is an absolute absence of evidence to support the verdict.” However, the Court found that Fintech and its witness presented sufficient evidence at trial to permit a reasonable jury to find that Fintech possessed at least one of the seven alleged trade secrets and that it was misappropriated. The evidence included emails indicating that its former vice president helped iControl discover Fintech’s internal processes to aid software developments, assisted iControl’s chief technology officer in troubleshooting issues in a manner similar to Fintech, shared screenshots of Fintech’s user portal and prompted customers to switch to iControl.

Similarly, the Eleventh Circuit found that the jury reasonably could have inferred from the evidence that iControl schemed to hire Fintech employees to misappropriate Fintech’s software features—an act that demonstrated willfulness.

After assessing the meanings of fixed and marginal costs and the properly fact-intensive revenue and profits figures of the businesses, the Eleventh Circuit agreed that the jury was not required to deduct Fintech’s fixed costs from its revenues to arrive at a proper “actual [...]

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How Not to Build a Case of Trade Secret Misappropriation

The US Court of Appeals for the Ninth Circuit affirmed a dismissal of trade secret claims, finding that although misappropriation of a trade secret prior to the enactment of the Defend Trade Secrets Act (DTSA) does not preclude a claim arising from post-enactment or continued use of the same trade secret, the publication of a trade secret in a patent application extinguishes trade secret status. Eli Attia; Eli Attia Architect PC v. Google LLC, et al., Case No. 19-15771 (9th Cir. Dec. 16, 2020) (Wallace, J.)

Eli Attia is an architect who developed a system and method for automated design, fabrication and construction, called Engineered Architecture (EA). In 2010, Attia entered into a partnership with Google. Attia disclosed his trade secrets related to the technology to Google so that they could work together to develop a program that would implement EA. Attia executed patent assignments with Google, and a year later Google filed patent applications related to the EA trade secrets. The patents were published in 2012. Google then allegedly excluded Attia from the project and used EA to create Flux, a platform used by architects, engineers and construction workers, focused on making buildings more efficient and using artificial intelligence to streamline the design process.

In 2014, Attia sued Google under state law for trade secret misappropriation and breach of contract. In 2016, Congress enacted the DTSA. Since its inception, DTSA has been an enumerated predicate for the civil Racketeer Influenced and Corrupt Organizations Act (RICO), which means that plaintiffs can bring lawsuits claiming a conspiracy when theft of trade secrets is an underlying claim. Attia amended his complaint to add RICO claims based on Google’s alleged trade secret misappropriation. Google removed the action to federal court and moved to dismiss. Attia filed another amended complaint, this time asserting a new DTSA claim and two RICO claims.

The district court dismissed Attia’s federal claims with prejudice and declined to exercise supplemental jurisdiction over the state law claims. The district court found that the alleged trade secrets were already disclosed in Google’s 2012 published patent applications, and those publications extinguished the relevant trade secrets. The court held that Attia lacked standing to assert DTSA or RICO claims, and neither estoppel nor continued use could convert the 2012 publications into a DTSA violation. Attia appealed.

On appeal, the Ninth Circuit noted that the issue was one of first impression before the Court, and set out to determine whether, as a matter of law, the pre-enactment disclosure of a trade secret forecloses the possibility of a DTSA claim arising from the continued use of the trade secret after enactment. The Uniform Trade Secrets Act (UTSA), the established model statute for trade secret misappropriation that has been adopted by the majority of the states, contains an anti-continued use provision, the Court noted. The UTSA states that “ a continuing misappropriation that began prior to the effective date,”… “does not apply to the continuing misappropriation that occurs after the effective date.” The DTSA does not [...]

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Defend Trade Secrets Act Supports Sealing Information on Appeal

Addressing whether purported trade secret information ought to remain under seal on appeal, the US Court of Appeals for the Sixth Circuit ruled in a one-judge order that the Defend Trade Secrets Act (DTSA) provided a statutory basis that overcame the presumption of public access. Magnesium Machine, LLC v. Terves, LLC, Case No. 20-3779 (6th Cir. Dec. 10, 2020) (McKeague, J.)

