By:       Chelcey E. Lieber

Question:  An employee is out on FMLA leave to care for her newborn baby.  Before her leave ends, she notifies her employer that she actually does not intend to return to work.  Does the employee still have any restoration rights?  Can the employer recover any health care premiums they paid during the employee’s FMLA leave?

Continue Reading FAQ: What Should An Employer Do When an Employee on FMLA Leave Says They Will Not be Returning to Work?

If location is the most important word in the restaurant business, then the three most important words for a plaintiff in a trade-secret or unfair-competition practice must be theory, theory, and theory.  Each legal theory must be supported by its own facts and evidence and a thorough understanding of the legal consequences of asserting and failing to succeed on a particular theory.  While the right facts aligned with the right legal theory can yield judgments in the hundreds of millions of dollars, the wrong theory can have significant negative consequences.

A recent unpublished court of appeals case, Parcell Steel Co. v. Sauer (2012 Cal. App. Unpub. LEXIS 1508), illustrates one of the dangers of claims filed against former employees.   Parcell designed and installed rebar for concrete construction.  Three of Parcell’s long-term employees left the company and went to work for Badger State Rebar, a company owned by one of Parcell’s former employees. It seems clear that someone at Parcell was upset at this group departure.  Maybe somebody was angry.  Whatever the plaintiff’s emotional state or motives, Parcell sued the former employees and Badger claiming the former employees had breached their duty of loyalty while they were still employed by Parcell, stole company property, interfered with prospective business relations, and engaged in unfair competition.

Although Parcell had first alleged a misappropriation-of-trade-secrets claim, it dropped that claim early in the case, even though it continued to allege that the former Parcell employees had used Parcell’s information to issue bids competitive to Parcell.  Parcell also alleged that, in the weeks and months prior to their departure from the company, the employees had failed to discharge their duties effectively.  Essentially, Parcel claimed that the employees were working to injure Parcell prior to their departure.   As an example, Parcell alleged that one of the employees had sold a forklift “as is” for a few thousand dollars but had spent several thousand repairing the forklift prior to sale.

The plaintiff’s focus on the breach of the duty of loyalty had important strategic and legal consequences.  Employees, agents and officers of a company can be entitled to seek indemnity for legal expenses arising from alleged malfeasance in their duties as an agent, officer or employee.  This section of the Corporations Code is often used by members of boards of directors who are sued by shareholders for malfeasance to recover fees incurred in the defense of those claims.  These sections of the Corporations Code allow employees, officers and agents of a corporation (who have prevailed in defending a claim against them that arises from their work for the corporation) to require the corporation to reimburse them for the legal fees they incurred.

Parcell lost.  The trial court awarded approximately $500,000 in attorney’s fees and costs under Corporations Code section 317 to the victorious defendants.

Here is where I detect something like irony: Had Parcell stuck with unfair-competition or trade-secret-misappropriation theories, the defendants may not have been eligible to seek an award of fees under the Corporations Code.  Parcell may still have lost, but then the basis for the fee application would have been under the California Trade Secrets Act’s much higher standard for an award of attorney’s fees.  (Essentially, a prevailing defendant must show that a Plaintiff filed the Trade Secret claim in “bad faith.”) Trade secret misappropriation  claims do not typically result in a fee award under Corporations Code section 317.  Why? In most trade secret cases the alleged misappropriation arises outside the course and scope of the employees duties. Thus, even if the defendant prevails, there is no entitlement under Corporations Code 317.  Here, however, the focus on the former employee’s conduct as an employee plainly implicated the indemnity rights under the Corporations Code.

Hindsight is 20/20, and appellate court decisions do not always provide the information needed to fully understand they parties tactics and decisions.  Nonetheless, plaintiff in such cases must pay great attention to the selection or rejection of three very important things; namely, theory, theory, and theory.

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.

Yawn.

By: James Kachmar

On May 16, 2012, a California Appellate Court issued its ruling in Fitzsimons v. California Emergency Physicians Medical Group and held that a partner could state a claim for unlawful retaliation against her partnership under the California Fair Employment and Housing Act (“FEHA”). 

Continue Reading Partnerships Beware! Partners May Have Claims for Unlawful Retaliation under FEHA