Uniform Trade Secrets Act

NuScience Corporation is a California corporation that researches, develops and distributes health and beauty products, including nutritional supplements. In 2009, NuScience obtained by default a permanent injunction in a California federal court against Robert and Michael Henkel, the nephew of a woman from whom NuScience purchased the formula for a nutritional supplement, prohibiting them from selling or marketing NuScience’s trade secrets. Before the federal court injunction was entered, NuScience terminated the employment of David McKinney, NuScience Vice President of sales and marketing. McKinney signed a separation agreement wherein he agreed to maintain the confidentiality of certain NuScience-related matters. What followed might be good book material.

In June 2010, NuScience received an email from a third-party which included an email string between Robert Henkel and McKinney that caused NuScience to conclude Robert Henkel was violating the federal court injunction. Based on the emails, NuScience sued McKinney and Robert Henkel in California Superior Court for misappropriation of trade secrets, among other claims. (“NuScience I”) Robert Henkel again did not appear and the court entered a default against him in March 2011.

McKinney appeared in the state court action and was represented by Stephen E. Abraham. McKinney filed a motion to compel further discovery responses from NuScience and a motion for sanctions against NuScience which NuScience initially opposed. But before the motion was heard, NuScience filed a request for dismissal without prejudice. McKinney responded to the NuScience voluntary dismissal with a motion for attorney’s fees and costs under the Uniform Trade Secrets Act, California Civil Code Section 3426 et seq. (“UTSA”). The trial court granted the motion for attorney’s fees, concluded the record showed subjective bad faith on NuScience’s part, and awarded McKinney the $32,842.81 he requested.

NuScience moved for reconsideration contending that after it took Henkel’s default, Henkel called NuScience’s attorney and said NuScience “better back off and leave [them] alone” and that Henkels thereafter began posting threats to publish NuScience’s trade secret formula on the Internet. NuScience’s attorney reported the threat to the FBI, which informed him that it had assigned an agent to investigate and the pending investigation should remain confidential. NuScience asserted that Henkel then told NuScience’s attorney that he “would release NuScience’s formula to the world unless [NuScience] dismissed this lawsuit” and “cease all enforcement of the federal judgment against the Henkels.” NuScience asserted that only later did the FBI “reluctantly acquiesce[ ]” and allowed NuScience to discuss the investigation.

The court denied the motion for reconsideration.

NuScience appealed the attorney’s fees award and the Court of Appeal reversed the decision of the lower court. The Appellate Court found that the email exchange between McKinney and Henkel on which NuScience I was premised was evidence that they were engaged in internal experimentation with NuScience’s trade secret formula and further stated McKinney had been using the samples. The court found this was sufficient evidence of actual or threatened misappropriation under the UTSA. The court further found that the email exchange was evidence that McKinney intended to use the NuScience customer list to market to buyers in Asia and that since McKinney was unlikely to have derived information about customers interested in the formula other than through his employment with NuScience, a trier of fact could conclude McKinney intended to use the information he derived from NuScience’s customer list to compete.

The day after the trial court awarded fees under the UTSA in NuScience I, McKinney filed a malicious prosecution action against NuScience and was represented again by Stephen Abraham (“NuScience II”). NuScience filed a motion to strike under California’s Anti-SLAPP (Strategic Litigation Against Public Policy) statute. The trial court granted the motion, and rejected McKinney’s claim that the dismissal prior to the hearing on the discovery motion was a favorable determination on the merits, noting “undisputed evidence… that the case was dismissed in response to extortionist threats.” The court awarded NuScience attorney’s fees of $129,938.75. The order was affirmed on appeal.

NuScience then filed an action against McKinney, Abraham and his law firm, and two other individuals in March 2014 alleging malicious prosecution and intentional interference with contractual relations against Abraham. Abraham responded with special motions to strike the causes of action.

