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

Growing California Trade Secret Preemption Doctrine May Thwart Efforts To Combat Employee Data Theft

Posted in Data Theft, Practice & Procedure, Trade Secrets, Unfair Competition

By Robert B. Milligan, Jessica Mendelson, and Daniel Joshua Salinas

Company information that is sensitive, but may not rise to the level of a trade secret is protectable in California, isn’t it?

Not necessarily. Some recent California decisions have significantly limited an employer’s ability to pursue certain claims and remedies based upon the theft of mere confidential or proprietary information by rogue employees.

Defendants (often individual former employees) who are sued in California for stealing a company’s data are increasingly using the trade secret preemption doctrine to seek dismissal of non-trade secret claims, which are often pleaded alongside trade secret misappropriation claims, that allegedly fall within the scope of the California Uniform Trade Secrets Act (“CUTSA”).

Non-trade secret claims advanced by the employer typically include:

  • conversion
  • interference with contract
  • interference with prospective economic advantage
  • breach of fiduciary duty
  • unjust enrichment
  • fraud
  • statutory claims brought under Bus. & Prof. Code section 17200.

These claims are typically made because they are often easier to prove than the elements of trade secret misappropriation.

While trade secret preemption does not displace breach of contract claims, it can significantly limit the claims and remedies that companies may seek when their confidential or proprietary information is stolen.

Differences Among the States:

Other States: The breadth and scope of trade secret preemption varies from state to state. While some states have held that preemption eliminates alternative causes of action for misuse or theft of confidential, proprietary or trade secret information, other states allow common law claims to be brought for the theft of confidential or proprietary information alone or along with trade secret misappropriation claims.

California state courts: In California, CUTSA generally preempts causes of action that rely on the same “nucleus of facts” as a trade secret misappropriation claim. A recent California Court of Appeal decision reaffirmed that CUTSA provides the exclusive civil remedy for conduct falling within its terms, so as to supersede other civil remedies based upon misappropriation of a trade secret. Accordingly, California state courts typically do not allow both trade secret and non-trade secret claims to be brought for the theft of company information.

 California federal courts: Some California federal courts have been more kind to employers, with some courts not forcing employers to choose until trial which of the claims they will ultimately pursue. A recent California federal court decision, however, refused to permit a plaintiff to proceed on a tort theory for the theft of confidential information at the pleading stages, leaving the pursuit of tort claims for the theft of information not rising to the level of a trade secret unsettled.

Thus, variety is the only consistency when it comes to the application and breadth of preemption under CUTSA in California state and federal court. The California Supreme Court has yet to determinatively address the supersessive scope of CUTSA, but may eventually resolve this difference of opinion.

Workplace Solutions:

California employers must be vigilant to ensure that their employees don’t share their valuable information with competitors. Employers should employ well-drafted and well-communicated agreements and policies to best protect themselves should a dispute arise. Best practices for employers include:

  • Identifying trade secrets or confidential information and adding confidentiality designations on the data
  • Creating agreements and policies to protect the secrecy and confidentiality of company trade secret and proprietary information
  • Effective employee education and training on importance of protecting company trade secrets
  • Effective entrance and exit procedures, including employing exit interviews
  • Tailoring non-disclosure of confidential information agreements to protect non-public and valuable information, and specifying examples of genuine confidential information
  • Utilizing contractual agreements–not simply employee handbooks or policies­­– with employees as contractual remedies are not preempted by CUTSA
  • Aggressive enforcement against breaches and prevention of data theft

Please see our recorded webinars on 2012 California Year in Review: What You Need to Know About the Recent Developments in Trade Secret, Non-Compete, and Computer Fraud Law and the Anatomy of a Trade Secret Audit for more details on how to put your company in the best position.