February 19, 2013 Articles

Preemption of Business Torts under the Uniform Trade Secrets Act

Courts are split on the preemption provisions of the UTSA.

By Peter J. Boyer

The National Conference of Commissioners on Uniform State Laws adopted the Uniform Trade Secrets Act (UTSA) in 1979 and amended it in 1985. Forty-seven states and the District of Columbia have enacted the UTSA; only New York, Massachusetts, and Texas have failed to do so. The UTSA provides statutory recognition and protection for information broadly defined in the statute as a “trade secret.” It also provides specific remedies, including recovery of counsel fees and exemplary damages in some cases, for misappropriation or misuse of information protected by the act. A stated purpose of the UTSA is to establish a uniform and consistent statement of the law with respect to the protection of trade secrets that applied throughout the country in those states that adopted the act. To accomplish this goal, the UTSA provides specific provisions addressing its impact on existing laws with respect to the protection of trade secrets.

The UTSA states the following, at Section 7, entitled “Effect on Other Law”:

(a) Except as provided in subsection (b), this [Act] displaces conflicting tort, restitutionary, and other law of this State providing civil remedies for misappropriation of a trade secret.

(b) This [Act] does not affect: (1) contractual remedies, whether or not based upon misappropriation of a trade secret or (2) other civil remedies that are not based upon misappropriation of a trade secret; or (3) criminal remedies, whether or not based upon misappropriation of a trade secret.

Courts considering this language have struggled with its scope. If information qualifies as a trade secret as defined in the statute, can common-law claims (e.g., unfair business practices, unjust enrichment, or conversion) still protect it? Most courts have said no, that by enacting the statute, the legislature intended to provide the only remedy for misappropriation of a trade secret as defined in the statute, a result that seems mandated by Section 7(a) of the UTSA. If information does not qualify as a trade secret, the answer becomes more problematic. One school of thought says that the preemption provisions of the UTSA were intended to limit judicial protection of confidential information to statutorily defined trade secrets and that, as a result, information that does not meet the statutory definition is not entitled to judicial protection. Another view is that the preemption provisions are limited to statutorily defined trade secrets and that protection of other types of confidential information remains subject to common law as developed in the jurisdiction at issue.

These conflicting approaches reflect two conflicting policy considerations. One desires uniformity, an arguably laudable goal in a high-tech world in which interstate business transactions are commonplace. The other desires to continue to promote and enforce existing common-law policies favoring the protection of confidential business information, even where it does not rise to the level of a trade secret. Those policies, while subject to some variation in different jurisdictions, are well settled. Proponents of the latter view would contend that these policies should not be abrogated.

Recent court decisions have highlighted the conflicting views on this issue, but the trend toward uniformity is winning out; as a result, the window for asserting common-law claims is narrowing. As this trend continues, the significance of the adoption of the UTSA becomes more pronounced.

Two recent California cases—one state and one federal—illustrate this trend. In Silvaco Data Systems v. Intel Corp., 109 Cal. Rptr. 3d 27 (Ct. of App., 6th Dist. 2010), the court focused on the preemption provisions of the UTSA as adopted in California and, drawing an analogy to the impact of the passage of the Uniform Commercial Code, concluded

[T]he Legislature adopted verbatim the commissioners’ declaration that the act should be “applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this title among states enacting it.” This purpose could not be served by merely making the Act . . . supplementary to the notoriously haphazard web of disparate laws governing trade secret liability. The central purpose of the Act was precisely to displace that web with a relatively uniform and consistent set of rules defining—and thereby limiting—liability.

109 Cal. Rptr. 3d at 49 (emphasis in original). Based on this rationale, the court dismissed common-law claims for conversion, unfair business practices, and intentional and negligent misrepresentation, finding that under the facts alleged, any remedy would arise under the UTSA.

In Sunpower Corp. v. Solarcity Corp., 2012 WL 6160472 (N.D. Ca. 2012), the court went a step further and expressly held that the California Uniform Trade Secrets Act (CUTSA) precludes common-law claims even where it is expressly alleged that the information taken does not meet the statutory definition of a trade secret:

In order to state a claim based on the taking of information, a plaintiff must show that he has some property right in such information (i.e. that the information is proprietary). . . . If the basis of the alleged property right is in essence that the information is . . . ‘not generally known to the public’ . . . then the claim is sufficiently close to a trade secret claim that it should be superseded notwithstanding the fact that the information fails to meet the definition of a trade secret. To permit otherwise would allow plaintiffs to avoid the preclusive effect of the . . . [CUTSA]
. . . by simply failing to allege one of the elements necessary for information to qualify as a trade secret. . . . Such a result would subvert CUTSA’s purpose of providing a uniform set of principles for determining when one is—and is not—liable for using information that is not secret when the CUTSA would not impose liability. . . .