Abraham attacked the intentional interference cause of action under the California Anti-SLAPP statute on the grounds that the conduct Abraham was alleged to have engaged in – the filing of declarations in federal and state court lawsuits that were signed by McKinney – is protected conduct. The trial court, and subsequently the Court of Appeal, concluded there could be no breach of contract absent a disclosure or public disparagement and the disclosure/disparagement NuScience alleged was Abraham’s public filing of McKinney’s declarations. As such, it was protected activity.

The trial court also granted Abraham’s SLAPP back action in the malicious prosecution claim. The Court of Appeal agreed, finding that NuScience had not demonstrated that the underlying malicious prosecution claim was initiated with malice because, in part, the malicious prosecution was alleged against a former adversary’s attorney, and not the former adversary. The court held that malice harbored by an adversary may not be attributed to its attorney. NuScience tried to identify additional evidence of Abraham’s own malice on appeal asserting, in part, that Abraham “told NuScience that he intends to destroy NuScience,” but the court pointed out that the actual evidence stated “NuScience will be out of business in six months” and “NuScience will be done in six months,” which the court stated suggested, at most, that Abraham believed that litigation would be successful and that NuScience’s demise was imminent, “not that he intended to cause its demise.” The Court of Appeal affirmed the order dismissing the claims against Abraham and affirmed the award of Abraham’s attorney’s fees of $99,595.00.

While the initial trade secret dispute between the parties here was relatively straightforward, this case is worth highlighting because of the extensive litigation that followed. Despite the company’s legitimate interest in protecting its threatened trade secrets, there were certainly unintended consequences as a result of the company’s vigorous advocacy to protect its interests. NuScience became embroiled in litigation spanning the course of the next eight years, itself even becoming the defendant to a lawsuit. This serves as a cautionary tale and a reminder of the inherent risk to engaging in litigation.

The case is NuScience Corp. v. Abraham, B264334 (Ca. Ct. of App. 2/1/17).

Insurance coverage is not something which comes to mind when thinking about trade secret misappropriation. In fact, since this blog was started in 2009, I cannot recall a single post about an insurance coverage issue.

That being said, one of the first things prudent defense counsel will do when a client is sued for alleged trade secret misappropriation is to instruct their client to notify their insurance carrier and inquire as to whether there is coverage for some or all of the claims. Sometimes there is; sometimes there isn’t.  However, the prudent course of action is always to play it safe and ask.

In a recent decision issued by Judge Dow in the U.S. District Court for the Northern District of Illinois, Sentinel Insurance Company, LTD v. Yorktown Industries, Inc., the defendant in what seems to have been a garden variety trade secrets misappropriation case  – Yorktown — demanded that its insurance carrier defend and indemnify it under its insurance policies.  The carrier denied coverage and denied having any duty to defend, and then brought a declaratory  judgment action seeking vindication for its position.

In the underlying lawsuit for which coverage and a defense was requested, Yorktown was sued for violation of the Uniform Trade Secrets Act, intentional interference with contractual relations, intentional interference with prospective business advantage, unfair competition, and civil conspiracy (i.e., claims commonly seen in these types of cases).

Yorktown requested indemnification under an insurance policy which provided coverage for claims for, among other things, “personal and advertising injury.” Yorktown’s argument was premised on the fact that it had been accused of stealing another’s “advertising idea.”

Judge Dow made short work of this claim, holding that Yorktown had merely been accused of stealing a customer list and sales information and wrongly using that information, and that this alleged misconduct did not amount to an allegation that Yorktown copied an “advertising idea” or copied trade secrets in an advertisement. Additionally, among other things, Judge Dow noted that the policy contained an express exclusion for claims predicated on the alleged misappropriation of a trade secret.

In these types of disputes, a common instance in which there may be coverage is where a breach of fiduciary duty is alleged, or where there is a claim against a director or officer and a “D & O” policy is implicated. Here, there was no mention of such claims.

