November 9, 2018

Whether the “Economic Loss Rule” Applies To DTSA Claims

Holland & Knight Trade Secrets Blog
Steven D. Gordon

A trade secret misappropriation claim can arise from the same facts as, and be joined with, a claim for breach of contract by the defendant, such as a breach of a covenant not to compete or breach of a non-disclosure agreement. One issue that has arisen in such cases is whether the trade secret claim can be barred, in whole or in part, by the "economic loss rule."

Damages for breach of contract are limited to what, at the time of contracting, was or should have been contemplated by the parties to be the probable result of a breach. The economic loss rule precludes the recovery of tort damages (uncontemplated consequential damages) for what is essentially a contract claim where the loss is economic in nature. In practice, the rule has often been applied to preclude tort claims where the duty allegedly breached by the defendant stems solely from a contract between the parties. The economic loss rule is a matter of state law and has been applied in a somewhat different fashion and to a greater or lesser extent by various states.

One federal appeals court has opined that a trade secrets claim can be precluded to the extent it is subsumed in a contract claim. Bohler-Uddeholm America, Inc. v. Ellwood Group, Inc., 247 F.3d 79, 106-07 (3d Cir. 2001) (applying Pennsylvania law). However, a number of other courts have taken the opposite view, primarily relying on the fact that trade secret claims are generally statutory in nature rather than common law claims. These courts have ruled that statutory remedies for trade-secret misappropriation are not barred by the economic loss rule. See USConnect, LLC v. Sprout Retail, Inc., 2017 WL 1450593, at *8 n. 1 (N.C. Super. Ct. 2017) (collecting cases).

The applicability of the economic loss rule to claims under the federal Defend Trade Secrets Act (DTSA) had not been addressed until recently. A federal court has now ruled that the economic loss rule cannot be applied to bar a trade secrets claim under the DTSA. Great American Opportunities, Inc. v. Kemp, 2018 WL 5249998, at *9-10 (D. Colo. 10/22/18). The court reasoned that "[t]he economic loss rule cannot be applied to preclude a statutory claim if the legislature intended the statute to provide a statutory remedy in addition to a contractual one." Because the DTSA was modeled after the Uniform Trade Secrets Act (UTSA), the court concluded that "there is no reason to think that the DTSA was not intended to provide extra-contractual remedies where the [Colorado version of the UTSA] was intended to provide extra-contractual remedies."

Whether the economic loss rule bars a trade secret claim is a question of state law for claims based on state trade secrets acts, and the answer may vary among different states. Nevertheless, trade secret claims made under the DTSA are not subject to limitation by state law, and so the applicability of the economic loss rule to DTSA claims should be uniform regardless of locale. Time will tell whether the conclusion of this federal court case in Colorado that the economic loss rule does not apply to a DTSA claim is shared by other federal courts.

Related Insights