Readers of this blog will note our frequent reminders that preemption under California’s Uniform Trade Secret Act (“CUTSA”) can threaten other common law claims if not properly pled. A recent decision out of the Eastern District of California in Hat World, Inc. v. Kelly, 2012 U.S. Dist. Lexis 113060 (Aug. 10, 2012) reinforces this position.
In Hat World, the plaintiff-company sued a former employee claiming that he misappropriated trade secret information when he left his employment to join a competitor, including customer lists, purchase orders, invoices and spreadsheets. In addition to a claim under CUTSA, plaintiff sued its former employee for common law trade secret misappropriation, unfair competition, conversion, intentional interference with contractual relations and prospective economic relations, breach of contract and violation of the computer Fraud and Abuse Act. The defendant filed a motion to dismiss many of plaintiff’s claims on the grounds of CUTSA preemption.
Preemption under CUTSA arises because the Legislature enacted a “comprehensive structure” with regard to trade secret misappropriation that was intended to “occupy the field” with respect to common law trade secret misappropriation claims. CUTSA is intended to provide the sole civil remedy for trade secret misappropriation under California law and thus preemption applies “to all common law claims that are `based on the same nucleus of facts as the misappropriation of trade secret claim.’” (Citing K.C. Multimedia, Inc. v. Bank of America Tech. & Operations, Inc., (2009) 171 Cal.App.4th 939.) There are three exceptions to CUTSA preemption: (1) claims based on contractual remedies; (2) other civil remedies not based on trade secret misappropriation; and (3) criminal remedies.
In bringing his motion to dismiss, the former employee argued that plaintiff’s claims for common law trade secret misappropriation, interference with contractual relations and prospective economic relations and conversion were all based on the “same nucleus of facts” underlying the CUTSA trade secret misappropriation claim. Plaintiff sought to avoid preemption of these claims by stating that in addition to containing allegations regarding trade secrets, they also alleged other wrongful conduct such as the “unlawful solicitation of Hat World customers and employees” and “unlawful conversion of purchase orders for Hat World products.”
Nevertheless, the Court agreed with the defendant employee and found that because it appeared that all of these claims seemed to be based in some part on the misappropriation of trade secrets, they were preempted under CUTSA and had to be dismissed. However, the Court ruled that because it was possible that some of the claims could be alleged based on facts different from those underlying trade secret misappropriation, the Court granted plaintiff an opportunity to amend the complaint to avoid preemption.
The Hat World ruling reminds attorneys that they need to be careful in drafting complaints asserting trade secret misappropriation and other common law claims to avoid preemption. Attorneys should include language making clear that the common law claims have a factual basis separate from that underlying a CUTSA claim. Otherwise, that attorney’s client faces the prospect of having its claims dismissed because of preemption and/or incurring additional fees in having to amend the complaint.