While Yorktown came up short before Judge Dow, the prudent course of action in every trade secrets case is to notify the carrier and inquire about coverage.   Because insurance policies (and lawsuits) come in all sizes and shapes, sometimes there is coverage; sometimes there isn’t.

In a question of first impression, the Illinois Appellate Court recently addressed what constitutes “bad faith” for purposes of awarding attorneys’ fees to the prevailing party under §5 of the Illinois Trade Secret Act (ITSA). That section provides, in pertinent part, that if “a claim of [trade secret] misappropriation is made in bad faith” or “a motion to terminate an injunction is made or resisted in bad faith,” “the court may award reasonable attorney’s fees to the prevailing party.” The Illinois Appellate Court delivered a split decision on the legal standards for assessing whether a “bad faith” fee award is warranted under the statute.

Specifically at issue before the court in Conxall Corp. v. ICONN Systems, LLC, et al., 2016 IL App (1st) 10158 (Sep. 2, 2016), was “whether the trial court had applied the correct legal standard in determining whether Conxall’s claims were brought in ‘bad faith,’ as that term is used and understood in the Act.”  The sharply divided court proposed divergent standards for analyzing this question, despite reaching the same conclusion that the issue should be remanded to the lower court for consideration anew.

One of the three Justices adopted the California Court of Appeal’s approach, which found that “bad faith” under California’s version of the Uniform Trade Secrets Act consists of two components: “(1) objective speciousness and (2) subjective bad faith.” Attentive to the goal of deterring such “bad faith” claims, the resultant standard embraces “speciousness [as a] looser standard” which accomplishes that goal, paired with a finding of “subjective bad faith.”

The other two Justices criticized this two-pronged test (which they noted appears to have taken hold among a number of federal courts), and instead held that the guidepost for an award of attorneys’ fees under ITSA should be “the preexisting definition of ‘bad faith’ in this state.”  While no Illinois court has had the opportunity to define “bad faith” specifically in the context of ITSA prior to ICONN, a “bad faith” test had already been articulated by the Illinois Supreme Court in Kratsack v. Anderson, 223 Ill. 2d 541 (2006) in the context of Illinois’ Consumer Fraud and Deceptive Business Practices Act.  Construing the Kratsack opinion, the ICONN majority held that Illinois state courts should resolve the “bad faith” issue by asking “whether the pleadings, motions and other papers which were filed by the party violated Illinois Court Rule 137” or if “the party’s other conduct during the course of the litigation ran afoul of the underlying purpose of Rule 137, which is to prevent abuse of the judicial process.” Rule 137, Illinois’ frivolous pleading rule, allows for attorneys’ fees when a party interposes its pleading or motion with “any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.” Kratsack, 223 Ill. 2d at 561-62.

There are several take-aways from the ICONN Court’s debate and ultimate finding.

Ask: Has your jurisdiction already made a decision to follow California and the federal court approach to determining “bad faith” under your state’s trade secrets act? If not, has your jurisdiction defined “bad faith” under any other statute?

Whatever the answer to these questions – and regardless of picking the “fed/Cal” or “state” side of the debate as to which legal standard should apply – any such motion for “bad faith” attorneys’ fees under your trade secrets act needs to clearly articulate the applicable standard for “bad faith” and consider the facts of the case in light of that standard.

High-stakes trade secret cases are typically aggressively prosecuted. But plaintiffs (and their attorneys) who prosecute these claims face substantial risks if the evidence does not support the contention that a trade secret has been misappropriated. Even a plaintiff who may have initiated a misappropriation action in good faith risks attorneys’ fees and malicious prosecution liability by continuing to prosecute the matter after it learns that the case is not substantiated.

Section 4 of the Uniform Trade Secrets Act authorizes a court to award costs and attorneys’ fees if the court determines that a claim for misappropriation is made in bad faith, and most jurisdictions include this provision. For example, California Civil Code § 3426.4 provides that “[i]f a claim of misappropriation is made in bad faith, a motion to terminate an injunction is made or resisted in bad faith, or willful and malicious misappropriation exists, the court may award reasonable attorney’s fees and costs to the prevailing party.”

