A Trade Secret By Any Other Name is Still a Trade Secret: Why UTSA Pre-emption Matters

Trade secret plaintiffs sometimes couch their claims under other, alternative titles, such as “common law misappropriation,” “unfair competition,” or “breach of confidence.” The tactic is often a deliberate ploy to avoid complying with state Uniform Trade Secrets Act (UTSA) statutes and case law governing trade secret litigation ' a body of law that favors former employees in many respects.

There is good news for attorneys who represent former employees and companies that hire them. A 2003 decision, the first of its kind under California law, holds that the UTSA pre-empts trade secret claims alleged under different names. California is the most prominent UTSA jurisdiction, and the ruling follows on the heels of numerous decisions elsewhere since the late 1990s. By taking advantage of such decisions in the early stages of a trade secret lawsuit, defendants can ensure that claims based on the alleged misuse of nonpublic information are litigated under the UTSA's statutory rules for trade secret claims ' as they should be. As will be explained below ' and using California law for illustrative purposes ' defendants can file two types of motions to seek an early UTSA pre-emption ruling.

The Problem

California's trade secret statutes and associated case law, like other UTSA jurisdictions, embody a comprehensive scheme that regulates litigation over the alleged misuse of nonpublic information. For example, trade secret plaintiffs are required by statute to identify their alleged secrets before discovery begins and they must establish that the information is in fact secret. In turn, defendants can use doctrines such as independent derivation to prevent plaintiffs from establishing the claim, and they can win fees for trade secret claims alleged in bad faith.

To get around these rules, plaintiffs sometimes allege trade secret claims in everything but name. A complaint will describe the usual allegations ' that employees left for a competitor, that the employees knew secret information, that the employees are using that information ' but the phrase “trade secret” will not appear in the claim. Instead, the cause of action will be titled “breach of duty” or “breach of trust.”

Alleging trade secret claims under other names is no accident. Plaintiffs who raise such claims may argue that they need not identify their alleged secrets, or argue that the statutes and case law under the Uniform Trade Secrets Act do not apply. This creates problems for defendants, who count on the protections of trade secrets statutes and case law to establish defenses and obtain needed specificity about the plaintiffs' allegations. The tactic also throws a wrench into California's special protections for employee mobility by giving former employers greater latitude to press overbroad or baseless allegations.

This type of pleading uses some of the historical, common law names for what is now known as trade secret litigation. Before the UTSA was enacted by state legislatures in the 1980s and 1990s, lawsuits alleging misuse of nonpublic information had many different names ' a common law claim for trade secret misappropriation was functionally identical to other common law claims under other names. Adding to the confusion, some post-UTSA cases in California and elsewhere have involved claims alleging misuse of nonpublic information under titles other than trade secret misappropriation, where both the parties and the court apparently did not address the pre-emption question.

The New Ruling

Beginning in the late 1990s, courts applying the UTSA in states around the country have ruled that many alternative trade secret claims ' alleged as unfair competition, common law misappropriation, unjust enrichment, and so forth ' are pre-empted by the UTSA's statutory scheme. Pre-emption decisions have been handed down under the laws of Michigan, Illinois, Kansas, and other states. The common thread among these cases is that each state's legislature intended to occupy the field of claims involving allegedly secret information through the UTSA.

In April 2003, a federal court applied the doctrine of UTSA pre-emption for the first time under California law. In Accuimage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941 (N.D. Cal. 2003), Judge Marilyn Hall Patel held that “the UTSA occupies the field in California” and dismissed the plaintiff's cause of action for common law misappropriation. The court held that the text of the statute and recent statements by the California Supreme Court, as well as case law from other UTSA jurisdictions, supported that holding. See id. at 953-54.

How to Use the Pre-emption Cases

Trade secret defendants should proactively use Accuimage and other pre-emption cases in two ways at the outset of litigation. First, if a complaint alleges a trade secret claim under a different name, the defense should file a demurrer (or motion to dismiss if the lawsuit is in federal court). The defendant should seek a ruling that the alternative claim is pre-empted by the UTSA, and the brief should describe the problems that will arise if the plaintiff is allowed to proceed outside the statutory framework. For example, defendants should point out that if the alternative claim is not dismissed, the court may have to deal with a plaintiff who refuses to identify its alleged secrets, or who persists in asserting nonsecret information as the basis of its claim. Where outdated case law suggests that causes of action may exist regarding former employees' use of nonsecret information, defense attorneys should pay special attention to the reasons why the UTSA should pre-empt such claims (some courts addressing pre-emption arguments have shown confusion over this issue). The reviewing court should be reminded that the UTSA makes its job easier by providing a body of case law by which cases can be decided. There is no comparable body of jurisprudence surrounding the various alternative labels for trade secret claims in California or elsewhere.

