Pre-emption Under The California Uniform Trade Secrets Act

Co-authored by Ted A. Gehring.  

There are three important holdings from the recent California Court of Appeal opinion in Angelica Textile Services, Inc. v. Park, 220 Cal. App. 4th 495 (2013).

First, while the California Uniform Trade Secrets Act (“CUTSA”) preempts tort claims based upon the same nucleus of operative facts as a claim for misappropriation of trade secrets, it does not preempt contract causes of action, even when based on the alleged misappropriation of trade secrets.

Second, even where tort claims may be related to an alleged claim for misappropriation of trade secrets, provided the theory of liability is independent from the claim of misappropriation of trade secrets, CUTSA will not preempt the claim.

And third, California’s broad prohibition against non-competition agreements—as codified at California Business and Professions Code Section 16600—does not apply to limitations on an employee’s conduct during the term of employment.

In Angelica, the plaintiff, Angelica Textile Services, sued its former employee, Jaye Park, and his new company on causes of action for misappropriation of trade secrets, breach of contract, conversion, breach of fiduciary duty, unfair competition, interference with business relations and conversion after Park, while still employed by Angelica, began working with Angelica’s customers using information from his employment at Angelica to create a laundry business to compete with Angelica. Park was a market vice-president at Angelica and had an agreement with Angelica that he would not, during his employment, become interested, directly or indirectly, in any business similar to Angelica’s business. On summary judgment the trial court dismissed the claims for breach of contract, conversion, breach of fiduciary duty, unfair competition, interference with business relations and conversion, holding that those claims were based upon the misappropriation of trade secrets and therefore preempted by CUTSA. At trial, a jury found against Angelica on its remaining CUTSA claim.

Angelica appealed. On appeal, the Angelica court reversed the trial court’s dismissal of the non-CUTSA claims.

As to the breach of contract claim, the Angelica court cited the language of the statute that “contractual remedies, whether or not based upon misappropriation of a trade secret,” (emphasis added) are not preempted by CUTSA. The Angelica court further held that, in any event, Angelica’s breach of contract claim was based on Park’s violation of the non-competition agreement. The Angelica court rejected Park’s claim that the non-competition agreement was invalid, holding that Section 16600 “has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends,” but does “not affect limitations on an employee’s conduct or duties while employed.”

As to the common law tort claims, the Angelica court held that none of the claims were based on the misappropriation of trade secrets and therefore, where not preempted. Citing Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210 (2010), the Angelica court held that CUTSA “does not displace noncontract claims that, although related to a trade secret misappropriation, are independent and based on facts distinct from the facts that support the misappropriation claims.” During discovery, Angelica had answered interrogatories asking the company to state all facts that supported their claims. The company had answered by stating that all of its claims were supported by the misappropriation of trade secrets. However, in response to the motion for summary judgment, Angelica produced evidence (which it claimed it learned of after responding to discovery) that provided independent bases of liability under the tort claims, including Park’s violation of his non-competition agreement and his duty of loyalty to Angelica and Park’s taking of documents that—even if not trade secrets—were still tangible property subject to a conversion claim. The Angelica court held that, based upon this new evidence of independently wrongful conduct, it was error for the trial court to conclude Angelica’s tort claims were displaced by CUTSA.