SASCO v. Rosendin Electric, Inc.

Several recent California cases highlight that the risk to employers (and the law firms representing them) is not simply in initiating actions for misappropriation but also for continuing to pursue them when the facts of the claim are not borne out in litigation.

In SASCO v. Rosendin Electric, Inc., 207 Cal.App.4th 837 (2012), the California Court of Appeal affirmed a trial court’s order awarding the defendants almost $485,000 in attorneys’ fees and costs pursuant to California Civil Code § 3426.4. SASCO sued Rosendin Electric, Inc.; another licensed electrical contractor; and three individual defendants for misappropriation of trade secrets, among other things. The trial court accepted for the sake of argument that SASCO’s computer program was a trade secret. The court concluded, however, that there was no evidence of misappropriation and that SASCO had sued the defendants based on the suspicion that they must have misappropriated trade secrets because the individual defendants went to work for a competitor, which subsequently secured a contract for which both companies were competing. The trial court concluded that the plaintiff engaged in bad faith pursuant to Section 3426.4, which consisted of both objective speciousness and subjective bad faith. The appellate court agreed with the trial court that continuing to prosecute the action without evidence of actual misappropriation constituted subjective bad faith.

FLIR Systems, Inc. v. Parrish

The risk to plaintiff employers (and their law firms) in pursuing claims in bad faith is not limited to attorneys’ fees and costs under the statute. On April 6, 2012, Latham & Watkins was sued for malicious prosecution in Los Angeles Superior Court. The plaintiffs, William Parrish and Timothy Fitzgibbons, were former officers and shareholders of Indigo Systems Corporation, which was purchased by FLIR Systems, Inc., in 2004. From 2004 to 2006, the plaintiffs worked for FLIR, leaving in 2006 to start their own business. FLIR retained Latham and sued the plaintiffs for, among other things, misappropriation of trade secrets. After a summary judgment motion was denied, the case proceeded to trial on FLIR’s claim for injunctive relief. The trial court denied FLIR’s request for a permanent injunction, found that FLIR brought the trade secrets action in bad faith, and awarded attorneys’ fees and costs of $1,641,216.78. The trial court’s decision was affirmed on appeal.[1]

In the subsequent malicious prosecution suit, Latham & Watkins filed a motion contending that the plaintiffs’ claims were barred by the statute of limitations and on their merits, contending that (i) a one-year statute of limitations applied to the plaintiffs’ claims and the claims were untimely under that limitations period and (ii) the trial court’s denial of summary judgment for the plaintiffs on the claims brought against them by FLIR established that the underlying action was brought with probable cause as a matter of law. The trial court granted Latham’s motion on statute of limitations grounds and did not expressly address Latham’s argument that the claims against the law firm were without probable cause.

On August 27, 2014, the Court of Appeal issued an opinion reversing the trial court. The Court of Appeal held that the applicable statute of limitations for malicious prosecution claims was not the one-year, but rather the two-year, limitation period set forth in Cal. Code Civ. Proc. Section 335.1.

The Court of Appeal then considered Latham’s argument disputing the merits of the plaintiffs’ malicious prosecution complaint. Key to Latham’s argument was the fact that the plaintiffs had moved for summary judgment in the underlying case and that motion had been denied. Latham argued that the “interim adverse judgment rule” applied, under which claims that have succeeded at a hearing on the merits are deemed not so lacking in potential merit to serve as the basis for a malicious prosecution claim (unless such ruling is obtained by fraud or perjury). Prior courts had routinely applied the interim adverse judgment rule to bar claims for malicious prosecution where there had been a denial of a defendant’s motion for summary judgment in the underlying action.

