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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Utah Appellate Court Holds That “Confidential” Price List Is Not A Trade Secret But A Contract Bid Could Be, And Uniform Trade Secrets Act Preempts Common Law Claims Based On Misusing Confidential Information Not A “Trade Secret”

Posted in Trade Secrets

In a recent, lengthy decision involving allegations of deceitful acts and unfair competition, the Utah Court of Appeals largely affirmed the lower court’s grant of summary judgment to the defendants with respect to a complaint alleging misappropriation of proprietary data and related conduct. Particularly noteworthy, the appellate court held that the Utah Uniform Trade Secrets Act (UTSA) preempts many common law claims relating to allegations of misuse of confidential information not qualifying as a trade secret. CDC Restoration & Constr., LC, v. Tradesmen Contractors, LLC, 2012 UT App. 60 (Feb. 24, 2012).

Paul Carsey was a long-time employee of CDC, a company that repairs concrete and installs protective and decorative coatings. CDC and its customer Kennecott entered into a preferred provider agreement containing CDC’s confidential labor and material costs. In January 2006, while Carsey was assisting CDC in the preparation of a Kennecott contract bid, he resigned from CDC and was elected vice president and project developer for Tradesmen Contractors, a CDC competitor.

At the same time, Kenneth Allen worked for an independent project manager hired by Kennecott to supervise projects such as the bidding. Previously, Allen had been a long-time Kennecott employee. Like Carsey, Allen had intimate knowledge of CDC’s bid. Shortly before Carsey joined Tradesmen, Allen formalized his ownership interest in that company. According to CDC, both Carsey and Allen went to great lengths prior to CDC’s bid submission to conceal their involvement with Tradesmen.

CDC, Tradesmen and a third company all bid on the Kennecott contract. Tradesmen’s bid was lower than CDC’s, a fact CDC attributed to Tradesmen’s knowledge of CDC’s prospective bid. Although Tradesmen’s bid was higher than the third company’s, Tradesmen was awarded the contract. CDC sued Tradesmen, Carsey and Allen, alleging (among other wrongs) misappropriation of trade secrets — CDC’s labor and equipment rates, and its bid — as well as the defendants’ intentional interference with CDC’s economic advantage. CDC also accused Carsey of breach of fiduciary duty.

The trial court granted the defendants’ motion for summary judgment. The appellate court agreed that CDC had failed to demonstrate that there was a genuine issue of material fact in dispute with respect to most of the counts of its complaint but reversed and remanded for trial the trade secret misappropriation claim relating to CDC’s bid. There was no evidence that the pricing information was unobtainable by proper means, or that it required a substantial amount of time and money to develop. Making an argument similar to the basis for a number of court rulings in favor of trade secret claims, CDC maintained that “if Defendants could have easily developed pricing for their [bid] without using CDC’s confidential information, why did they not do so?” The Court of Appeals was not persuaded and held that “mere use” of confidential information is neither “sufficient to maintain a finding of trade secret status, [nor] even a factor relevant to that inquiry.” Moreover, because Carsey himself had provided input into development of CDC’s pricing information, and Allen “lived and worked” this type of data, the court concluded that their general knowledge and experience defeated CDC’s trade secret claim. Finally, the equipment rates, at least, were readily ascertainable simply by making an inquiry to equipment rental companies.

Both courts held that CDC’s bid was a trade secret, but the trial court reasoned that there was no evidence that the bid was used by the defendants, or that they even knew the amount. CDC persuaded the appellate court that there was sufficient circumstantial evidence of the defendants’ use and knowledge of CDC’s bid to defeat a motion for summary judgment.

CDC struck out completely on its common law claims relating to misappropriation “of confidential, proprietary, or otherwise secret information falling short of trade-secret status (e.g., idea misappropriation, information piracy, theft of commercial information, etc.” This was an issue of first impression in Utah appellate courts and one which has divided that state’s federal district courts. Agreeing with a majority of decisions from other states and from Utah district courts, as well as a concern about a ruling that could “undermine the uniformity that motivated the creation and passage of the” uniform trade secrets statutes, the Court of Appeals held that CDC’s common law causes of action were preempted by the UTSA because they “are dependent on the same facts as” CDC’s trade secrets misappropriation claim. Well aware that this holding produces the harsh result that CDC’s common law claims are “preempted by a statute that grants [CDC] no cause of action,” the court observed that the UTSA expressly permits protection of “valuable commercial information contractually, regardless of whether such information meets the statutory definition” of a trade secret.

Although for different reasons, the Utah trial and appellate courts rejected CDC’s claim that Carsey breached a fiduciary duty to the company arising because he was an employee. Without addressing preemption, the trial court held that there was no evidence of a fiduciary duty. The Court of Appeals observed that Utah law is unclear as to whether an employee owes a fiduciary duty to the employer. However, since the supposed breach of fiduciary duty was based on an alleged obligation not to disclose or use confidential business information, the claim was dependent on “misappropriation-of-trade-secret facts” and, therefore, preempted because those are precisely the facts with which the UTSA deals.

Lastly, neither court found a basis for a trial regarding CDC’s averments of tortious interference. While “the evidence supports the allegation that Carsey and Allen did engage in deceptive and deceitful acts,” those acts “all were done to facilitate Tradesmen’s preparation of the winning bid using CDC’s pricing information.” Since CDC’s claim for intentional interference with economic relations relies “on the misuse of confidential information,” that claim also is preempted by the UTSA.

Not all courts would have reached the same result, or would have based the result on the same arguments, as the Utah court did. Other jurisdictions have stronger protections for confidential information that may not rise to the level of a trade secret. One lesson learned is that protecting confidential information by contract may be preferable to reliance solely on a trade secrets statute, at least in Utah.