Thursday, November 20, 2014

Supreme Court of Arizona Gives Trade Secrets Preemption a Narrow Construction

Perhaps the most boring question in all of trade secrets law generates a lot of commentary, particularly in the blogosphere.

The question is whether the displacement provision of the Uniform Trade Secrets Act applies to claims based on misappropriation of confidential information that isn't valuable enough to meet the trade secret definition. If that's not scintillating, I don't know what is.

If you can contain your excitement, know that courts take differing points of view on this and so the question is somewhat significant to nerds. I gave my view on this a few years back, summarizing the policy rationale for taking a broad view of preemption - one that would displace claims based on misappropriation of confidential information.

The Supreme Court of Arizona yesterday disagreed with me (who doesn't?) and found that a narrow view of preemption was appropriate, relying heavily on the text of the UTSA provision which states that preemption doesn't affect "other civil remedies that are not based on misappropriation of a trade secret." The case is Orca Communications Unlimited, LLC v. Noder, No. CV-13-0351. (This is the Scalia-Easterbrook-Garner school of textualism at its best, revealing just how influential that cadre has been at influencing law over the past 20 years.)

The defendant made some of the same arguments about the absurdity of narrow-form preemption that I have made before. There are many good reasons for broadly interpreting preemption, including some the Arizona court cited and rejected - the uniform structure the UTSA creates for dealing with claims of data misappropriation, the specter of greater punitive damages for misappropriating less valuable types of information. To me, the soundest rationale lies in the incentives that underlie preemption.

If parties have a common-law claim for misappropriation of confidential information, why would they subject themselves to having to prove that it's a trade secret? I cannot understand this. The remedies available to a trade-secret holder aren't materially more significant. The damages theories (aside, possibly, from a royalty-based theory) are not all that different than those found in tort law. But to prove the existence of a trade secret, you must show how the information derives value from being secret and rigorous security measures. Allowing a plaintiff to default to a common-law theory for virtually the same type of information would provide no incentive for a business to undertake secrecy measures.

Just as problematically, in many jurisdictions, this would enable a plaintiff to bring claims in the alternative (i.e., it's a trade secret, but if not, then it's confidential). This alternative pleading scheme, which narrow-form preemption openly invites, undermines the entire purpose of the displacement clause.

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