Step Aside! Trade Secret Preemption of Other Claims

Order Granting in Part and Denying in Part Motion to Dismiss, Henry Schein, Inc. v. Cook, et al., 16-cv-03166-JST (Judge Jon Tigar)

One purpose of the California Uniform Trade Secrets Act (“CUTSA”) is to preempt and displace many common law causes of action that could arguably apply in a trade secrets case, such as conversion. Nevertheless, it is still common for plaintiffs in trade secrets cases to plead a great variety of causes of action. A recent decision from Judge Tigar helps clarify when such causes of action are preempted and when they can coexist with a cause of action for trade secret misappropriation.

Henry Schein, Inc. (“HSI”) alleged that Cook had misappropriated its trade secrets and had provided them, along with other proprietary information, to her new employer, which is a competitor of HSI. HSI also alleged that Cook had attempted to divert HSI customers to her new employer and had assisted her new employer in setting up accounts for the customers whom she planned to bring over from HSI. HSI additionally alleged that Cook had begun working on behalf of her new employer while still employed at HSI.

Cook moved to dismiss 5 of the 12 causes of action in the Complaint because, according to Cook, they were preempted by CUTSA. In its opinion, the Court restated the rule that CUTSA preempts a claim when it is “based on the same nucleus of facts” as a misappropriation of trade secrets claim. “The preemption inquiry is a factual one, focusing on whether other claims are no more than a restatement of the same operative facts supporting trade secret misappropriation.” (By statute, CUTSA does not preempt breach of contract claims).

Applying these standards, the Court declined to dismiss the causes of action for 1) breach of fiduciary duty/duty of loyalty, 2) tortious interference with prospective economic relations, or 3) unfair competition. Although those claims mentioned Cook’s alleged trade secret misappropriation, they did not rely solely on overlapping allegations. Rather, they went beyond trade secret misappropriation by touching on Cook’s alleged attempts to deceive HSI’s customers and lure them to her new employer. The Court found that, as pled, Cook did not necessarily rely on HSI’s trade secrets when she allegedly attempted to prod HSI’s customers to switch over.

The Court dismissed the cause of action for violation of California Penal Code § 502, however. That statute imposes liability on any person who knowingly accesses and without permission takes, copies, or makes use of any data from a computer, computer system, or computer network. HSI alleged that Cook had knowingly accessed HSI’s computer system and, after her employment was terminated, copied documents containing HSI trade secrets. The Court found that the section 502 claims “cannot survive after the trade secret facts are removed.”

The Court also dismissed the cause of action for conversion. A conversion cause of action is preempted unless the value of the converted property is rooted in something other than the information it contains. The Court interpreted HSI’s Complaint to allege that the value of the converted documents was entirely derived from their status as trade secrets, leaving nothing to support a separate conversion claim.

Trade secret preemption can be something of a trap for unwary attorneys new to trade secret practice. Judge Tigar’s recent order can help those attorneys craft their Complaint to avoid a potentially distracting motion to dismiss or demurrer, and provide guidance to defendants on which causes of action may be successfully eliminated on preemption grounds.