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April 20, 2023 Articles

How Can Litigators Avoid Preemption to Protect Company Trade Secrets and Confidential Information?

Statutes such as the Uniform Trade Secrets Act and Defend Trade Secrets Act may preempt common-law remedies for violations of trade secrets, but certain strategies could allow for litigation of broader claims.

By Parker E. Thoeni and Courtney B. Amelung

Companies are increasingly eager to take action to protect their confidential corporate information and trade secrets. And rightfully so—if such information ends up in the hands of someone willing to wrongfully use or disclose it, the consequences could be significantly damaging for the company. Fortunately, a variety of legal claims can be invoked when confidential and proprietary information or trade secrets have been misappropriated. Statutory remedies are available under the Uniform Trade Secrets Act (UTSA) and Defend Trade Secrets Act (DTSA), for example, and common-law claims such as breach of contract, tortious interference, conversion, and breach of fiduciary duty may be asserted as well. That said, there is a substantial risk that state common-law claims will be challenged as preempted by the UTSA, especially if all of the claims are based on the same set of operative facts. The extent of the UTSA’s preemptive effect also depends on the jurisdiction in which the claims are filed.

What Is the Uniform Trade Secrets Act?

The UTSA prohibits the misappropriation or improper disclosure of trade secrets. Under the statute, trade secrets are specifically defined as any information “including a formula, pattern, compilation, program, device, method, technique, or process” that has independent economic value. To create uniformity and predictability for companies operating throughout the United States, nearly all states and the District of Columbia have adopted some version of the UTSA.

Significantly, the UTSA expressly preempts conflicting tort, restitutionary, and other state law claims, providing civil remedies for misappropriation of a trade secret. The UTSA does not, however, preempt contractual remedies (whether or not based on misappropriation of a trade secret) or other civil remedies that are not based on misappropriation of a trade secret.

The UTSA’s Preemption Conundrum

Despite the desire for uniformity, courts interpreting their respective states’ versions of the UTSA have not consistently interpreted and applied the UTSA’s preemption provision. Rather, courts have come to varying conclusions about the preemption provision’s intended scope—namely, whether it preempts claims related to confidential information that does not necessarily or in fact constitute a trade secret as defined by the UTSA.

The conflicting views have routinely been divided into two camps. The “majority view” takes the position that if something is or is alleged to be a trade secret in the complaint, then all common-law claims (except for breach of contract) are preempted by the UTSA, regardless of whether the information at issue falls squarely within the statutory definition of a trade secret. In other words, the UTSA preempts all common-law claims related to misappropriation of confidential or proprietary information. The “minority view” applies a more stringent preemption analysis, holding that only claims involving information that meets the statutory definition of a trade secret are preempted. To the extent the information at issue does not meet that definition, the plaintiff is free to pursue other state law remedies.

How to Preempt the Preemption Provision

The scope of the UTSA’s preemption provision remains a subject of serious debate, with courts continuing to issue varying opinions. This lack of certainty can be not only confusing but also frustrating, as companies may have a protectable interest in confidential or proprietary information that does not rise to the definition of a “trade secret.” However, there are steps a company can take to ensure that all of its confidential information remains protected.

As previously mentioned, the scope of the UTSA’s preemptive impact varies between jurisdictions. The bottom line is that if any common-law claims are grounded in the same set of facts that support a UTSA claim, there is a significant possibility those common-law claims will be preempted. To ensure the protection of all forms of confidential information, particularly information that does not qualify as a trade secret, companies should be sure to clearly allege separate claims that are supported by facts unrelated to alleged trade secret misappropriation. In other words, make sure the facts underlying the alleged misuse of trade secrets are distinguishable from the facts underlying the alleged misuse of other confidential or proprietary information. Doing so will result in a greater likelihood that the common-law claims will be permitted to proceed.

In addition, keep in mind that there are other statutory claims available that can be relied on in the event of trade secret misappropriation. The DTSA provides a federal private cause of action for trade secret misappropriation. Although it is modeled after the UTSA, unlike that statute, the DTSA supplements, but does not preempt, state law claims for misuse of confidential or proprietary information. Therefore, claims for trade secret misappropriation may be pursued simultaneously under both the DTSA and state common law.

Finally, breach of contract claims are never preempted by the UTSA—regardless of whether or not the alleged breach is based on a misappropriation of trade secrets. Consequently, companies would be wise to rely on employment, confidentiality, or nondisclosure agreements to protect any confidential or proprietary information that does not constitute a trade secret. The terms “confidential” and “proprietary” are not defined by statute, meaning that companies have discretion in determining the scope of those terms and can more broadly define the type of information that cannot be disclosed or misappropriated.

Ditch the “Kitchen Sink” Approach to Litigating

Plaintiffs tend to think that they gain leverage in litigation by pursuing any and all claims that could potentially be viable and seeing what ultimately sticks. This type of “kitchen sink” approach is not advisable when it comes to litigating the misappropriation of confidential company information, especially where trade secrets are involved. Instead, companies would benefit from strategic and deliberate consideration about the type of confidential information at issue and, therefore, the types of claims that can be pursued without the risk of preemption.

Parker E. Thoeni and Courtney B. Amelung are with Shawe Rosenthal in Baltimore, Maryland.

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