Status of Preemption Claims Under the Uniform Trade Secrets Act
Prior to 1979, states handled trade secret misappropriation claims in varying ways. To unify the contrasting state approaches, the National Conference of Commissioners on Uniform State Laws adopted the Uniform Trade Secrets Act (“UTSA”) in 1979.[1] The UTSA provides protection for information defined as a “trade secret.”[2] Notably, the UTSA preempts “conflicting tort, restitutionary, and other [state] law . . . providing civil remedies for misappropriation of a trade secret[.]”[3] However, the UTSA does not preempt contractual remedies, or other civil remedies “not based upon misappropriation of a trade secret[.]”[4] A UTSA preemption question often arises when an employer sues a former employee for misusing information gained in the course of employment, and asserts both UTSA claims and state tort claims such as breach of trust, common law misappropriation, conversion, unfair competition, and unjust enrichment.[5] This paper summarizes the current split of authority regarding UTSA preemption and analyzes the challenges employers may face in states adopting the “majority” approach.
The UTSA does not preempt contractual remedies, so employer's desiring to protect confidential information may require employees who handle sensitive information to sign confidentiality agreements.
While nearly every state has adopted the UTSA,[6] courts interpreting their state’s act have reached conflicting results regarding the scope of the UTSA’s preemption clause. In Stolle Machinery Co., LLC v. RAM Precision Industries,[7] the Sixth Circuit noted the rift, stating “courts are divided about whether the UTSA preemption clause should be read literally, to displace only civil non-contract remedies for misappropriation of a trade secret, or whether it should be interpreted more broadly so as to abolish all other causes of action for theft, misuse, misappropriation of any confidential or secret information.”[8] Accordingly, whether a plaintiff-employer can properly raise state tort claims based on confidential information that does not meet the act’s definition of “trade secret” depends on the jurisdiction where the plaintiff brings the claim.
A. Majority Approach – UTSA Preempts State Tort Claims
The majority of courts interpret the UTSA’s preemption clause broadly to abolish alternative state court causes of action based on confidential information that is not protected as a “trade secret” under the UTSA.[9] In BlueEarth Biofuels LLC v. Hawaiian Elec. Co.,[10] the Hawaii Supreme Court following the UTSA’s main objective—“of eliminating uncertainty and creating a single action for misappropriation of a trade secret”[11]—determined that the Hawaii Uniform Trade Secret Act (“HUTSA”) intended to go beyond the “plain language” of the statue and preempt non-UTSA claims that would “simultaneously establish a claim of misappropriation of trade secrets[.]”[12] The HUTSA preempts non-contract civil claims based upon confidential information that does not rise to the level of a trade secret.[13]
In Sunpower Corp. v. Solarcity Corp.,[14] the Northern District of California used similar rationale to hold that the California Uniform Trade Secrets Act (“CUTSA”) preempts state tort claims based upon confidential information that does not rise to the level of a trade secret. The Sixth Circuit in Stolle Machinery used similar logic to conclude that the UTSA should be understood to preempt causes of action for and causes of action based upon misappropriation of trade secrets.[15] These are not the only courts to reach this conclusion, but they reflect the majority view on UTSA preemption.[16]
B. Minority Approach
Other courts interpret the UTSA’s preemption clause narrowly, relying on its “plain language” and allow state tort claims for confidential information even though it does not meet the “trade secret” definition. In Orca Communications Unlimited, LLC v. Noder,[17] the Arizona Supreme Court looked to the “plain language” of the Arizona Uniform Trade Secrets Act (“AUTSA”), noting that “[i]f the legislature seeks to preempt a cause of action, the law’s text or at least the legislative record should say so explicitly.”[18] As a result, the Orca Communications court found that the AUTSA does not preempt a plaintiff’s state tort claim based upon information “that falls outside AUTSA’s definition of ‘trade secret[.]’”[19] Similarly, In Stone Castle Financial, Inc. v. Friedman, Billings, Ramsey & Co.,[20] the Eastern District of Virginia held that the Virginia Uniform Trade Secrets Act only preempted claims where the information in question dealt “exclusively with trade secrets.”[21]
C. How the UTSA Majority View Affects Employers
In states applying the majority view, plaintiff-employers are limited to the remedies offered by the UTSA and information is either protectable under the UTSA as a “trade secret,” or is not protectable and may be considered in the public domain. From an employer’s perspective, problems arise when the employer wants to protect all information, regardless of whether it rises to the level of a trade secret.[22] The UTSA explicitly exempts contractual remedies from its preemption clause, which allows an employer desiring to protect all confidential information given to employees by requiring the employee to sign a confidentiality agreement explicitly setting forth the types of documents considered confidential to be protected through contract.[23] If a confidentiality agreement is in place, and the employee ultimately leaves the company and misuses the confidential information, the employer may bring a breach of contract claim outside the scope of the UTSA’s preemption clause in states applying the majority view. Such an agreement might not be needed in states applying the minority view approach to UTSA preemption, which typically would allow a state tort law claim even if the information is not considered a trade secret.