This case presented the issue of what part of a record may be sealed on appeal—normally a routine question—in litigation that was anything but routine. According to the verified complaint, Magnesium Machine discovered a particular salt-based treatment for use on oil and gas tools. According to Magnesium, in the course of litigating a patent infringement suit against one of Magnesium’s suppliers, Terves and its counsel, McDonald Hopkins, obtained information reflective of Magnesium’s alleged trade secret from a third party pursuant to subpoena. Specifically, Magnesium claimed that particular language in a settlement agreement disclosed Magnesium’s trade secrets. The settlement agreement had been produced by the third party without any confidentiality designation. The complaint alleged violations of the federal DTSA and Oklahoma and Ohio state trade secrets acts.

Invoking the seizure provisions of the DTSA, Magnesium sought and obtained an ex parte order directing the US Marshals to seize Terves’s electronic equipment, including devices at Terves’ president’s home. That order did not last long. Following an evidentiary hearing (in which Terves participated) the day after the order was issued, the district court vacated the seizure order because Magnesium had not demonstrated misappropriation of a trade secret.

To appeal, Magnesium requested express findings of fact and conclusions of law. The district court explained that Terves and its lawyers subpoenaed materials in good faith, that the settlement agreement was produced without restriction (such as a confidentiality marking), that Terves’s lawyers did not impermissibly share the settlement agreement with Terves employees and that upon objection by Magnesium, Terves deleted its copies of the settlement agreement. Thereafter, on motions to dismiss, the district court concluded that Magnesium failed to allege misappropriation and that the litigation privilege protected Terves’ counsel.

Terves sought and obtained attorneys’ fees against Magnesium and its counsel for proceeding in bad faith. The district court found that Magnesium had every reason to know that its claims were baseless, because it was “well aware at the time the suit was filed that Defendants had received the allegedly secret information through legitimate discovery means and that it was provided to them without description.” Moreover, claiming that a three-word phrase in the settlement agreement purportedly disclosed trade secret information was “an intentional exaggeration/misrepresentation.” Indeed, other public statements had provided far more detail than the purportedly secret phrase, according to the district court.

On appeal, although Terves contended that the purported trade secret did not qualify as a secret, in the exercise of caution and on Magnesium’s request, Terves nonetheless sought to file a brief under seal. Judge David McKeague, acting on behalf of the Sixth Circuit, agreed that it was appropriate to seal the information, [...]

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Trade Secret Misappropriators Fail to Launch in Rocket Facility

Addressing a variety of challenges to a judgment against defendants in a trade secret misappropriation action, the US Court of Appeals for the Third Circuit found that the plaintiff had standing on the basis of lawful possession (as opposed to ownership) of the trade secret materials and that the damages awarded, including punitives, was supported by sufficient evidence. Advanced Fluid Systems, Inc. v. Huber, Case Nos. 19-1722; -1752 (3d Cir. Apr. 30, 2020) (Jordan, J.).

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New WDTX Order Shakes Up Initial Judge Assignments

A recent order from Chief Judge Garcia of the US District Court for the Western District of Texas (WDTX) changes how judges are initially assigned to cases filed in its Waco Division. As of July 25, 2022, patent cases filed in the Waco Division shall be randomly assigned to one of 12 judges. The list includes at least one judge from each of the district’s seven divisions. The order states that the new practice is due to “consideration of the volume of new patent cases assigned to the Waco Division, and in an effort to equitably distribute those cases.”

It’s no secret that the Waco Division has been a magnet for patent lawsuits in the last four years. The only judge in Waco—Judge Alan D. Albright—has presided over more than 2,500 patent cases since September 2018. Those 2,500 patent cases account for about 17% of all patent cases filed nationally in district courts in that timeframe. Plaintiffs’ preference to file in Waco is due in part to Judge Albright’s knowledge of patent cases, his interest in patent cases and his promulgation of local patent rules aiming for a predictable and quick path to trial.

