By Daniel Hargis

The case of Illumination Management Solutions, Inc. v. Ruud pending in the Eastern District of Wisconsin exemplifies the continuing lack of certainty on the scope of California Uniform Trade Secrets Act (“CUTSA”) preemption when the claims potentially subject to preemption concern information that itself may not qualify as a trade secret but is nevertheless confidential or proprietary.

CUTSA does not preempt claims that seek “civil remedies that are not based upon misappropriation of a trade secret.” Cal. Civ. Code § 3426.7(b). While this language may suggest on its surface that claims alleging misappropriation of information not rising to the level of a trade secret are not preempted, courts disagree on the issue. Compare, e.g., Leatt Corp. v. Innovative Safety Tech., LLC, No. 09–CV–1301, 2010 WL 2803947, at *6 and n. 5 (S.D. Cal. July 15, 2010); Phoenix Tech. Ltd. v. DeviceVM, No. C 09–04697, 2009 WL 4723400, at *5 (N.D. Cal. Dec. 8, 2009) with Mattel, Inc. v. MGA Entm’t, Inc., 782 F.Supp.2d 911, 987 (C.D. Cal. 2011); Gabriel Techs. Corp. v. Qualcomm Inc., No. 08CV1992, 2009 WL 3326631, at *11 (S.D. Cal. Sept. 3, 2009).

Illumination Management, which was adjudicating the CUTSA as the case was originally filed in federal court in Los Angeles but was later transferred to the Eastern District of Wisconsin, falls into the group of cases finding such claims to be preempted. The dispute arose out of the one-time collaboration of two businesses in the lighting industry. The plaintiff, a company specializing in the development of light emitting diode technology, partnered with the Wisconsin based defendants to incorporate its technology into defendants’ products. The collaboration led to the defendants becoming shareholders in the plaintiff and obtaining a seat on the plaintiff’s board. Because of the relationship, the plaintiff freely shared information and technology with the defendants. The defendants are alleged to have thereafter introduced their own competing products using the light emitting diode technology. And the defendants entree into the market, according to the plaintiffs, was due to various wrongs perpetrated by the defendants, including misappropriation of the plaintiff’s trade secrets and breach of common law duties owed to the plaintiff.

After the case was transferred to the Eastern District of Wisconsin, the defendants moved to dismiss the plaintiff’s second amended complaint, which alleged eleven claims, including misappropriation under CUTSA and several common law claims.

In September, the court dismissed plaintiff’s common law claims for breach of fiduciary duty, civil conspiracy, aiding and abetting breach of fiduciary duty, and negligent breach of the duty of care finding that the claims arose from the same nucleus of facts as the CUTSA claim and were thus preempted. Illumination Management Solutions, Inc. v. Ruud, No. 10–C–1120, 2012 WL 4069315 (E.D. Wis. Sept. 14 2012). The court stated that claims based on the misappropriation of information that does not qualify as a trade secret are preempted by CUTSA. Id. at *4. Recently, the court denied the plaintiff’s motion for reconsideration of the dismissal order. Illumination Management Solutions, Inc. v. Ruud, No. 10–C–1120, 2012 WL 6060967, *1-2 (E.D. Wis. Dec. 6, 2012). The court, however, did grant the plaintiff’s alternative request to amend its complaint to attempt to allege common law claims that “do not involve the misuse of trade secrets or confidential information.” Id. at *3 (emphasis original).

Whether claims based on the misappropriation of information that does not qualify as a trade secret are preempted by CUTSA may one day be resolved by the California Supreme Court. But until then, Illumination Management highlights that claimants who merely assert, in the alternative to their trade secret claim or otherwise, that misappropriation of information not qualifying as a trade secret can nevertheless give rise to non-trade secret claims risk dismissal of those claims on preemption grounds.

Claimants need to be aware of the issue and, if there are valid grounds to do so, plead around the preemption defense. If there is another theory that would support a non-trade secret claim beyond a misappropriation of information theory, the claimant should plead that alternative theory if it can do so in good faith. The theory can be pled in conjunction with, but as a clearly delineated alternative to, a misappropriation of information theory. Before filing the pertinent pleading, the claimant should thus consider potential alternative theories for its non-trade secret claims, ensure there is support for the alternative theories, or if the theories can be asserted on information and belief, and draft the pleading such that it is clear that the alternative theories are distinct from a misappropriation of information theory. This is really an exercise in issue spotting and thinking creatively about one’s claims.

Finally, claimants shouldn’t assume they will be able to cure pleading deficiencies through amendment. Even if given leave to amend, the allegations in a prior pleading can doom a subsequent pleading. For example, at least in California, admissions in an original pleading that has been superseded by an amended pleading remain within the court’s cognizance, and the alteration of such admissions by amendment designed to conceal fundamental vulnerabilities in a plaintiff’s case will not be accepted the court. See, e.g., Berg & Berg Enterprises, LLC v. Boyle, 178 Cal.App.4th 1020, 1043 n. 25, 100 Cal.Rptr.3d 875 (2009). Similarly, a claimant may not avoid dismissal by alleging facts in an amended pleading that contradict those facts originally pled. See, e.g., McKell v. Washington Mut., Inc., 142 Cal.App.4th 1457, 1491, 49 Cal.Rptr.3d 227 (2006).