The nineteenth century English jurist Lord Ellenborough once observed that “it is difficult to struggle with the common law.” Kerr v. Willan, 171 Eng. Rep 570 (K.B. 1817). Nearly two centuries later, struggling with the common law is still a formidable task – especially in cases involving claims of trade secrets misappropriation under the Uniform Trade Secrets Act (“UTSA”).
The UTSA, which has been enacted in one form or another by all but two states, provides a statutory remedy for trade secrets misappropriation. Like the version of the UTSA enacted by other states, Arizona’s version of the UTSA, the Arizona Uniform Trade Secrets Act (“AUTSA”), contains a provision broadly providing that the law “displaces conflicting tort, restitutionary, and other laws of this state providing civil remedies for misappropriation of a trade secret.” A.R.S. § 44-407(A). Also like the version of the UTSA enacted by other states, the AUTSA includes an important exception to this broad preemption provision:
This chapter does not affect:
1. Contractual remedies, whether or not based on misappropriation of a trade secret.
2. Other civil remedies that are not based on misappropriation of a trade secret.
3. Criminal remedies, whether or not based on misappropriation of a trade secret.
A.R.S. § 44-407(B).
These provisions are straightforward when a plaintiff sues for misappropriation of information that is clearly a “trade secret” as defined by the AUTSA. In those cases, the AUTSA is the plaintiff’s sole remedy (other than criminal and contractual remedies) and the plaintiff cannot bring common law claims (such as claims for unfair competition, conversion, or unjust enrichment) for misappropriation of the same information. But what happens when a plaintiff sues for misappropriation of both “trade secrets” and confidential information that does not qualify as a “trade secret” under the AUTSA? Since the plaintiff cannot assert an AUTSA claim for misappropriation of run-of-the-mill confidential information that does not qualify for protection as a trade secret, is the plaintiff free to assert common law claims for misappropriation of that run-of-the-mill confidential information? Or is the plaintiff simply out of luck?
Courts throughout the country have grappled with this question since the UTSA was first adopted. Not surprisingly, courts have reached different opinions on the question. Courts in several states have held that the UTSA should be read broadly to preempt all claims related to the misappropriation of information, regardless of whether or not the information falls within the definition of a trade secret. Conversely, courts in other states have concluded that the UTSA preempts only claims for misappropriation of “trade secrets,” as defined by the UTSA, and leaves available all other remedies for the protection of confidential information that is not a trade secret.
With its recent decision in Orca Communications Unlimited, LLC v. Noder, 337 P.3d 545 (Az. 2014), the Arizona Supreme Court joined this latter group and held as a matter of first impression that the AUTSA does not displace common law remedies for misappropriation of confidential information that does not qualify as a trade secret.
In that case, Orca Communications Unlimited (“Orca”), sued its former employee, Noder, for unfair competition after Noder left Orca to start a competing business. In its complaint, Orca alleged that, through her employment with Orca, Noder had “learned confidential and trade secret information about Orca,” including “Orca’s business model, operation procedures, techniques, and strengths and weaknesses,” and that she intended to “steal” and “exploit” that information to gain a competitive advantage for her new company. After Noder filed a motion to dismiss, the trial court dismissed Orca’s unfair competition claim, reasoning that the AUTSA preempted “common law tort claims arising from the alleged misuse of ‘confidential information,’” even as to information “not asserted to rise to the level of a trade secret.” On appeal, the Arizona Supreme Court disagreed and reversed the trial court’s decision. Noting the split of authority on the scope of the UTSA’s preemption of common law remedies, the court based its decision on the express language of the AUTSA cited above and observed:
On its face, § 44-407 displaces only conflicting tort claims for “misappropriation” of a “trade secret,” terms AUTSA specifically defines, A.R.S. § 44-401(2), (4), and leaves undisturbed claims “that are not based on misappropriation of a trade secret,” id. § 44-407(A), (B)(2). Nothing in this language suggests that the legislature intended to displace any cause of action other than one for misappropriation of a trade secret.
Moreover, the court noted that Noder’s argument was inconsistent with the “well-established principle” that “[i]f the legislature seeks to preempt a cause of action, the law’s text or at least the legislative record should say so explicitly” and that “[a]bsent a clear manifestation of legislative intent to displace a common-law cause of action, we interpret statutes with every intendment in favor of consistency with the common law.” Accordingly, because the text of the AUTSA “creates reasonable doubt about the legislature’s intent regarding displacement of common-law claims that do not involve trade secrets as defined in AUTSA,” the court concluded that the trial court erred in dismissing the unfair competition claim to the extent that it was premised on misappropriation of confidential information that is not protected by the AUTSA.
The Arizona Supreme Court’s decision in Orca illustrates a significant trend in trade secrets litigation in recent years: as an increasing number of states adopt the UTSA, courts throughout the country increasingly must consider how the UTSA impacts existing common law remedies, As reflected by the split of authorities that the Arizona Supreme Court cited in Orca, courts are literally all over the map in how they answer this question. Since interpretation of the UTSA (as enacted by each state) is a matter of state law, it is unlikely that a consensus will be reached on this issue anytime in the near future. And although creation of a federal civil cause of action for trade secrets misappropriation appears increasingly likely, current proposals in Congress provide that any federal civil action will not preempt state law. Assuming that Congress does not completely preempt state law trade secrets law, the split of authorities among state courts will likely continue even if a federal trade secrets law is passed.
Given the lack of uniformity on this issue, employers should stay abreast of how courts are interpreting the UTSA or other trade secrets law in the jurisdictions where they do business. For a quick reference on how your jurisdiction stacks up on trade secrets protection, refer to our 50 State Desktop Reference and contact a Seyfarth Shaw trade secrets lawyer.