Although Waco cases may now initially be assigned to other judges, whether they choose to keep the assignments remains to be seen. The recent order contains a footnote stating that its previous order for assigning judges “remains in full force and effect.” That previous order allows judges to reassign any case “by mutual consent.” (See Item XVIII(a).) Thus, judges may self-select out of these cases. A large criminal docket is one example of why a judge might self-select out of a patent case.

Even if another judge is assigned and decides to keep a Waco patent case, it remains to be seen whether they will adopt Judge Albright’s local patent rules. Judge Albright has put extensive efforts into the local rules, including procedures related to discovery disputes, pre-Markman discovery, Markman hearings, infringement and invalidity contentions, US Patent & Trademark Office inter partes review effects and more. His cases have averaged about eight months to a Markman hearing and about 24 months to trial. Other judges may decide to make use of that framework to save time and effort or to avoid inconsistencies within the division.

Stay tuned for updates as this new assignment practice unfolds and more patent cases are assigned.




Breach of Confidentiality Claim Survives Motion to Dismiss under Anti-SLAPP Law

The Court of Appeals of Texas (Fourth District) upheld a trial court’s order denying a motion to dismiss a breach of confidentiality agreement claim pursuant to the Texas Citizens Participation Act (TCPA), which is designed to protect people from strategic lawsuits against public participation (SLAPP). Harper v. Crédito Real Bus. Cap., Case No. 21-0212 (Tex. App. July 20, 2022) (Martinez, Chapa, Watkins, JJ.)

Crédito Real Business Capital (CRBC) leases equipment and provides financing services to companies in the construction industry. CRBC provides its services through two limited liability companies: CR-FED and CR-FED Leasing. Earl Harper previously worked for CRBC as executive vice president and was required to sign a confidentiality agreement with CR-FED stipulating that he would not share its confidential information with third parties.

CRBC advanced money and leased equipment to Ontrack Site Services, a site grading contractor and customer with whom Harper worked. As part of his employment, Harper was provided with confidential information regarding CRBC’s plans and projections for its relationship with Ontrack, including CRBC’s willingness to extend additional financing or leasing services to the contractor. Harper allegedly used this information to help Ontrack negotiate better lease rates and financing terms to CRBC’s detriment. CRBC terminated Harper’s employment. Harper subsequently joined a new company and advised Ontrack to obtain financing from that company instead of CRBC.

CRBC sued Harper for breach of fiduciary duty and breach of contract for misappropriating CRBC’s trade secrets and breaching the confidentiality agreement. Harper filed a motion to dismiss the breach of contract claim pursuant to the TCPA, under which a party can file a motion to dismiss a lawsuit if it “is based on or is in response to a party’s exercise of the right of free speech, right to petition, or right of association.” The trial court denied the motion. Harper appealed, contending the following:

  • CRBC’s breach of contract claim related to Harper’s exercise of free speech.
  • CRBC did not establish a prima facie case of its breach of contract claim.
  • The trial court improperly considered CRBC’s amended petition.

A motion to dismiss pursuant to the TCPA is evaluated under a three-step burden shifting framework:

  • The movant must first demonstrate that the legal action is based on the movant’s exercise of the right to free speech, the right to petition or the right to association.
  • The nonmovant must then establish a prima facie case of its claim.
  • If the nonmovant satisfies its burden, the action must still be dismissed if the movant establishes grounds on which it is entitled to judgment as a matter of law.

The Texas Court of Appeals first addressed whether the trial court was permitted to consider CRBC’s amended petition when it ruled on the motion to dismiss. CRBC’s amended petition merely clarified that “CRBC” was the assumed name for both CR-FED and CR-FED Leasing, rather than just CR-FED. Because the amended petition was filed well before the hearing date and did not include any element of surprise, the Court concluded that [...]

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Stormy Weather Ahead: Lack of Causation Evidence Rains Out Appeal

The US Court of Appeals for the Tenth Circuit found that a trade secret owner lacked “non-speculative and sufficiently probative evidence of a causal nexus between Defendants’ alleged bad acts and [the trade secret owner’s] asserted damages,” and upheld a lower court’s summary judgment ruling for defendants. GeoMetWatch Corp. v. Hall, et. al, Case No. 19-4130 (10th Cir. June 29, 2022) (Holmes, Kelly, Lucero, JJ.)

