I can say “CUTSA preemption” and see eyes begin to immediately glaze over. Even those who follow trade secrets closely sometimes have to stifle a yawn when it comes to CUTSA preemption.
Boring or not, CUTSA preemption should be understood by those who seek to protect their trade secrets. Both federal and state courts have held that section 3426.7(b) of the California Uniform Trade Secrets Act (CUTSA) “implicitly preempts alternative civil remedies based on trade secret misappropriation.” (K.C. Multimedia, Inc. v. Bank of America Technology and Operations, Inc., 171 Cal.App.4th 939, 954.) “Alternative civil remedies” means non trade secret claims such as breach of duty or intentional interference. This preemption applies only where a common law or non-CUTSA claim is “based on the same nucleus of facts as the misappropriation trade secrets claim for relief.” (Id. at 958.)
Thus the rule (if one can be extracted from cases that sometimes point in different directions) is that a plaintiff who seeks to allege both common law and trade secret claims in California must give some thought to separating the “nucleus of facts” that supports the common law claims from the “nucleus of facts” that supports the trade secret claims.
This lesson was recently illustrated in What 4 LLC v. Roman and Williams, Inc. (May 17, 2012), where a federal district court considered a motion to dismiss a complaint that alleged both common law claims of breach of fiduciary duty and concealment and trade secret misappropriation. In What 4, a developer of a proposed youth hostel entered into nondisclosure and other agreements with an interior designer and planner. During the course of the defendant designer’s work, the designer failed to disclose to the plaintiff that it had entered into an exclusive relationship with plaintiff’s competitors. The defendant moved to dismiss the breach of concealment claims arguing that they were preempted by the CUTSA claim. Plaintiff countered that, at most, its claims were only partially preempted. Plaintiff said that there was not complete preemption because it had not simply alleged misappropriation of trade secrets in conjunction with these claims. Rather, it had also alleged breach and concealment because: (1) defendant disclosed other confidential information that does not constitute plaintiff’s trade secrets; and (2) defendant failed to disclose its negotiation and eventual work with plaintiff’s direct competitor.
Plaintiff’s first argument is attractive. It is one that almost every plaintiff in a trade secret case may seriously want to consider to wit, that the defendant misappropriated two kinds of information: (1) trade secret information that qualifies as a trade secret, and (2) confidential information that does not qualify as trade secrets under California law. In considering this argument in the What 4 case, the Court found that plaintiff had not alleged it. The What 4 Court looked at plaintiff’s routine allegation that its “confidential information … constitutes `trade secrets’ within the meaning of the [CUTSA].” This allegation — that confidential information constitutes trade secret information — appears in many, if not most, employer policies and many, if not most, trade secret misappropriation complaints. The Court also noted that plaintiff had not alleged — even as an alternative position — that any of the confidential information that was disclosed fell short of rising to the level of a trade secret. “Accordingly, the Court agree[d] with defendants that, as pled, the claims based on disclosure of the Confidential Information are preempted by the CUTSA.”
In so ruling, the Court was sticking the plaintiff with the narrowness of its own allegations. If a plaintiff in a trade secret case believes it has information which will not qualify as a trade secret but that common law or equitable principles will nonetheless protect, the plaintiff must say so. It would also be helpful if the plaintiff’s policies and confidentiality agreements reflected the separation between “confidential” and “trade secret” information.
The Court, however, found plaintiff’s second argument compelling. Citing K.C. Multimedia’s admonition that CUTSA preemption can be found only where the common law claims are based on the same nucleus of facts as the misappropriation claim, the Court found that the defendant’s alleged failure to disclose the negotiations with plaintiff’s direct competitor was separate from allegations concerning misuse of trade secret information and was sufficient to prevent preemption.
Plaintiffs in trade secret cases in California should think carefully about whether the facts in their case can be separately or alternatively pled, so as to support both CUTSA and common law breach of interference claims.