Can Oregon employers bring conversion claims against employees who misappropriate confidential information without having their claims preempted by the state’s Uniform Trade Secrets Act? According to a recent Oregon federal district court opinion, the answer is “yes”; however, in several other states, the answer is “no”.
This result highlights the continued divergence of opinion across the nation concerning the viability of tort or statutory claims based upon the theft of information that may not rise to the level of a trade secret.
It matters because such claims are often easier to prove than trade secret claims, particularly before juries who may have high expectations for trade secret classification. They also provide a wider variety of remedies than contract claims, exposing defendants to liability for all harm proximately caused by the defendants’ conduct. Additionally, such claims may not be subject to the stringent discovery requirements for trade secret claims in some states which require the identification of the stolen information with particularity before discovery commences.
Simply put, theft of information claims (whether based upon common law business torts or statute) provide employers with additional leverage to protect their companies from employees and competitors that may use such information but arguably are inconsistent with the preemption provisions found in many states’ Uniform Trade Secrets Acts.
In KF Jacobsen v. Gaylor, Case No. 3:12-cv-02062-AC, — F.Supp.2d —-, 2013 WL 2318853 (D. Or. 2013), an employer filed suit against its former employee alleging that, when he departed, he took with him a variety of confidential and proprietary files. The employer’s complaint included claims for violation of the Oregon Trade Secrets Act (“OTSA”), the Computer Fraud and Abuse Act, the Stored Communications Act, and conversion.
The employee then brought a motion to dismiss arguing that the employer’s conversion claim was preempted by its claim under the OTSA and that a plaintiff may not base a conversion claim on taking copies of information. The employer argued that its conversion claim was not preempted by the OTSA to the extent it sought damages for the conversion of information other than trade secrets and that it had adequately alleged that the employee exercised control over the copied information in a manner inconsistent with the employer’s rights as owner of the information. In its complaint, the employer described the documents allegedly misappropriated by employee as “some of which may be additional misappropriated trade secrets of plaintiff or confidential and proprietary information of plaintiff.” (emphasis added).
The OTSA supersedes “conflicting tort, restitution or other law of Oregon providing civil remedies for misappropriation of a trade secret.” OR. REV. STAT. 646.473(1). Actions seeking contractual and criminal remedies are not affected by the Trade Secrets Act. OR. REV. STAT. 646.473(2)(a) and (c). Additionally, a plaintiff may still pursue an action for “civil remedies that are not based upon misappropriation of a trade secret.” OR. REV. STAT. 646.473(b).
The court indicated that Oregon courts have not addressed the extent to which the OTSA preempts civil remedies. The court acknowledged that a number of courts in other states have extended the preemptive effect of the language found in OR. REV. STAT. 646.473 to claims that are based on the same operative facts as a claim for trade secret misappropriation. See id. (citing Penalty Kick Mgmt. Ltd. v. Coca Cola Co., 318 F.3d 1284, 1297-98 (11th Cir. 2003) and Hutchinson v. KFC Corp., 809 F.Supp. 68, 72 (D. Nev. 1992). The court further acknowledged that an Oregon federal district court had specifically held that the OTSA preempts conversion claims based on alleged misappropriation of trade secrets. See id. (citing Kante v. Nike, Inc., No. CV 07-1407-HU, 2008 WL5246090, *4 (D. Or. Dec. 16, 2008). (emphasis added).
The employer argued that its allegations were broad enough, when read together to allege that employee may have in his possession information that is not trade secret information and, therefore, not covered by the OTSA. The court found that the term “confidential and proprietary information” could be construed broadly enough to include information that does not fall with the definition of “trade secret” under the OTSA. Consequently, the court found that the conversion claim seeks damages for the conversion of information other than trade secrets, and thus was not preempted by the OTSA.
The employee also argued that, even if the employer’s claim were not preempted, the employer still could not assert conversion because he did not interfere with the employer’s ability to access or control their documents. The employee argued that he “merely copied documents…at a time when he had the authority to do so.” The court did not find this argument persuasive. It stated that the “the gravamen of the tort [of conversion] is the defendant’s intent to exercise control over the chattel inconsistently with the plaintiff’s rights.” The court found that employee’s alleged copying, retaining, and sharing of the information with third parties, without the employer’s consent, was inconsistent with the employer’s control over the documents and the information in the documents, and its right to keep the information confidential. Accordingly, the court found that the employer had sufficiently alleged in its pleading that the employee “exercised control over the chattel inconsistently” with employer’s rights to maintain the confidentiality of the information.
With the court’s rejection of the employee’s arguments against the conversion claim, the court confirmed that the employer could state a claim based upon the theft of confidential information. There is, however, an interesting footnote in the court’s opinion that could limit the applicability of its analysis. In this footnote, the court stated that conversion “generally covers only chattel or tangible property.” According to the court, neither party raised the issue of whether the employee misappropriated tangible property, rather than intangible property “not subject to conversion.” Accordingly, whether the confidential information at issue (either in hard copy or electronic form) qualifies for protection remains an open question in the case. With the prevalence of information sharing/transfer through email, Drop Box, social media, and flash drives, this is an important distinction to keep in mind and is worth following as the case progresses. Nevertheless for Oregon employers who face the situation of an employee who walks out the door with confidential information, this decision lays out a path to plead a claim for conversion (at least for now).
This decision comes in the wake of several other preemption rulings which have reached different results.
A federal district court in California, for example, recently held claims for intentional interference with contractual relations, intentional interference with prospective economic advantage, unfair competition, breach of fiduciary duty were preempted or subject to supersession. Other California courts have reached different results.
Additionally, another California federal district court recently found that a return of personal property claim based on the taking of “confidential, proprietary, and/or trade secret information” was preempted. In that case, the court analyzed three different approaches to preemption employed by California courts. Under one approach, a claim has been found exempt from supersession so long as the claim requires the allegation of “something more” than just trade secrets misappropriation. Another approach has found a claim exempt from supersession unless it is based on the taking of information that is ultimately adjudged to be a trade secret. Lastly, other courts have found information theft claims are only saved from supersession if a plaintiff “assert[s] some other basis” beside trade secrets law for a property right in the information at issue.” In the case, the court granted the motion to dismiss and adopted the third approach “given CUTSA’s breadth and structure, its purpose of promoting uniformity, and the broad superseding effect of the narrower uniform trade secrets.”
The California Supreme Court has yet to determinatively address the supersessive scope of CUTSA, but may eventually resolve this difference of opinion.
Courts in western states such as Arizona, Hawaii, Nevada, Utah, and Washington have reached similar results preempting “confidential information” theft claims under their respective trade secret preemption statutes. A Pennsylvania federal court, however, recently found that preemption should not be determined on the pleadings and a New Jersey state court determined that common law claims were not displaced by New Jersey’s new trade secret statute.
The only certainty in this area appears to be its variety (even within states). For some best practices to protect confidential information in light of this uncertainly, please see our previous blog post. Additionally, I will be leading a presentation at the ABA Annual Meeting in San Francisco, California this Friday, August 9, 2013 at 2:00 p.m.-3:30 p.m. p.s.t. on Hot Topics in Trade Secrets Law Across the Country. Please consider attending to learn more about the latest in trade secret preemption and other hot topics in trade secrets law.