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October 2011

Narrowing the Claims in Trade Secret Litigation: Preemption Under the California Uniform Trade Secrets Act

By | Trade Secrets - News & Publications

by Andrew Holland

A recent decision by the California Court of Appeal clarifies the impact of California’s Uniform Trade Secret Act on other related common law claims. In K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., et. al. (2009) 171 Cal.App.4th 939, the Court of Appeal upheld the trial court’s dismissal of plaintiff’s causes of action for breach of confidence, tortious interference with contract and statutory unfair competition. The court held that California’s Uniform Trade Secret Act (“CUTSA”) preempts common law claims and provides the exclusive remedy for any claims based on the same nucleus of facts as a misappropriation of trade secrets claim under CUTSA.
In K.C. Multimedia, Inc., a dispute arose after plaintiff supplied defendant Bank of America Technology & Operations, Inc. with technology services. Plaintiff claimed that during the business relationship, the bank misappropriated plaintiff’s trade secrets, which consisted of prototypes for two banking applications that were designed to simplify customers’ access to on-line banking information. The trial court dismissed plaintiff’s common law claims after it determined that these claims were based on the same nucleus of facts as plaintiff’s claim for misappropriation of trade secrets. After defendant subsequently defeated plaintiff’s claim under CUTSA at trial, plaintiff unsuccessfully appealed the trial court’s dismissal of plaintiff’s other common law claims.
K.C. Multimedia, Inc. is consistent with previous federal decisions interpreting California case law. For example, in First Advantage Background Services Corp. v. PrivateEyes, Inc. (N.D. Cal. 2008) 569 F. Supp.2d 929, the court found that CUTSA preempts common law claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets.
Why is K.C. Multimedia, Inc. Significant?
By clarifying the preemption effect of CUTSA, K.C. Multimedia, Inc. should help narrow the scope of discovery and disputed issues in trade secret litigation. Until recently, California state law was unclear as to whether there was a legal distinction between a misappropriation of trade secret claim under CUTSA and claims for the misuse of confidential information that did not meet the legal definition of a trade secret. Many plaintiffs alleging a claim for misappropriation under CUTSA would often capitalize on California’s lack of uniformity in published cases and lack of guidance on the issue by alleging a host of related causes of action in their complaint such as breach of confidence, breach of the duty of loyalty, unfair competition and interference with contract. Instead of having a single statute of limitations, potentially numerous statute of limitations could apply to different claims based on the same nucleus of facts. Moreover, in the event that a defendant successfully demonstrated that the information at issue did not meet the legal definition of a trade secret1, plaintiffs could rely on a second line of attack to argue that the use of this “confidential information” was still actionable, although attorney’s fees and treble damages otherwise available under CUTSA may not be recoverable.
K.C. Multimedia, Inc. makes it clear that plaintiffs alleging a claim for the misuse of “confidential information” face the same legal standards required for proving a misappropriation of trade secret claim under CUTSA. Moreover, they can not plead around this legal standard or seek relief under an alternative theory by alleging various other common law or statutory causes of action based on the same nucleus of facts.
1 CUTSA defines “trade secret” as “information, including a …compilation…that: (1) derives economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (Civ. Code, §3426.1(d.))