California is one of the 47 states to have adopted the Uniform Trade Secrets Act. Among other things, “CUTSA,” as it is sometimes referred to in the Golden State, brought greater clarity to what qualifies as a “trade secret” and “misappropriation” of a trade secret, and it established an enforcement scheme that provides for an award of attorneys' fees to a prevailing party and for potential award of a “royalty” in cases where the aggrieved party cannot prove actual damages.
By the plain language of the statute, CUTSA was intended to take the place of most business tort causes of action that were historically used to address trade secret misappropriation. The term “preemption” is often used to address this concept, but that is technically incorrect because preemption involves the trumping of state law by federal law. More accurately, some courts have used the term “supersession,” or “displacement” of state law. Whatever term is used, the question is whether a victim of trade secret misappropriation pursuing a CUTSA claim may also pursue other business torts such as breach of the duty of loyalty or conversion against the wrongdoer. The California Court of Appeal recently addressed this issue in Angelica Textile Services v. Park to find that CUTSA did not displace a state law claim for conversion of trade secrets, but the court reached that conclusion in a novel manner.
Angelica Textiles, a large-scale laundry business catering to hospitals and other medical facilities, sued one of its former managers, Jaye Park, on a variety of causes of action, including CUTSA, after he left the company to form a competing business. The evidence in the case indicated that Mr. Park had been actively engaged in preparation to open his competing business while still employed by Angelica, and he had criticized the company’s business practices when speaking with customers while still on the company’s payroll. Angelica also contended that Park had improperly taken a variety of proprietary documents at the time of his departure.
The trial court entered summary judgment on Angelica’s claims against Park and his competing business for breach of fiduciary duty, unfair competition, interference with business relations, and breach of contract. The court ruled that these business tort claims were “preempted” by CUTSA because they were based on the same facts and circumstances as the CUTSA claim. The CUTSA claim proceeded to a jury trial, but the jury rendered a defense verdict on the grounds that the documents that Park had allegedly stolen did not meet the statutory definition of a “trade secret.” Angelica appealed the entry of summary judgment on the tort claims but did not attempt to challenge the validity of the jury’s verdict.
The California Court of Appeal reversed the entry of summary judgment. The court noted that the language of CUTSA is quite clear that breach of contract claims based on a misappropriation of trade secrets are never supplanted by the statute, even if those claims are based on the same facts underlying the CUTSA claim. Other business tort claims are displaced by CUTSA only if they depend upon the same facts as the CUTSA claim without other supporting allegations. For example, the Court of Appeal found that Angelica’s claim against Park for breach of fiduciary duty was based on alleged misconduct wholly apart from his alleged misappropriation of trade secrets, including his disparagement of Angelica to its customers while still employed. Therefore, that claim was not preempted.
The Court of Appeal’s rationale for its conclusion that Angelica’s claim for conversion was not displaced by CUTSA is the most interesting aspect of the decision. The jury had concluded that the documents that Park had allegedly purloined on his way out the door did not qualify as “trade secrets.” The Court of Appeal noted that if these documents were not trade secrets then Angelica could not have a claim under CUTSA and, therefore, CUTSA did not displace its common law claim for conversion. The court noted that nothing in the record indicated that these documents, which apparently did not have any actual competitive value, had ever been returned. Thus, the outcome of the ruling was that Angelica technically or theoretically had available a cause of action based on Park’s alleged misappropriation of the documents, but the company had no damages, no right to recover attorneys’ fees, no right to a statutory royalty, and even injunctive relief would be of no value.
This case illustrates once again how important precise pleading can be in a trade secret misappropriation claim, and that great care must be taken to plead all facts that might support a business tort claim outside the scope of CUTSA.