2012 WL at 6160472 *5.

 

California is neither the first nor the only jurisdiction to take this view. In Composite Marine Propellers, Inc. v. Van Der Woude, 962 F.2d 1263, 1275 (9th Cir. 1992), the court, applying Illinois law, rejected common-law claims of breach of fiduciary duty and unfair competition in holding that “unless defendants misappropriated a statutorily defined trade secret, they did no legal wrong.” See also CDC Restoration & Constr. v. Tradesmen Contractors, 274 P.3d 317 (Utah App. 2012) (the UTSA preempts claims based on the unauthorized use of information, irrespective of whether that information meets the statutory definition of a trade secret).

On the other hand, some courts continue to take the position that if confidential information is not covered by the statutory definition of a trade secret, it may remain protected under existing common-law or statutory provisions. For example, in Cenveo Corp. v. Slater, 2007 WL 527720 (E.D. Pa. 2007), the court denied a motion to dismiss, asserting common-law claims had been preempted by the UTSA because

If the Court were to dismiss plaintiff’s conversion claim and later make the finding that, although plaintiff had proved that defendants took its pricing structure and business proposals, such information was not a protected trade secret under the PTSA [Pennsylvania Trade Secret Act], the Court would be in the difficult position of telling the plaintiff that it had no remedy.

See also Burbank Greas Services, LLC v. Sokolowski, 294 Wis.2d 274, 298 (2006) (a civil tort claim not grounded in a trade secret, as defined in the Wisconsin UTSA, is not preempted by the act).

In light of the lack of uniform decisions on the important issue of the continued viability of common-law claims, evaluating issues arising under or that may be governed by the UTSA requires careful examination of both the underlying facts and the applicable law.

Practice Pointers
Is There a Confidentiality Agreement?

Regardless of whether information is deemed a trade secret and regardless of whether preemption applies to “non-trade secret information,” the UTSA expressly provides for continued enforcement of contractual agreements to preserve and protect confidential business information. Many employees and some independent contractors who have been granted access to confidential information are asked to sign such an agreement. Assuming there is, you may be able to avoid the preemption issue altogether or assert an alternative claim for breach of contract. If you are seeking to enforce rights to the protection of confidential business information, find out if there is such an agreement. If you are counseling a client who is looking for ways to protect confidential business information, encourage the client to have such an agreement signed by persons given access to that information.

The Broad Scope of the UTSA’s Definition of a Trade Secret  The layperson’s concept of a trade secret (and the concept adopted by some courts in common-law decisions) is narrower than the statutory definition under the UTSA. A trade secret under the statute is not just a formula or a compilation of technical information or processes. While the classic example of the Coca-Cola formula would still qualify as a trade secret, the statutory definition includes anything that “derives economic value from not being generally known, and not readily ascertainable by proper means, by other persons who can obtain economic value from its use” and “which is the subject of reasonable efforts to maintain its secrecy.” UTSA § 1. For example, while there was some debate under the common-law decisions whether a customer list should be considered a trade secret, it would seem to clearly fall within the definition of a trade secret under the UTSA, and most courts confronting the issue have so held, assuming reasonable steps have been taken to protect its confidentiality. Indeed, some states, including Pennsylvania and Connecticut, have expressly included customer lists in the statutory definition of a trade secret. 12 Pa. C.S.A. § 5302; C.G.S.A. § 35-51.

Research Local Nuances in the Applicable Jurisdiction
Like many uniform laws, the UTSA is not truly uniform throughout the country. There are variations in statutory language and judicial construction of that language in different jurisdictions. Despite the stated goal of uniformity, careful analysis of the statutory language and judicial interpretation in the applicable jurisdiction is critical to advising your client and achieving your client’s objectives. Be mindful of the three-year statute of limitations for statutory claims under the UTSA, which may be shorter, in some cases, than common-law claims that existed prior to the adoption of the UTSA.

Enactment of the UTSA in most jurisdictions is a laudable step in recognizing and enforcing the protection of trade secrets and providing uniformity in its application. In order to advance the uniformity of application, the law expressly provides for statutory preemption of common-law claims protecting trade secrets. However, the expansion of the preemption doctrine by some courts to include preemption of common-law claims relating to information that does not strictly qualify as a trade secret has resulted in a lack of uniformity with respect to the continued viability of those claims. As a result, practitioners should pay close attention to the current law in the jurisdiction at issue and advise their clients accordingly.

Keywords: litigation, business torts, trade secrets, confidential information, preemption, misappropriation

Peter J. Boyer – February 19, 2013