The Court of Appeal noted that the plaintiffs had evidence that:

  1. Latham filed a complaint alleging actual misappropriation of a business plan, disregarding a claim that the plaintiffs had created the business plan prior to their employment with FLIR;
  2. when plaintiffs presented that evidence to Latham, Latham changed the theory of the case to pursue a claim that the plaintiffs could not effectuate the business plan without inevitably using FLIR’s intellectual property;
  3. Latham knew that inevitable disclosure is not a viable legal theory in California and, therefore, knew that this theory lacked legal basis;
  4. the factual basis for Latham’s theory was expert testimony that considered only publicly available technology when Latham knew that the plaintiffs’ business plan would be using non-public technology obtained lawfully from third parties; and
  5. FLIR’s president testified that he had no factual basis to assert that the plaintiffs would use FLIR’s intellectual property, strongly implying that the claim against them was a preemptive strike.

Critically, the Court of Appeal found that Latham had “sought an obviously anti-competitive injunction based on the speculative possibility that the [plaintiffs’] product might violate its client’s trade secrets . . . .” The Court of Appeal held that these circumstances supported the conclusion that “no reasonable attorney would have believed [the] case had merit,” and it reinstated plaintiffs’ claim.

Latham filed a petition for re-hearing, which was denied on September 19, 2014, and then, on the court’s own motion, was granted on September 25, 2014. On June 26, 2015, the Court of Appeal issued its decision, this time, affirming the trial court’s order granting Latham’s motion on the ground that the “interim adverse judgment rule” established Latham had probable cause to bring the action. The court held that exceptions to the interim adverse judgment rule did not apply in this case because (i) the summary judgment motion was not denied on procedural or technical grounds and (ii) the summary judgment motion was not obtained by fraud or perjury.[2]

But this ruling did not conclude the matter. On October 14, 2015, the California Supreme Court granted the plaintiffs’ Petition for Review, and the case is pending.

Understand the Risk Before Prosecuting

There are substantial risks in pursuing trade secret actions if it appears that plaintiffs are using the Trade Secrets Act to mask an anti-competitive intent. If, during the course of the litigation, there is no evidence that a trade secret has been misappropriated or it does not look like a trade secret can be proven, plaintiffs and their attorneys must understand this risk in assessing whether, or to what extent, to continue to pursue the action.

A version of this article originally appeared in the Take 5 newsletter “Restrictive Covenants: Do Yours Meet a Changing Landscape?

[1] FLIR Systems, Inc. v. William Parrish, et al., 174 Cal.App.4th 1270 (2009).

[2] Parrish v. Latham & Watkins, 238 Cal.App.4th 81, 97 (2015).

A recent Opinion issued by the Arizona Supreme Court highlights a noteworthy dichotomy in the way various states interpret the pre-emptive effect of their respective Uniform Trade Secrets Acts (“UTSA”). Forty-eight states have enacted some form of the UTSA, which aims to codify and harmonize standards and remedies regarding misappropriation of trade secrets that had emerged in common law and which differed from state to state. Only New York and Massachusetts have not enacted some form of the UTSA.

One important feature of the UTSA is its pre-emptive effect upon state common law causes of action involving trade secrets, including misappropriation and unfair competition. Whether this “displacement” provision of the UTSA applies to claims that involve “confidential information” that does not rise to the level of being a trade secret is the point of departure for the split of authority among the states.

The recent Arizona Opinion in Orca Communications Unlimited, LLC v. Noder, No. CV-13-0351-PR (November 19, 2014), involved Ann Noder, who served as president of Orca Communications Unlimited, LLC between 2002 and 2009. The complaint alleges that in 2009 Noder set up a competing company, Pitch Public Relations, LLC and urged Orca’s customers to do business with her new company. The claim at issue before the Arizona Supreme Court alleged that Noder engaged in unfair competition by intending to steal and exploit “confidential and trade secret information about Orca.” Ruling on a motion to dismiss, the Court held that, to the extent the unfair competition claim pertained to confidential information that falls outside of the Arizona UTSA’s definition of trade secret, it was not pre-empted by that statute.