GeoMetWatch (GMW) alleged misappropriation of trade secrets and multiple other complaints against several different groups of defendants, including the Hall defendants, Utah University Advanced Weather Systems Foundation (AWSF) defendants, and Utah State University Research Foundation (USURF) defendants. The lower court granted summary judgment to all defendants based on lack of non-speculative causation relating to lost profits, to the USURF and AWSF defendants based on governmental immunity under Utah law, and to AWSF on its contractual counterclaim. GMW appealed.

Background

GMW launched a venture for a new satellite-based weather-detecting senor system developed by USURF. GMW entered into a cooperation agreement with AsiaSat, a foreign commercial satellite operator on which GMW relied to secure funding from Export-Import Bank. There were two conditions precedent before AsiaSat would seek the loan: a guarantee for the loan and a convertible note. The Hall defendants were brought in to possibly provide the guarantee, and with the understanding that Hall would maintain confidentiality of GMW’s information. After reviewing the confidential information, Hall entered into a nondisclosure agreement (NDA) with GMW. Despite the NDA, Hall launched a competing company and sent a series of inflammatory emails regarding the state of GMW to AsiaSat. These actions became the basis for GMW’s complaint of trade secret appropriation. After failing to make payments to AWSF for the construction of the senor, and despite finding a replacement manufacturer, GMW never satisfied either of the conditions precedent and AsiaSat never applied for the loan. GMW eventually ran out of money and filed the underlying suit.

GMW argued that its lost profits stemmed from its failure to secure a loan with AsiaSat and Export-Import Bank because of the defendants’ trade secrets misappropriation and other bad acts. GMW relied on evidence such as a series of inflammatory emails from Hall stating that “GMW is in Trouble,” along with an invitation to do business with a new company that the Hall defendants launched reviewing GMW’s confidential information. The lower court found that GMW had failed to provide more than speculative evidence that the defendants’ actions, with or without GMW’s confidential information, caused GMW’s lost profits.

The Tenth Circuit’s Ruling

At the Tenth Circuit, GMW argued that the lower court ignored “non-speculative” evidence from which it could be inferred that the defendants’ actions were the cause of lost profits. The Court noted that the district court found that none of GMW’s experts actually opined that any of the defendants’ actions caused the lost profits. Although one expert put forth a theory based on GMW losing its “first-mover advantage,” the Court found that no specific facts were offered to support this theory. The [...]

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No Breach of Contract Where Company Disclosed Its Own Non-Public Information

The US Court of Appeals for the Eighth Circuit affirmed a district court’s dismissal of a trade secret lawsuit against a consultant that allegedly failed to prevent its client from disclosing its own proprietary information during a call with a potential buyer. Protégé Biomedical, LLC v. Duff & Phelps Securities, LLC, and Philip I. Smith, Case No. 21-1368 (8th Cir. Apr. 4, 2022) (per curiam) (Erickson, J., dissenting).

Protégé entered into an agreement with Duff & Phelps to help Protégé find a buyer for its business. Under the agreement, Duff & Phelps received immunity from certain types of claims, its employees were shielded from individual liability and it owed no fiduciary duties to Protégé.

One of Protégé’s competitors, Z-Medica, was identified as a potential buyer. One of Duff & Phelps’s employees, Philip Smith, facilitated execution of the non-disclosure agreement (NDA) by a member of Z-Medica’s board of directors. Protégé assumed that the NDA would also bind Z-Medica and thus participated in conference calls with Z-Medica in which Protégé revealed non-public information. In Z-Medica’s view, however, the board member signed the NDA in his personal capacity and not as Z-Medica’s representative. As a result, Z-Medica used the information it received from Protégé to create its own competing product.

Protégé sued Z-Medica. After settling with Z-Medica, Protégé sued Duff & Phelps and Smith in state court for breach of contract, unlawful practice of law, negligence, breach of professional services and breach of fiduciary and principal-agent duties. Duff & Phelps removed the case to federal court on the ground that Smith, the only non-diverse defendant, had been fraudulently joined. The district court dismissed the case for failure to state a claim. Protégé appealed.