D. Conclusion
The majority view interprets the UTSA’s preemption clause broadly to abolish all state tort claims based on confidential information that does not rise to the level of a “trade secret.” The minority view looks to the plain language of the clause to determine that state tort claims can exist based on information that does not rise to the state’s “trade secret” definition. Depending on how a particular jurisdiction interprets the UTSA can have drastic effects on whether a company’s confidential information will be protected. To ensure the utmost protection of confidential information, practitioners must know how his or her state interprets the UTSA’s preemption clause and how claims to protect confidential information will be treated. Counsel should also be given to employers to require the their employees to sign confidentiality agreements if the employee is given access to information, that may not be considered a trade secret, but that the employer wishes to keep confidential.
[1] Charles T. Gains and Elizabeth Tippett, UTSA Preemption and the Public Domain: How Courts Have Overlooked Patent Preemption of State Law Claims Alleging Employee Wrongdoing, 65:1 Rutgers L. Rev. 59, 65 (2012).
[2] The UTSA defines “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” See Unif. Trade Secrets Act § 1(4) (1979) (amended 1985). While state UTSA laws vary slightly in degree, this paper will use and refer to the UTSA, unless noted otherwise.
[3] See Unif. Trade Secrets Act § 7(a) (1979) (amended 1985).
[4] See Unif. Trade Secrets Act § 7(b) (1979) (amended 1985). Additionally, the UTSA does not preempt criminal remedies.
[5] See Gaines, supra note 1, at 65-66.
[6] Peter J. Boyer, Preemption of Business Torts under the Uniform Trade Secrets Act, American Bar Association, Section of Litigation, February 19, 2013, http://apps.americanbar.org/litigation/committees/businesstorts/articles/
winter2013-0213-preemption-business-torts-uniform-trade-secrets-act.html (last visited Oct. 16, 2015). Currently, forty-eight states and the District of Colombia have enacted the UTSA; only New York and Massachusetts have yet to adopt the act.
[7] Stolle Machinery Co., LLC v. RAM Precision Industries, 605 F. App’x 473 (6th Cir. 2015).
[8] Id. at 484 (internal quotation omitted).
[9] Id.; see also Fenwick & West LLP, Preemption of state law tort claims under the Uniform Trade Secrets Act, Lexology, December 19, 2012, http://www.lexology.com/library/detail.aspx?g=f26ad9c6-098f-47a3-a219-9405a540b08f (last visited Oct. 14, 2015).
[10] BlueEarth Biofuels, LLC v. Hawaiian Elec. Co., 235 P.3d 310 (Haw. 2010).
[11] Id. at 318.
[12] Id.
[13] Id. at 318-19. The court expressly noted that claims “based upon wrongful conduct, independent of the misappropriation of trade secrets,” are not preempted by the HUTSA.
[14] Sunpower Corp. v. Solarcity Corp., 2012 WL 6160472 (N.D. Ca. 2012); see also Boyer, supra note 7.
[15] Stolle Machinery, 605 F. App’x. at 484.
[16] See, e.g., Robbins v. Supermarket Equip. Sales, LLC, 722 S.E. 2d 55 (Ga. 2012); Mortgage Specialists, Inc. v. Davey, 904 A.2d 652 (N.H. 2006); RK Ent., LLC v. Pro-Comp Mgmt., Inc., 158 S.W. 3d 685 (Ark. 2004); Savor, Inc. v. FMR Corp., 812 A.2d 894 (Del. 2002); Weins v. Sporleder, 605 N.W. 2d 488 (S.D. 2000).
[17] Orca Communications Unlimited, LLC v. Noder, 337 P.3d 545 (Ariz. 2014).
[18] Id. at 547 (internal quotation omitted).
[19] Id. at 550. The court further noted “[i]f such broad displacement was intended, the legislature was required to express that intent clearly.”
[20] Stone Castle Financial, Inc. v. Friedman, Billings, Ramsey & Co., 191 F. Supp. 2d 652 (E.D. Va. 2002).
[21] Id. at 659; The Wisconsin Supreme Court also reached a similar conclusion as Orca Communications and Stone Castle Financial. See Burbank Grease Servs., LLC v. Sokolowski, 717 N.W. 2d 781 (Wis. 2006).
[22] Bill Donahue, Ariz. Deepens States’ Rift on UTSA Preemption, Law 360, Nov. 20, 2014.
[23] See Boyer, supra note 7.