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Tidings of Data Theft and Coal: California Federal Court Holds That Trade Secret Misappropriation Statute Preempts Claim For Misappropriation Of Confidential Non-Trade Secret Data

Posted in Trade Secrets

By Paul Freehling and Jim McNairy

There was only coal delivered for California employers in a recent California federal decision in which the Court refused to permit a plaintiff to proceed on a tort theory for the theft of confidential information.

In a well-researched and articulate opinion, the federal court for the Northern District of California recently dismissed, as preempted by the California Uniform Trade Secrets Act (CUTSA), claims for misappropriation of non-trade secret proprietary information. Judge Koh, reasoned that those claims arose out of the same operative facts as the plaintiff’s trade secret misappropriation cause of action. SunPower Corp. v. Solarcity Corp., Case No. 12-CV-00694-LHK (N.D. Cal., Dec. 11, 2012) (Koh, J.).

CUTSA contains two somewhat contradictory provisions. It states that “claims based on the same nucleus of facts as trade secret misappropriation” are preempted. But it also provides that the preemption clause does not affect contractual and other claims “that are not based upon misappropriation of a trade secret.” A court analyzing a complaint which alleges misappropriation of trade secrets may conclude that some of the confidential proprietary data referenced does not qualify as a trade secret because, for example, the owner failed to make reasonable efforts to maintain its secrecy. Judicial decisions are divided in such instances as to whether a cause of action for misappropriation of non-trade secret data is preempted.

Judge Koh relied primarily on a California Appellate Court opinion in which, albeit in dicta and in a footnote, the Appellate Court “emphatically reject[ed]” a Pennsylvania federal court’s decision that statutory preemption does not apply. Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210, 239 n.22 (2010) (“a prime purpose of the [Uniform Act] was to sweep away the adopting states’ bewildering web of rules and rationales and to replace it with a uniform set of principles for determining when one is—and is not—liable for acquiring, disclosing, or using ‘information of value’”), disapproved on other grounds, Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011).

The individual defendants in SunPower all were sales employees of the plaintiff, a manufacturer and distributor of solar panels, until they were recruited by SolarCity which also distributes solar panels. All of the individual defendants had signed confidentiality agreements with SunPower. The nine-count complaint alleged that the individual defendants misappropriated (a) trade secrets, in violation of CUTSA, and (b) “non-trade secret proprietary information.” The defendants moved to dismiss the latter claims primarily on the ground that they were superseded by the statute.

In SunPower, Judge Koh cited Georgia, Hawaii, Idaho, New Hampshire and Vermont Supreme Court decisions, as well as several district court opinions, that concurred with the Silvaco dicta and held that non-trade secret misappropriation claims are preempted. However, she also identified a half dozen other district court opinions that were in accord with the Pennsylvania federal court ruling Silvaco criticized. Moreover, she referenced two Ninth Circuit holdings which, “while not explicitly addressing the issue of supersession, . . . have suggested” that the Pennsylvania federal court decision is correct, but she concluded that those holdings “should not be followed to the extent they suggest that SunPower may bring a claim based on confidential or proprietary information that does not satisfy the definition of a trade secret.” She reasoned that the Silvaco court’s rationale was the more persuasive and that decisions to the contrary failed adequately to consider that rationale.

Ultimately, Judge Koh held that, in light of Silvaco, claims for misappropriation of proprietary non-trade secret information would be superseded by CUTSA unless (1) such information was “made property by some provision of positive law”, or (2) the non-trade secret claims allege “wrongdoing that is materiall[y] distinct [] [from] the wrongdoing alleged in a [C]UTSA claim”. By addressing both the nature of the information at issue and the conduct related to alleged unlawful acquisition or use of such information, Judge Koh very broadly interpreted the preemptive effect of CUTSA. In doing so, she placed a premium on careful, precise pleading.

Another issue raised by SunPower in opposition to SolarCity’s motion concerned the propriety of deciding, pursuant to a Rule 12(b)(6) motion rather than delaying until the summary judgment stage, whether SunPower’s trade secret and non-trade secret claims arose out of the same nucleus of facts. In several cases cited by SunPower, the courts denied Rule 12(b)(6) motions on the ground that, for purposes of deciding such motions, the plaintiffs’ factual allegations must be accepted as true. However, Judge Koh was not convinced. She cited one Northern District of California decision to the contrary, and she referenced the U.S. Supreme Court’s opinions in Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombley in concluding that SunPower’s complaint asserted implausible causes of action regarding non-trade secret information (however, she said she would grant SunPower leave to amend its complaint).

Judge Koh left no doubt concerning her resolution of the present confusing and contradictory state of California law regarding preemption by CUTSA of non-trade secret claims. She went out on a limb by relying on controversial dicta in a California Appellate Court opinion, an opinion which she candidly noted was disapproved —on other grounds—in a later California Supreme Court ruling. Her decision will be applauded and cited by defendants in that state and elsewhere, but it will be criticized by plaintiffs and employers having deal with data theft by former employees.  At an early date, the legislators should consider amending the Act by removing the current inconsistency. This is particularly the case because a trade secret claim has a heightened evidentiary standard and employers may not be able to pursue such a claim (at least under a tort theory) where an employee steals data that may not rise to the level of a trade secret in light of this decision.