The Eighth Circuit first analyzed whether the case belonged in federal court. The Court upheld the district court’s determination that Smith was fraudulently joined. The Court stated that fraudulent joinder occurs when there is no reasonable basis in fact and law for the claims brought against the non-diverse defendant. Here, the Court found that there was no reasonable basis for Protégé to allege breach of contract against Smith since he was never a party to the contract between Protégé and Duff & Phelps. The Court found that Protégé’s unlawful practice of law claim against Smith also constituted fraudulent joinder because Smith never gave legal advice to Protégé. The Court noted that the contract immunized Smith from Protégé’s other claims and thus, without any viable claims against Smith, the case was properly in federal court under 28 U.S.C. § 1332.

Turning to the merits of the claims against Duff & Phelps, the Eighth Circuit affirmed the dismissal for failure to state a claim. The Court reasoned that Protégé’s breach of contract claim was predicated on an alleged failure by Duff & Phelps to prevent Protégé from disclosing its proprietary information. However, the agreement only made Duff & Phelps responsible for its own conduct, not for Protégé’s conduct. The Court explained that Protégé’s other claims failed for the same reason.

Judge Erickson [...]

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No Service, No Notice

Addressing the notice requirements of Fed. R. of Civ. Pro. 65(a)(1), the US Court of Appeals for the Fifth Circuit vacated a preliminary injunction, finding that the aggrieved party did not have sufficient notice of the possibility of a preliminary injunction. Document Operations, L.L.C., v. AOS Legal Tech., Inc., Case No. 20-20388 (5th Cir. Aug. 23, 2021) (Per Curiam) (unpublished).

In 2017, Doc. Ops. entered into a licensing agreement by which AOS Japan would serve as the company’s exclusive representative and marketing provider in Japan for its virtual data room technology. Later, Doc. Ops. learned that a competing product known as AOS VDR had been developed by AOS Korea and would soon be marketed in the two Asian countries. Despite protests from AOS Japan that AOS Korea developed AOS VDR independently, Doc. Ops. filed suit alleging violation of the Texas Uniform Trade Secrets Act and for common law breach of contract, fraudulent inducement, conversion, civil conspiracy and breach of fiduciary duty.

The licensing agreement mandated that AOS Japan protect Doc. Ops.’ confidential information and also prohibited AOS Japan from acting to “represent, promote, develop, or otherwise try to sell within [Japan] any lines of product that. . . compete with [the technology].” Doc. Ops. sought a temporary restraining order (TRO) as well as preliminary injunction and filed and emailed copies of the complaint and TRO motion to AOS representatives. Once a Zoom hearing was scheduled, Doc. Ops. again contacted AOS to inform it of the hearing date. When AOS failed to appear at the hearing, the district court chose to reschedule the hearing three weeks later in order to ensure that AOS was aware of the hearing.

During this three-week interval, Doc. Ops. continued to communicate relevant dates and filings with AOS, which had appointed Texas-based counsel. One of these communications included a letter from Doc. Ops. to the district court stating that if the district court granted its TRO motion, Doc. Ops. would seek to conduct limited expedited discovery to prepare for a subsequent preliminary injunction. AOS failed to appear at the second hearing, stating that it would not appear until served with process. Subsequently, the district court not only granted the TRO motion and the related request for expedited discovery but also issued a preliminary injunction against AOS. AOS appealed both the preliminary injunction and the order granting expedited discovery.

The Fifth Circuit first explained that Rule 65 requires sufficient notice for a preliminary injunction, which the Supreme Court of the United States has interpreted as implying a hearing where the defendant is given a fair opportunity to oppose the preliminary injunction. The Court contrasted the notice requirement for preliminary injunctions from the more informal notice requirement for TROs. While TRO hearings are sometimes converted into preliminary injunction hearings, this conversion has two requirements: Sufficient notice and an opportunity to meaningfully prepare and respond.

The Fifth Circuit found that while AOS certainly had notice that a preliminary injunction was looming, it lacked sufficient notice that this relief would [...]

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