The Court went on to recognize the split of authority among states on whether the UTSA displaces all common law tort claims based on misappropriation of confidential information, noting by example that such claims are pre-empted in Hawaii and New Hampshire, but are not pre-empted in Virginia and Wisconsin.

For employers in UTSA states, it pays to be aware of how the UTSA’s displacement provision is interpreted. Depending on the state’s law, if pursuing litigation against an employee who has resigned and taken merely confidential information which does not amount to a trade secret, the employer may not be limited to the remedies set forth in the UTSA.

On April 29, 2014, Senators Chris Coons (D-Del.) and Orrin Hatch (R-Utah) introduced a bill which seeks to create a private right of action under federal law for theft of trade secrets. As noted in the press release accompanying the bill, the so-called “Defend Trade Secrets Act would empower companies to protect their trade secrets in federal court.”

The Defend Trade Secrets Act of 2014 echoes and amplifies a similar effort made last year, in which Representative Zoe Lofgren (D-Cal.) introduced a bill entitled the “Private Right of Action Against Theft of Trade Secrets Act of 2013.” We discussed that bill in this space last July.

Like the 2013 bill, the 2014 bill proposes amendments to the Economic Espionage Act, 18 U.S.C. § 1831 et seq. The 2014 bill, however, is more detailed and expansive in scope. The 2013 bill merely sought a two-paragraph amendment of 18 U.S.C. § 1832, adding text providing for a private right of action for compensatory damages and injunctive relief or other equitable relief, with a two-year statute of limitations.

The 2014 bill proposes an extensive amendment of 18 U.S.C. § 1836 which would not only create a private right of action, but also would:

  • Allow for courts to issue civil ex parte orders (a) “for the preservation of evidence,” including by making a copy of an electronic storage medium that contains the trade secret, and (b) providing for the seizure of any property used to commit or facilitate the commission of a violation;
  • Authorize courts to award (a) injunctive relief, (b) damages for actual loss or any unjust enrichment, (c) a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret, (d) exemplary damages (up to treble the amount of compensatory damages); and/or (e) attorneys’ fees;
  • Grant U.S. District Courts original jurisdiction of civil actions brought under the section;
  • Establish a 5 year statute of limitations period; and
  • Include definitions of “misappropriation” and “improper means” that largely track similar language in the model Uniform Trade Secret Act, which has been adopted in various forms in 48 states (with Massachusetts and New York being the two exceptions).

While there is strong support in the business community for the Defend Trade Secrets Act of 2014, only time will tell whether it actually will become the law of the land, and in what form. Nonetheless, for various reasons — including high-profile trade secret thefts and prosecutions in the news, a desire to standardize the law on trade secrets, and a perception that the U.S. economy is vulnerable to trade secret thefts from overseas — momentum does appear to be on the side of these efforts to create the elusive federal private right of action for trade secret theft.
 

California is one of the 47 states to have adopted the Uniform Trade Secrets Act. Among other things, “CUTSA,” as it is sometimes referred to in the Golden State, brought greater clarity to what qualifies as a “trade secret” and “misappropriation” of a trade secret, and it established an enforcement scheme that provides for an award of attorneys’ fees to a prevailing party and for potential award of a “royalty” in cases where the aggrieved party cannot prove actual damages.

By the plain language of the statute, CUTSA was intended to take the place of most business tort causes of action that were historically used to address trade secret misappropriation. The term “preemption” is often used to address this concept, but that is technically incorrect because preemption involves the trumping of state law by federal law. More accurately, some courts have used the term “supersession,” or “displacement” of state law. Whatever term is used, the question is whether a victim of trade secret misappropriation pursuing a CUTSA claim may also pursue other business torts such as breach of the duty of loyalty or conversion against the wrongdoer. The California Court of Appeal recently addressed this issue in Angelica Textile Services v. Park to find that CUTSA did not displace a state law claim for conversion of trade secrets, but the court reached that conclusion in a novel manner.