Second, if the plaintiff refuses to serve a statement identifying the nonpublic information at issue, the defense should file a motion to enforce California Code of Civil Procedure section 2019(d), or identification requirements in other jurisdictions. The motion should use the UTSA pre-emption doctrine and ask the court to treat the claim as one for trade secret misappropriation so that the plaintiff must identify the information at issue. Such a motion might be filed simultaneously with the demurrer or motion to dismiss, so that the defense can be assured that the reviewing court will fully understand the importance of the pre-emption doctrine to the issue of the plaintiff's identification of alleged secrets.

Attorneys should be aware, however, that the UTSA expressly does not pre-empt contract-based claims. California Civil Code section 3426.7, for example, makes that clear. All the same, California trade secrets plaintiffs cannot use contract-based claims to avoid the rules for trade secret litigation. This is because California employers cannot bar former employees from using nonsecret information, as many cases have made clear. Indeed, a ruling in December 2003, Thompson v. Impaxx, 113 Cal. App. 4th 1425 (2003), reiterated that rule. Any lawsuit based on an employment contract, then, must necessarily involve a trade secrecy analysis. Attorneys in other states can raise similar arguments, based on the employee mobility case law in each state.

Accuimage did not address whether the UTSA would pre-empt an alternative trade secret claim based on statute, such as a claim alleged under Business & Professions Code section 17200, California's unfair competition statute. Indeed, the plaintiff in that case alleged a Section 17200 claim, and the defendant apparently did not move to dismiss it on pre-emption grounds. California Civil Code section 3426.7, like UTSA statutes elsewhere, states that the UTSA “does not supersede” statutes “relating to” or regulating trade secrets. This exception presumably refers to the various procedural and evidentiary statutes regulating disclosure of trade secrets in legal and governmental proceedings in place in most (if not all) jurisdictions. But Section 17200, enacted in its current form in 1976, certainly does not relate to or regulate trade secrets. Trade secret defendants thus should move to pre-empt alternative trade secret claims alleged under Section 17200, or under similar statutes in other states.

Meaningful Results

A successful UTSA pre-emption ruling on a demurrer or motion to force a plaintiff to identify its alleged trade secrets can pay important dividends throughout a trade secrets case, in California and every other UTSA jurisdiction. The plaintiff will be forced to identify its alleged secrets, and it will bear the burden of proof on several specific elements of its claim. The plaintiff will be unable to argue that information in the public domain can somehow form the basis of a claim, and it could be liable for attorneys' fees for any allegations based on material that is clearly nonsecret.

In short, the doctrine of UTSA pre-emption is a tool that trade secret defendants can use to protect the rights of employee mobility and the freedom of every business to use nonsecret information.

Trade secret plaintiffs sometimes couch their claims under other, alternative titles, such as “common law misappropriation,” “unfair competition,” or “breach of confidence.” The tactic is often a deliberate ploy to avoid complying with state Uniform Trade Secrets Act (UTSA) statutes and case law governing trade secret litigation ' a body of law that favors former employees in many respects.

There is good news for attorneys who represent former employees and companies that hire them. A 2003 decision, the first of its kind under California law, holds that the UTSA pre-empts trade secret claims alleged under different names. California is the most prominent UTSA jurisdiction, and the ruling follows on the heels of numerous decisions elsewhere since the late 1990s. By taking advantage of such decisions in the early stages of a trade secret lawsuit, defendants can ensure that claims based on the alleged misuse of nonpublic information are litigated under the UTSA's statutory rules for trade secret claims ' as they should be. As will be explained below ' and using California law for illustrative purposes ' defendants can file two types of motions to seek an early UTSA pre-emption ruling.

The Problem

California's trade secret statutes and associated case law, like other UTSA jurisdictions, embody a comprehensive scheme that regulates litigation over the alleged misuse of nonpublic information. For example, trade secret plaintiffs are required by statute to identify their alleged secrets before discovery begins and they must establish that the information is in fact secret. In turn, defendants can use doctrines such as independent derivation to prevent plaintiffs from establishing the claim, and they can win fees for trade secret claims alleged in bad faith.

To get around these rules, plaintiffs sometimes allege trade secret claims in everything but name. A complaint will describe the usual allegations ' that employees left for a competitor, that the employees knew secret information, that the employees are using that information ' but the phrase “trade secret” will not appear in the claim. Instead, the cause of action will be titled “breach of duty” or “breach of trust.”

Alleging trade secret claims under other names is no accident. Plaintiffs who raise such claims may argue that they need not identify their alleged secrets, or argue that the statutes and case law under the Uniform Trade Secrets Act do not apply. This creates problems for defendants, who count on the protections of trade secrets statutes and case law to establish defenses and obtain needed specificity about the plaintiffs' allegations. The tactic also throws a wrench into California's special protections for employee mobility by giving former employers greater latitude to press overbroad or baseless allegations.

