Wednesday, November 2, 2011

California Court Holds Trade Secrets Preemption Issue Premature for Ruling (Amron Int'l Diving Supply v. Hydrolinx Diving)

The preemption provision of the Uniform Trade Secrets Act is a topic on which I write quite frequently. The idea is that the UTSA is supposed to displace conflicting tort claims based on trade secrets misappropriation.

States which have adopted the UTSA are varied in how they approach key principles of preemption. One of those concerns whether a court can determine if preemption applies when no definitive ruling has been made on whether something alleged to be a trade secret actually qualifies as such.

A California court has joined the reasoning of states holding that a court cannot adjudicate preemption on the basis of an allegation alone. It joins Virginia, Wisconsin and other courts holding that motions on the pleadings, claiming preemption under the UTSA, are premature.

Ohio is among a group of states (the majority) reaching the opposite conclusion. In such states, it is routine to see ancillary tort claims (such as conspiracy, conversion, and tortious interference) dismissed because the underlying conduct is alleged to be based on misappropriation of a trade secret.

UPDATE X1: A commenter has astutely pointed out that this ruling likely is inconsistent with California state court precedent (which would be binding, as opposed to this memorandum opinion). It appears California adopts a broad view of preemption under K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal. App. 4th 939 (6th Dist. 2009). From reading that case, it appears that courts are empowered to dismiss ancillary tort claims prior to a finding of trade secrets misappropriation. This is the far more sensible rule and is more consistent with California's policy towards non-compete and trade secrets claims.


Court: United States District Court for the Southern District of California
Opinion Date: 10/21/11
Cite: Amron Int'l Diving Supply, Inc. v. Hydrolinx Diving Comm., Inc., 2011 U.S. Dist. LEXIS 122420 (S.D. Cal. Oct. 21, 2011)
Opinion Date: 10/21/11
Favors: Employer

1 comment:

  1. Kenneth,

    This very short slip ruling is inconsistent with California law on UTSA preemption, including two state court appellate opinions which should be binding on a federal district court purporting to apply California law.

    California takes the majority position, including ruling preemption on alternative confidentiality formulations at the demurrer (pleading stage) as a question of law, and not as something for further factual analysis. The KC Multimedia and Intel cases both make that clear, as do other federal court rulings such as AirDefense.

    In addition, California does not recognize a "confidential but not secret" theory in any event because of the policies of Business & Professions Code section 16600. Even before the UTSA was enacted, that statute protected potential defendants by applying a single-tier IP standard: secret information was off-limits, but nonsecret information was fair game. There was no intermediate tier in the pre-UTSA days.

    In other words, one could never even reach the issue the Wisconsin court seemed to contemplate in Burbank Grease, because no such alternative claim could be allowed under pre-UTSA California law. That is why there would be no basis to delay a ruling to see if the plaintiff could establish some intermediate IP category of "confidential but not secret," whatever that would mean.

    This very cursory slip ruling does not mention any of that, and it does not mention California's strong preemption of common law claims under Uniform Acts in general, such as the UCC and others.

    I believe that this is an outlier and not worth the attention of your excellent blog. Certainly this ruling does not place California with Wisconsin as an anti-preemption state (a federal slip opinion can't overrule published state appellate decisions on a question of state law), so I respectfully submit that statement in your posting should be revised.

    If the California Supreme Court were to take up the issue, it would almost certainly side with the two published appellate opinions and the host of better-reasoned federal court opinions on UTSA preemption, and it would also likely follow its own broad 2007 ruling on UCC preemption of common law claims.

    My guess is that the litigants here did not fully brief the issue -- the preemption question gets only a couple of paragraphs with very sloppy case citations -- and the court thus did not recognize its importance or consider all the cases and other policy considerations in play.

    Unfortunately, trade secret litigants do not always do a good job of explaining the UTSA preemption issue during briefing, which leaves courts vulnerable to making rulings like this one. Ultimately the question is whether each UTSA state allows a two-tier system of state-created intellectual property, one tier governed by the UTSA and its guidelines and the other, alternative tier ("confidential but not secret") governed by no rules, procedural safeguards, or other definitinal limits, and with serious Supremacy Clause problems. Preemption favors a one-tier system, and anti-preemption favors a two-tier system.

    That's a very important policy question (for innovation encouragement, employee mobility, and regional economic growth), and one that should not be dealt with through simplistic briefing. Unfortunately even the attorneys litigating a case do not always recognize that bigger picture issues are in play on the preemption question.

    I agree with you that this is a very important issue.

    Thank you.