Angelica Textiles, a large-scale laundry business catering to hospitals and other medical facilities, sued one of its former managers, Jaye Park, on a variety of causes of action, including CUTSA, after he left the company to form a competing business. The evidence in the case indicated that Mr. Park had been actively engaged in preparation to open his competing business while still employed by Angelica, and he had criticized the company’s business practices when speaking with customers while still on the company’s payroll. Angelica also contended that Park had improperly taken a variety of proprietary documents at the time of his departure.

The trial court entered summary judgment on Angelica’s claims against Park and his competing business for breach of fiduciary duty, unfair competition, interference with business relations, and breach of contract. The court ruled that these business tort claims were “preempted” by CUTSA because they were based on the same facts and circumstances as the CUTSA claim. The CUTSA claim proceeded to a jury trial, but the jury rendered a defense verdict on the grounds that the documents that Park had allegedly stolen did not meet the statutory definition of a “trade secret.” Angelica appealed the entry of summary judgment on the tort claims but did not attempt to challenge the validity of the jury’s verdict.

The California Court of Appeal reversed the entry of summary judgment. The court noted that the language of CUTSA is quite clear that breach of contract claims based on a misappropriation of trade secrets are never supplanted by the statute, even if those claims are based on the same facts underlying the CUTSA claim. Other business tort claims are displaced by CUTSA only if they depend upon the same facts as the CUTSA claim without other supporting allegations. For example, the Court of Appeal found that Angelica’s claim against Park for breach of fiduciary duty was based on alleged misconduct wholly apart from his alleged misappropriation of trade secrets, including his disparagement of Angelica to its customers while still employed. Therefore, that claim was not preempted.

The Court of Appeal’s rationale for its conclusion that Angelica’s claim for conversion was not displaced by CUTSA is the most interesting aspect of the decision. The jury had concluded that the documents that Park had allegedly purloined on his way out the door did not qualify as “trade secrets.” The Court of Appeal noted that if these documents were not trade secrets then Angelica could not have a claim under CUTSA and, therefore, CUTSA did not displace its common law claim for conversion. The court noted that nothing in the record indicated that these documents, which apparently did not have any actual competitive value, had ever been returned. Thus, the outcome of the ruling was that Angelica technically or theoretically had available a cause of action based on Park’s alleged misappropriation of the documents, but the company had no damages, no right to recover attorneys’ fees, no right to a statutory royalty, and even injunctive relief would be of no value.

This case illustrates once again how important precise pleading can be in a trade secret misappropriation claim, and that great care must be taken to plead all facts that might support a business tort claim outside the scope of CUTSA.
 

In a decision recently issued by the Utah Court of Appeals, CDC Restoration & Construction, LC v. Tradesmen Contractors, LLC et al., the court broadly interpreted the preemption clause in the Uniform Trade Secrets Act (“UTSA”) to hold that it “preempts claims based on the unauthorized use of information, irrespective of whether that information meets the statutory definition of a trade secret.”

With various modifications, the UTSA has been adopted by all but a handful of states. One of its provisions expressly preempts conflicting tort and other common law or statutory civil causes of action “for misappropriation of a trade secret.” (The preemption provision does not, however, preempt contractual or criminal remedies, regardless of whether they are based upon misappropriation of a trade secret, or other civil remedies not based upon misappropriation of a trade secret.)

Some courts have interpreted the UTSA’s preemption clause narrowly, holding that it only preempts claims based on information that meets the statutory definition of a trade secret. Their rationale is that if the UTSA was held to preempt claims based on theft of information that is not a statutory trade secret, a wronged plaintiff might be left without any remedy.

