The UTSA and Preemption of Other Claims
A Trade Secret Claim By Any Other Name (Usually) Does Not Smell So Sweet
In drafting initial pleadings, some litigators assert every cause of action that could possibly fit the facts, so as to protect their clients from every angle. This approach requires extra care when one of the claims arises under the Uniform Trade Secrets Act (UTSA), which has been adopted in some form or another by virtually every U.S. state and territory. The reason? The UTSA's preemption provision—Section 7 of the Uniform Act—mandates that the trade secrets act "displaces" all other non-contractual civil remedies for trade secret misappropriation.1
This has very real implications, because trade secret claims often overlap heavily with other claims such as business torts, and can even be used to preempt claims concerning non-trade secret information. In general, such overlapping claims should survive preemption only if, and to the extent that, they have a distinct factual basis from a claim for trade secret misappropriation. The preemption provision is increasingly relevant today, given the present surge in trade secret litigation and pervasive concern over securing business information of all kinds. This post discusses the effect of the UTSA preemption provision, and the split of authority concerning its scope.
UTSA Preemption in Action
A recent case out of the Southern District of Florida is illustrative. In Pelfrey v. Mahaffy, Schmidt and Exquadrum, Inc.2 Judge Donald M. Middlebrooks relied on the Florida uniform trade secret act (FUTSA), which was based on the UTSA, to dismiss several claims, because they were materially indistinguishable from an accompanying trade secret claim. The plaintiff, Pelfrey, sued his former employer/business partners at Exquadrum, Inc. Exquadrum then counterclaimed by alleging that when Pelfrey left the company, he stole, destroyed and otherwise misused client data and other confidential business information.
In relevant part, Exquadrum asserted trade secret misappropriation under FUTSA, and also asserted conversion; tortious interference with contracts; tortious interference with existing business relationships; tortious interference with prospective business relationships; unfair competition; computer hacking under Florida law; and computer hacking under federal statute. Pelfrey moved to dismiss, arguing that each of those counterclaims (except trade secret misappropriation) was preempted.
As to the Federal computer hacking claim, the court denied the motion to dismiss because a claim arising under Federal law cannot be preempted by state statute. As to the remaining counterclaims, three were dismissed entirely, and three were dismissed in part—the business tort counterclaims survived only insofar as they were based on factual allegations "independent of the facts supporting the misappropriation claim." 3
For instance, Exquadrum's claim of conversion survived with respect to property not characterized as "confidential" and/or constituting "trade secrets" under the FUTSA claim, and the company's tortious interference and unfair competition claims survived with respect to allegations that Pelfrey held himself out as an owner of Exquadrum's technology, which was not an alleged act of misappropriation per se. Thus, to the extent the non-trade secret claims arising under state or common law relied on the same alleged misconduct and harm as the trade secret claim (even if those other claims "emphasized" different alleged facts), they were preempted by FUTSA.
As demonstrated by Pelfrey, trade secret claimants should take care to distinguish between the allegations underlying a claim of misappropriation and those necessary to any other, non-contractual claim. Mindless kitchen-sink pleading will not do. Claimants also may consider (1) any potential claims arising under federal laws, such as the Defend Trade Secrets Act (DTSA) 4 or the Computer Fraud and Abuse Act (CFAA), which cannot be preempted by state statute, and (2) any potential contract-based claims, which are exempt from UTSA preemption. Trade secret defendants, meanwhile, should always consider preemption as a way to knock out overlapping claims, in whole or in part.
Split of Authority
Although the vast majority of state trade secret statutes include some version of the UTSA preemption provision, a split of authority has emerged regarding the scope of the preemption. Some courts have founds that the UTSA preempts non-contractual claims concerning the protection of all confidential or proprietary business information, whether or not that information constitutes a trade secret as defined by the UTSA. Other courts, however, determined that preemption only affects the protection of actual UTSA trade secrets.
In some jurisdictions, UTSA preemption is appropriate for an initial motion to dismiss (as in Pelfrey) or a later motion for judgment on the pleadings. In others, where the relevant trade secret statute is interpreted to only preempt claims based on trade secrets,5 UTSA preemption is unlikely to be resolved on the pleadings, because the existence of a trade secret is generally considered a question of fact. In those jurisdictions, preemption should be preserved as an affirmative defense and may be addressed upon a motion for summary judgment.
Before filing non-contractual claims to protect their business information, potential plaintiffs should consider how the preemption provision is treated. That consideration may factor into venue selection as well as the drafting of claims. Defendants in such cases should educate themselves on the same issue, for purposes of crafting responsive pleadings or motions, preserving rights as needed, and determining whether and how to claim that any alleged trade secret does not qualify as such.
In addition, those looking to protect their trade secrets and other business information should employ confidentiality agreements whenever possible (i.e., with employees, contractors and business partners exposed to proprietary information), since the UTSA never preempts contractual remedies, regardless of whether the relevant information constitutes a trade secret.
1 The vast majority of states include some version of the UTSA Section 7, but a few, including New Mexico, Iowa and Nebraska, have eschewed the preemption provision altogether.
2 Pelfrey v. Mahaffy, Schmidt and Exquadrum, Inc., Case No. 17-cv-80920, 2018 WL 3110797 (S.D. Fla., Feb. 07, 2018).
3 The dismissals were granted without prejudice because it was unclear whether amendment would be futile. See id. at *7.
4 The DTSA, enacted in 2016, provides a federal cause of action for misappropriation of trade secrets related to interstate or foreign commerce. In contrast to the UTSA, the DTSA expressly disavows the preemption of any other provision of law. 18 U.S.C. 1838.
5 Trade secret statutes that have been interpreted according to the minority rule include those of Arizona, Maryland, Mississippi, South Carolina, Virginia and Wisconsin.