California Court of Appeal Issues Decision Upholding Preemption of Claims for Breach of Confidence, Interference with Contract, and Statutory Unfair Competition under the California Uniform Trade Secrets Act

June 3, 2009

On March 3, 2009, the California Court of Appeal for Sixth Appellate District issued a significant published opinion substantively analyzing the scope of the preemption clause (Civ. Code § 3426.7) of the California Uniform Trade Secrets Act (“CUTSA”).   In K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal. App. 4th 939 (2009), the Court of Appeals takes a step beyond the California Supreme Court’s decision in Cadence Design Systems, Inc. v. Avant! Corp., 29 Cal. 4th 215, 223 (2002)–which noted that post-CUTSA claims for common law misappropriation were preempted by the Act–concluding that the Act also preempts common law claims for breach of confidence, interference with contract, and statutory unfair competition (under Cal. Bus. & Prof. Code § 17200) where those claims are “based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.”  171 Cal. App. 4th at 958 (citing Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1035 (N.D. Cal. 2005)).

A Common Sense Approach

In reaching its decision, the K.C. Multimedia court took a straightforward, fact-based approach that both considered the plain language of the statute and the logic of several federal court opinions interpreting the Act.  First, it reasoned that CUTSA’s “comprehensive structure and breadth”–by which it “defines key terms, provides various forms of relief, spells out methods for preserving the secrecy of trade secrets, and sets forth the limitations period”–suggested a legislative intent to occupy the field.  Id. at 957 (citing AccuImage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941, 953 (N.D. Cal. 2003)).  Then, specifically analyzing CUTSA’s preemption clause–which states in pertinent part that CUTSA does not affect “other civil remedies that are not based upon misappropriation of a trade secret”–the court concluded that this language would be “meaningless” if common law claims based upon misappropriation were allowed to go forward.  Id. at 958 (citation omitted; emphasis added).  The court further explained that the phrase “‘based upon misappropriation’ – strongly suggests a factual inquiry, one that examines the conduct alleged in the claim.”  Id. (citation omitted).  In making this observation, the court cited recent federal court precedent applying the same type of fact-based analysis under California law.  See, e.g., Callaway Golf Co. v. Dunlop Slazenger Group Americas, 318 F. Supp. 2d 216, 219 (D. Del. 2004).

The K.C. Multimedia court also pointed out that CUTSA’s preemption clause, unlike those of many other states, did not follow the language of the Model Uniform Trade Secrets Act (“UTSA”), which provides that the UTSA “displaces conflicting tort, restitutionary, and other [state] law . . . providing civil remedies for misappropriation of a trade secret.”  171 Cal. App. 4th at 955 (citing 14 West’s U. Laws Ann., UTSA, § 7(a)) (emphasis added).  While it went on to acknowledge the overarching goal of uniformity of the law among states adopting the UTSA, the court nonetheless concluded that the deviation in CUTSA’s preemption clause language was “deliberate.”  Id. at 955-56.  Thus, it held that case law interpreting the Model UTSA preemption language could not be persuasive to the interpretation of CUTSA’s “unique” preemption provision.  Id. at 956.

In rejecting these non-California cases, the court also rejected the “something more” standard they applied, a rule which allows common law claims to “go forward whenever they seek ‘something more’ than trade secret relief.”  Id. at 958.  Because this rule was based in non-California authority, and because the California case law cited by Appellant did not address the specific preemption question before the court–i.e., statutory preemption of common law–the court concluded that this authority “offer[ed] no reasoned basis for allowing common law claims to go forward whenever they seek ‘something more’ than trade secret relief.”  Id.  How this language will be interpreted in practice is yet to be seen, but it should open the door for courts to engage in a more exacting preemption analysis at the pleading stage.

A Beginning

K.C. Multimedia is a significant addition to the otherwise almost vacant landscape of published California state authority on the scope of CUTSA’s preemption clause, but it is only a beginning.  Indeed, the opinion strongly suggests that it should not be interpreted as laying down any “hard and fast” rules concerning preemption of particular common law or statutory causes of action.  It is permeated with careful language tying its preemption analysis to a thorough fact-based inquiry–even noting, at one point, that the court below “was armed with a great deal of information derived from the long history of the case, including appellant’s prior pleadings and other submissions.”  Id. at 952; see, e.g., id. at 960 (regarding the breach of confidence claim: “[e]mploying that same fact-driven approach here, we focus on the factual predicate for the claim. . . .”); id. at 961 (regarding the interference claim:  “[f]actually, the conduct derives from ‘the same nucleus of facts’ as the trade secrets claim . . .”) (citation omitted); id. at 962 (“[A]ppellant’s statutory unfair competition claim rests squarely on its factual allegations of trade secret misappropriation.”).

Moreover, at times, the court seemed to consciously insert cautionary language into its opinion–observing, for example, that “[a]s yet, it is not clear to what extent, if any, a statutory cause of action for trade secret misappropriation supersedes a cause of action for breach of confidence.”  Id. at 960 (emphasis added; citation omitted).  Likewise, it acknowledged that “Courts and commentators frequently analyze separately unfair competition and trade secrets protection.”  Id. at 961 (citation omitted).  Thus, it is unlikely that this decision will mark the end of claims for either common law breach of confidence or for statutory unfair competition based on some variation of a CUTSA claim.

Practical Effects of the Decision

While the court’s focus on a factual inquiry suggests that defendants may continue to face an uphill battle in asserting CUTSA preemption on demurrer, the potential remains for the early, ‘preventative’ use of Section 3426.7.  As many practitioners know, trial courts historically have shown reluctance to dismiss CUTSA companion claims on the basis of preemption–particularly when faced with a dispute as to whether the information at issue was in fact a trade secret.  But in K.C. Multimedia, the appellant presented that very issue to the Court of Appeal, and also asserted that the trial court’s preemption ruling was premature, “since no evidence had been presented” at the time of the ruling.  Id. at 951.  The court rejected these arguments and concluded that the trial court properly “acted within its inherent authority” to control the litigation when it granted a motion in limine on the preemption issue.  Id. at 951-53.  

Additionally, based on its own independent review of the complaint, the court concluded that the claims were in fact preempted, and thus, that the trial court’s ruling was also substantively correct.  Id. at 953.  In reaching its decision, the court reminded litigants that the preemption inquiry looks at “the particular facts pleaded” and further pointed out that “[c]onstruction of a complaint presents a legal question.”  Id. at 958-59.  The opinion therefore can be read to suggest that trial courts can and should engage in a more rigorous preemption analysis at the demurrer stage.

Only time will tell whether K.C. Multimedia will lead trial courts to require more particularized pleading for complaints asserting both CUTSA and related common law and/or statutory claims.  Should this occur, the practical effects could emerge in the form of more focused discovery, and more streamlined pretrial proceedings (due to the dismissal of claims that in substance do not differ from statutory misappropriation claims).  On the other hand, the K.C. Multimedia decision also could encourage practitioners to delay pleading a CUTSA claim until they have engaged in discovery on parallel common law, contract, and/or statutory claims and have concluded that a viable CUTSA claim in fact exists.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher’s Intellectual Property Practice Group is available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you work or any of the following:

Wayne Barsky – Los Angeles (310-557-8183, [email protected])
Denis R. Salmon
– Palo Alto (650-849-5301, [email protected])
Angelique Kaounis – Los Angeles (213-229-7137, [email protected])

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