Other courts (a majority that have addressed the issue, according to the opinion in CDC Restoration & Construction) take a broader view of the UTSA’s preemption clause, and hold that it preempts any claim based on the unauthorized use of information – regardless of whether that information meets the statutory definition of a trade secret, and regardless of whether such a broad reading might deprive a plaintiff of a remedy for the misappropriation of information which does not constitute a statutory trade secret. As explained in CDC Restoration & Construction, “[a] contrary approach would render the statutory preemption provision effectively meaningless, leaving prior law untouched and converting an exclusive remedy into just another basis for recovery” (internal quotations omitted).

Employers should draw two lessons from this case. First, when prosecuting or defending misappropriation of trade secrets claims, employers need to be aware of the different interpretations of the UTSA’s preemption provision in different states; a valid claim in one state may be preempted in another. Second, employers should protect themselves against broad UTSA preemption by having employees sign contractual provisions protecting their confidential information – regardless of whether such information constitutes a “trade secret” for purposes of the UTSA. After all, the UTSA does not preempt contractual remedies.
 

On Monday, January 9, 2012, Governor Chris Christie signed into the law the New Jersey Trade Secrets Act (NJTSA, http://www.njleg.state.nj.us/2010/Bills/S2500/2456_R1.HTM), the Garden State’s version of the Uniform Trade Secrets Act (UTSA). New Jersey, thus, becomes the forty-seventh state to adopt some form of UTSA. While the New Jersey Act will promote some level of uniformity in the approach to trade secrets issues, New Jersey specific changes to the uniform act promise that this statute will build upon, rather than depart from, New Jersey’s common law tradition of protection of trade secrets and other valuable business information.

Some New Jersey specific points in the legislation:

• The definition of “trade secret” under NJTSA is broader than under UTSA, as NJTSA incorporates the broader protections of New Jersey common law principles;

• NJTSA supplements, rather than displaces, New Jersey common law, as the statute states that the rights, remedies, and prohibitions under NJTSA “are in addition to and cumulative of any other rights, remedies, or prohibitions provided under common law or statutory law of this State”;

• NJTSA prohibits acquisitions of the trade secrets of another by “improper means,” and contains definitions of that term and “proper means” not found in UTSA;

• NJTSA makes mere or threatened acquisition by improper means of another’s trade secret actionable, and enjoinable, even if there is no concomitant likelihood of disclosure to or use by third party.

These NJTSA-specific provisions combine with UTSA’s allowing for recovery of attorneys’ fees and punitive damages to provide the holders of trade secrets a powerful new tool in New Jersey. Those who helped frame, over a multi-year time period, the bill as adopted in New Jersey included its sponsors, employer groups, and the New Jersey Law Revision Commission and its legal advisors, including the author of this post.
 

A recent Alabama Court of Appeals case, Jones v. Hamilton, Case No. 2081077 (January 22, 2010), illustrates how a failure to take reasonable steps to maintain the confidentiality of documents and information will result in the loss of trade secret status.

In Jones, the parties’ trade secret dispute centered on the alleged misappropriation of confidential and sensitive documents that were left in an unmarked cardboard box for at least a week in the backseat of a company-owned car to which various company employees had access. The documents were not marked "confidential," and the keys to the vehicle were either kept "on a peg" or in the front of an office where they were widely accessible. Even though there was no evidence that anyone other than the defendant accessed the vehicle or the documents without authorization, "[t]he documents were left vulnerable to whomever chose to enter or to drive the vehicle."

Based on this vulnerability, the Court held that the documents were not "trade secrets" within the meaning of Alabama’s version of the Uniform Trade Secrets Act and that the defendant therefore was not guilty of trade secret misappropriation. In reaching its conclusion, the Court did not focus on the sensitivity of the documents; rather, by itself, the company’s failure to take reasonable steps to ensure the security of the documents precluded them from qualifying as trade secrets.

Hence, this case illustrates the importance of taking reasonable steps to protect the secrecy of alleged trade secrets. Although what is "reasonable" will vary depending on the circumstances, the bottom line is that if a company hopes to protect documents or information as a "secret," they need to be treated as such.