Wednesday, December 19, 2018

The Relationship Between Fiduciary Duty and Trade Secret Law: I've Got Some Questions . . .

    As part of the duty of loyalty, a fiduciary of a company should not use confidential information belonging to the company for the fiduciary’s personal benefit.  See, e.g., Hollinger Intern., Inc. v. Black, 844 A.2d 1022, 1061 (Del. Ch. 2004).  In a recent Texas case, Super Starr Int’l, LLC v. Fresh Tex Produce, LLC, 531 S.W.3d 829 (Tex. App. 2017), a wrinkle on bringing such a breach of fiduciary duty claim was introduced -- at least to me. 

    In December 2010, Kenneth Alford, Lance Peterson, and David Peterson created Tex Starr Distributing, LLC (the “LLC”).  Under the Tex Starr operating agreement, Fresh Tex Produce, LLC (the “Distributor”) and Super Starr International, LLC (the “Importer”) were the LLC’s only members.  Lance Peterson was associated with the Importer.

    In October 2016, the Distributor filed an original petition and application for injunctive relief individually and derivatively on behalf of the LLC. The defendants were the Importer, Lance Peterson, and others.  Among other claims, the Distributor brought an action for breach of fiduciary duty and for violation of the Texas Uniform Trade Secrets Act (“TUTSA”).  The Distributor’s breach of fiduciary duty claim alleged:  “By diverting [the LLC's] accounts and business for [the Importer's] own benefit, by using confidential and proprietary information owned by [the LLC] against the interests of [the LLC], and by soliciting [the LLC's] accounts and employees, [the Importer] and [Lance Peterson] are engaging in serious breaches of their fiduciary duty to [the LLC]” (emphasis added).

    According to the court, the Distributor's breach of fiduciary duty claim duplicated its alleged violation of TUTSA.  Why does this matter?  Because, according to the court, TUTSA generally “displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret.” TEX. CIV. PRAC. & REM. CODE ANN. § 134A.007(a).  The court observed that “[w]here a claim is based on a misappropriation of a trade secret, then it is preempted by the Texas Uniform Trade Secrets Act.”  As a result, the court held that TUTSA’s preemption provision precluded the Distributor's breach of fiduciary duty claim from serving as a basis for temporary injunctive relief.

    I may be missing something, but this blows my mind.  First, not all confidential information rises to the level of a trade secret.  Does TUTSA preempt a breach of fiduciary duty claim for misappropriation of confidential information that does NOT constitute a trade secret?  I would assume no.  Second, what if the confidential information does rise to the level of a trade secret, but the plaintiff does not assert a TUTSA claim?  Does a breach of fiduciary duty claim survive?

    Finally, and most importantly, the preemption provision in the Texas statute (Civil Practice and Remedies Code § 134A.007) is nearly identical to § 7 of the Uniform Trade Secrets Act.  The comment to § 7 of the Uniform Act states, in part, the following:  “The Act also does not apply to a duty imposed by law that is not dependent upon the existence of competitively significant secret information, like an agent’s duty of loyalty to his or her principal.” 

    So . . . doesn’t that mean that even if the confidential information does rise to the level of a trade secret, a breach of fiduciary duty claim based on misappropriation of that information – i.e., a duty of loyalty claim that is imposed by law and that does not depend on the information qualifying as a trade secret – is NOT preempted by the Act?  I need to look into this further as I’m no trade secrets expert, but at the moment my head is spinning . . . .

https://lawprofessors.typepad.com/business_law/2018/12/the-relationship-between-fiduciary-duty-and-trade-secret-law-ive-got-some-questions-.html

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Comments

That is interesting - I'm no IP expert but "Does TUTSA preempt a breach of fiduciary duty claim for misappropriation of confidential information that does NOT constitute a trade secret? I would assume no." - I'd actually assume yes, if the decision stands up, because often there's an argument to the effect of, "the state balanced the interests of innovation etc and decided to define what is and isn't a trade secret and if not, it's left to the public." So if you assume trade secret statutes preempt here, you'd assume that means things defined out of that statute are meant to be available for all to use.

But obvs I don't know Texas law on the matter. Still, it might be a real danger.

Posted by: Ann Lipton | Dec 19, 2018 10:31:47 AM

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