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Trade Secrets and Preemption

Posted in Trade Secrets

By James Kachmar

Although several federal courts in California have previously considered the issue of preemption in trade secret misappropriation cases, the Sixth Appellate District, in K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc. ___ Cal.Rptr. 3d ____ (6th Dist. Mar. 3, 2009), became one of the first (if not the first) California state court to hold that the California Uniform Trade Secrets Act (“CUTSA”) preempts state common law claims based on the same facts as a misappropriation claim. This ruling could have a significant impact on how trade secret misappropriation cases are both pled and litigated in California. 

 

K.C. Multimedia entered into two contracts with defendants to supply technology services which: (1) allowed bank customers to use a handheld wireless device to access their account information; and (2) simplified customer’s access to online banking services. Late, one of plaintiff’s former employees allegedly gave the claimed trade secrets to the defendants in exchange for employment with them. In June 2001, plaintiff filed a complaint alleging trade secret misappropriation, conversion, breach of contract and unjust enrichment. The case did not go to trial until February 2006, at which point there was a fifth amended complaint setting forth claims for trade secret misappropriation, breach of the duty of confidence, conversion, breach of contract, tortious interference with contract and unfair competition.

Prior to trial, the court heard in limine motions and took up the preemption issue raised in the defendants’ trial brief. The trial court ruled that the plaintiff’s claims for breach of confidence, interference with contract and statutory unfair competition were preempted by CUTSA and dismissed these claims. After receiving an unfavorable jury verdict, the plaintiff appealed the court’s ruling on the preemption issue.

 

In affirming the lower court’s ruling, the Appellate Court began by recognizing the general rule “that statutes do not supplant the common law unless it appears that the Legislature intended to cover the entire subject or in other words to `occupy the field’.” The Court noted that CUTSA has previously been “characterized as having a `comprehensive structure and breadth …’” that suggested “a legislative intent to preempt the common law.” The Court also reasoned that CUTSA “occupies the field,” at least as to common law trade secret misappropriation claims, and contains specific provisions concerning preemption. Thus, the Court concluded that CUTSA can preempt common law claims and that “the determination of whether a [common law] claim is based on trade secret misappropriation is largely factual.” 

 

In reviewing the federal cases, the Court recognized that in Calloway Golf Co. v. Dunlop Slazenger Group Americas, Inc. (D. Del. 2004) 318 F.Supp.2d 216, the court found that the cross-complainant’s claims for conversion and unjust enrichment were “based entirely on the same factual allegations that formed the basis of its trade secrets claim,” and thus, were preempted. Likewise in Digital Envoy, Inc. v. Google, Inc. (N.D. Cal. 2005) 370 F.Supp.2d 1025, 1035, the Court held that CUTSA preempted the plaintiff’s claims for unfair competition and unjust enrichment since “those claims are based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.” 

 

The K.C. Multimedia Court continued by adopting “the broad view that CUTSA’s `comprehensive structure and breadth’ suggests a legislative intent to occupy the field” because CUTSA defined “key terms, provides various forms of relief, spells out methods for preserving the secrecy of trade secrets and sets forth the limitations period.” Thus, the Court agreed with the prior federal cases and held CUTSA can preempt common law claims that are “based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.” 

 

The Court then examined each of the specific causes of action at issue and found that “the complaint as a whole rests on factual allegations of trade secret misappropriation.” For instance, plaintiff’s breach of the duty of confidence claim focused solely on its former employee’s duty to maintain the secrecy of its trade secrets and his alleged misappropriation of them. Likewise, plaintiff’s claim for intentional interference with contract alleged that the defendants had induced and encouraged plaintiff’s former employee to misappropriate its trade secrets. Finally, plaintiff’s claim for statutory unfair competition under section 17200 was premised solely on defendants’ alleged misappropriation of its trade secret. Because each of these claims was based solely on allegations of trade secret misappropriation, the Court held that the trial court properly determined that these common law causes of action were preempted by CUTSA. 

 

Plaintiff also appealed the procedural means by which the trial court decided that these claims should be dismissed because of preemption. Normally, the defense of preemption is raised at the early stages of litigation, such as in an answer or by way of demurrer. In K.C. Multimedia, the issue was not raised until the eve of trial by way of mention in a trial brief. The Sixth District Court held that plaintiff had waived raising this argument on appeal because it did not object to this procedure at the trial court level.

 

At least one California state court (and several federal court decisions) now holds that CUTSA preempts state common law claims based upon the same nucleus of facts giving rise to a trade secret misappropriation claim. Plaintiffs in such cases must now give careful consideration as to how they wish to frame the complaint to avoid preemption. For instance, asserting factual allegations of wrongdoing in addition to the trade secret misappropriation, may help a plaintiff avoid preemption of its state common law claims. Likewise, defendants in such cases should be cognizant of the Court’s ruling in K.C. Multimedia and raise the issue of preemption at the earliest opportunity possible.