Tuesday, August 31, 2010

Supreme Court of Hawaii Takes Expansive View of Trade Secrets Preemption (BlueEarth Biofuels v. Hawaiian Electric)

Warning: This post touches upon the incredibly dry subject of trade secrets preemption.

If you are still reading and you're not a lawyer, I am really impressed. The concept of trade secrets preemption is formalistic, but not difficult to understand. A few decades ago, it was generally thought the law concerning trade secrets was not particularly well-developed and somewhat confusing. When a uniform law was finally drafted (and subsequently enacted in many states), the idea was to coalesce trade secrets law so that lawyers and judges actually had some idea what to do. (Note: This is an extremely truncated, unsophisticated history of why the uniform law ever came to pass.)

Part of the problem with trade secrets law was that a plaintiff could pursue a number of different legal theories arising out of the same set of trade secrets facts - conversion, unjust enrichment to name a few. The commissioners who drafted the uniform law saw this as a problem and wanted to limit the potential claims based on trade secrets theft to just one - statutory misappropriation. Accordingly, the uniform law contains a strong displacement, or preemption, clause that indicates a clear intent that other common law, non-contract remedies are displaced.

The Supreme Court of Hawaii recently had occasion to answer several certified questions concerning the preemption clause in its version of the Uniform Trade Secrets Act. The Court took the majority view and adopted the "same proof" test. In essence, a claim will be displaced if it depends on whether the defendant is found to have misappropriated trade secrets. The most common claims that will be preempted include conversion, conspiracy to misappropriate trade secrets, and (in some states) common law or statutory unfair competition claims. The Court rejected a more narrow "elements" test that some jurisdictions have adopted, which holds that preemption applies if the same legal elements must be proven to the displaced claims. If a plaintiff needs to prove just one other element (such as an agreement in a trade secrets conspiracy claim), then preemption does not apply. This "elements" test makes no sense.

The more interesting question the Court addressed was whether preemption under the Uniform Act applies to non-contract claims based upon "confidential information" that does not rise to the level of a trade secret. Again, the Court followed the majority and held that such claims were in fact preempted (which is interesting, since the statute does not define or even mention these claims). This question, from my perspective, is a very difficult one to address, but the Court answered it the right way.

To allow non-contract claims to proceed when no trade secret is at issue actually would undermine the purposes of the uniform law and lead to a whole host of vague, potentially frivolous lawsuits. A party who diligently invests and protects truly secret information would fare no better than a party who takes only perfunctory steps towards protection (and presumably incurs fewer security measures costs). As a result, the incentive to develop secret information that yields a competitive advantage would be compromised.

Of course, if a party has an enforceable non-disclosure or confidentiality agreement and can establish a breach, then preemption has no impact on this analysis and the court proceeds to a straight contract claim. But to permit common-law, non-contract claims on the theory of misuse of confidential information is a clear invitation for abuse. Those claims should be preempted, for that is the clear intent of the Act's displacement provision.


Court: Supreme Court of Hawaii
Opinion Date: 7/20/10
Cite: BlueEarth Biofuels, LLC v. Hawaii Electric Co., Inc., 235 P. 3d 310 (Haw. 2010)
Favors: N/A
Law: Hawaii

1 comment:

  1. I am in Hawaii and have a non-compete clause in the mobile phone industry. It goes as far as saying I cannot even promote another company in my industry without defining promote. So if I have a buddy nearby that can meet a need for my solution, I cannot refer business that way.

    The company I represent argues since they pump in tons of money into advertising, if I were to sell another company, it would be utilizing their hard earned money. However other companies have huge marketing are much larger and have larger brand names. In fact people come to my store looking for the other carriers.

    I feel I am doing a disservice to my customers with my hands tied and not providing them the most beneficial solution to them.