This type of pleading uses some of the historical, common law names for what is now known as trade secret litigation. Before the UTSA was enacted by state legislatures in the 1980s and 1990s, lawsuits alleging misuse of nonpublic information had many different names ' a common law claim for trade secret misappropriation was functionally identical to other common law claims under other names. Adding to the confusion, some post-UTSA cases in California and elsewhere have involved claims alleging misuse of nonpublic information under titles other than trade secret misappropriation, where both the parties and the court apparently did not address the pre-emption question.

The New Ruling

Beginning in the late 1990s, courts applying the UTSA in states around the country have ruled that many alternative trade secret claims ' alleged as unfair competition, common law misappropriation, unjust enrichment, and so forth ' are pre-empted by the UTSA's statutory scheme. Pre-emption decisions have been handed down under the laws of Michigan, Illinois, Kansas, and other states. The common thread among these cases is that each state's legislature intended to occupy the field of claims involving allegedly secret information through the UTSA.

In April 2003, a federal court applied the doctrine of UTSA pre-emption for the first time under California law. In Accuimage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941 (N.D. Cal. 2003), Judge Marilyn Hall Patel held that “the UTSA occupies the field in California” and dismissed the plaintiff's cause of action for common law misappropriation. The court held that the text of the statute and recent statements by the California Supreme Court, as well as case law from other UTSA jurisdictions, supported that holding. See id. at 953-54.

How to Use the Pre-emption Cases

Trade secret defendants should proactively use Accuimage and other pre-emption cases in two ways at the outset of litigation. First, if a complaint alleges a trade secret claim under a different name, the defense should file a demurrer (or motion to dismiss if the lawsuit is in federal court). The defendant should seek a ruling that the alternative claim is pre-empted by the UTSA, and the brief should describe the problems that will arise if the plaintiff is allowed to proceed outside the statutory framework. For example, defendants should point out that if the alternative claim is not dismissed, the court may have to deal with a plaintiff who refuses to identify its alleged secrets, or who persists in asserting nonsecret information as the basis of its claim. Where outdated case law suggests that causes of action may exist regarding former employees' use of nonsecret information, defense attorneys should pay special attention to the reasons why the UTSA should pre-empt such claims (some courts addressing pre-emption arguments have shown confusion over this issue). The reviewing court should be reminded that the UTSA makes its job easier by providing a body of case law by which cases can be decided. There is no comparable body of jurisprudence surrounding the various alternative labels for trade secret claims in California or elsewhere.

Second, if the plaintiff refuses to serve a statement identifying the nonpublic information at issue, the defense should file a motion to enforce California Code of Civil Procedure section 2019(d), or identification requirements in other jurisdictions. The motion should use the UTSA pre-emption doctrine and ask the court to treat the claim as one for trade secret misappropriation so that the plaintiff must identify the information at issue. Such a motion might be filed simultaneously with the demurrer or motion to dismiss, so that the defense can be assured that the reviewing court will fully understand the importance of the pre-emption doctrine to the issue of the plaintiff's identification of alleged secrets.

Attorneys should be aware, however, that the UTSA expressly does not pre-empt contract-based claims. California Civil Code section 3426.7, for example, makes that clear. All the same, California trade secrets plaintiffs cannot use contract-based claims to avoid the rules for trade secret litigation. This is because California employers cannot bar former employees from using nonsecret information, as many cases have made clear. Indeed, a ruling in December 2003, Thompson v. Impaxx , 113 Cal. App. 4th 1425 (2003), reiterated that rule. Any lawsuit based on an employment contract, then, must necessarily involve a trade secrecy analysis. Attorneys in other states can raise similar arguments, based on the employee mobility case law in each state.

Accuimage did not address whether the UTSA would pre-empt an alternative trade secret claim based on statute, such as a claim alleged under Business & Professions Code section 17200, California's unfair competition statute. Indeed, the plaintiff in that case alleged a Section 17200 claim, and the defendant apparently did not move to dismiss it on pre-emption grounds. California Civil Code section 3426.7, like UTSA statutes elsewhere, states that the UTSA “does not supersede” statutes “relating to” or regulating trade secrets. This exception presumably refers to the various procedural and evidentiary statutes regulating disclosure of trade secrets in legal and governmental proceedings in place in most (if not all) jurisdictions. But Section 17200, enacted in its current form in 1976, certainly does not relate to or regulate trade secrets. Trade secret defendants thus should move to pre-empt alternative trade secret claims alleged under Section 17200, or under similar statutes in other states.

Meaningful Results

A successful UTSA pre-emption ruling on a demurrer or motion to force a plaintiff to identify its alleged trade secrets can pay important dividends throughout a trade secrets case, in California and every other UTSA jurisdiction. The plaintiff will be forced to identify its alleged secrets, and it will bear the burden of proof on several specific elements of its claim. The plaintiff will be unable to argue that information in the public domain can somehow form the basis of a claim, and it could be liable for attorneys' fees for any allegations based on material that is clearly nonsecret.

In short, the doctrine of UTSA pre-emption is a tool that trade secret defendants can use to protect the rights of employee mobility and the freedom of every business to use nonsecret information.