Thursday, January 3, 2019

More on the Relationship Between Fiduciary Duty and Trade Secret Law

    Hope everyone had some great holidays.  A couple of weeks ago I posted on the relationship between fiduciary duty and trade secret law.  I ran across a recent Fifth Circuit case (applying Louisiana law) that comes out the way I had hoped (at least in part), but that drops a footnote indicating that this resolution is far from uniform among the states.  In relevant part, the court noted the following:

LUTSA’s [Louisiana's Uniform Trade Secret Act] preemption provision states:

  1. This Chapter displaces conflicting tort, restitutionary, and other laws of this state pertaining to civil liability for misappropriation of a trade secret.
  2. This Chapter does not affect:

(1) contractual or other civil liability or relief that is not based upon misappropriation of a trade secret, or

(2) criminal liability for misappropriation of a trade secret.

LA. STAT. ANN. § 51:1437. Official commentary to the statute explains that LUTSA “applies to duties imposed by law in order to protect competitively significant secret information.” Id. cmt. (1981) (Louisiana Official Revision Comments). But it does not apply to contractual duties or to “duties imposed by law that are not dependent upon the existence of competitively significant secret information, such as an agent’s duty of loyalty.” Id. 

A claim for conversion of trade secrets plainly seeks protection of competitively significant information. Thus, we conclude that the plain text of LUTSA would preclude a civilian law conversion claim involving confidential information that qualifies as a trade secret under LUTSA.

We also conclude that if confidential information that is not a trade secret is nonetheless stolen and used to the unjust benefit of the thief or detriment of the victim, then a cause of action remains under Louisiana law. LUTSA’s uniformity provision instructs that LUTSA “shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this Chapter among states enacting it.” LA. STAT. ANN. § 51:1438. But courts interpreting their respective states’ versions of the Uniform Trade Secret Act (“UTSA”) have not uniformly applied UTSA’s preemption provision; instead, courts have come to varying conclusions about the preemption provision’s intended scope.4 Thus, because there is not enough uniformity among states to predict how the Louisiana Supreme Court would decide the issue, we look to intermediate state court decisions. See In re Katrina, 495 F.3d at 206.

The Louisiana appellate courts have twice held that LUTSA does not preempt where non-trade secret information was at issue.5 See B&G Crane Serv., L.L.C. v. Duvic, 935 So.2d 164, 166–67 (La. Ct. App. 2006)Defcon, Inc. v. Webb, 687 So.2d 639, 642–43 (La. Ct. App. 1997) (holding that LUTSA does not preempt breach of fiduciary duty claims for misappropriation of confidential information, as the statutory comments “make it clear that the Act ... does not apply to duties ... that are not dependant [sic] upon the existence of a trade secret”). These cases appear consistent with the plain text and stated purpose of LUTSA’s preemption provision: to preempt tort claims “pertaining to civil liability for misappropriation of a trade secret,” LA. STAT. ANN. § 51:1437, which the official commentary explains limits LUTSA’s preemption to other laws that “protect competitively significant secret information,” id. cmt. (1981) (Louisiana Official Revision Comments). Because Defcon and B&G Crane support the plain-text reading of LUTSA’s preemption provision, we conclude that LUTSA does not preempt civilian law claims for conversion of information that does not constitute a trade secret under LUTSA. Thus, we REVERSE the district court’s judgment on Brand Services’s civilian law claim for conversion of confidential information outside the definition of a trade secret without reaching the merits of that claim.

FN 4:  See Spitz v. Proven Winners N. Am., LLC, 759 F.3d 724, 733 (7th Cir. 2014) (concluding that Illinois’s UTSA preempts claims “that are essentially claims of trade secret misappropriation, even when the alleged ‘trade secret’ does not fall within the Act’s definition”); Unique Paving Materials Corp. v. Fargnoli, 361 F. App'x 689, 690 (6th Cir. 2010) (affirming without analysis the district court’s conclusion that Ohio’s UTSA preempted claims for “conversion, misappropriation of trade secrets, tortious interference, and unfair competition”); C&F Packing Co. v. IBP, Inc., 224 F.3d 1296, 1307–08 (Fed. Cir. 2000) (holding that Kansas’s UTSA preempted a fraud claim where it was “indistinguishable from [the plaintiff’s] trade secret misappropriation” claim); Omnitech Int’l, Inc. v. Clorox Co., 11 F.3d 1316, 1330 (5th Cir. 1994)(concluding that LUTSA preempted a fiduciary duty claim “grounded in ... trade secret allegations”); Integrated Direct Mktg., LLC v. May, 2016 Ark. 281, 495 S.W.3d 73, 76 (2016) (concluding that “intangible property, such as electronic data, standing alone and not deemed a trade secret, can be converted”); Am. Biomedical Grp., Inc. v. Techtrol, Inc., 374 P.3d 820, 827 (Okla. 2016) (holding that Oklahoma’s UTSA preempts “conflicting tort claims only for misappropriation of a trade secret” and “does not displace tort claims for information not meeting this definition” (internal quotation marks and citation omitted) ); Orca Commc’ns Unlimited, LLC v. Noder, 236 Ariz. 180, 337 P.3d 545, 547 (2014) (concluding that the state’s UTSA “leaves undisturbed claims that are not based on misappropriation of a trade secret,” including claims for misuse of confidential information (internal quotation marks omitted) ); Robbins v. Supermarket Equip. Sales, LLC, 290 Ga. 462, 722 S.E.2d 55, 58 (2012) (concluding that Georgia’s UTSA did not except from its scope claims for “the misappropriation of proprietary or confidential information”); BlueEarth Biofuels, LLC v. Hawaiian Elec. Co., 235 P.3d 310, 323 (Haw. 2010) (concluding that Hawaii’s UTSA preempts common law claims for misappropriation of trade secrets and other confidential information); Burbank Grease Servs., LLC v. Sokolowski, 294 Wis.2d 274, 717 N.W.2d 781, 793–94 (2006) (holding that Wisconsin’s UTSA “leave[s] available all other types of civil actions that do not depend on information that meets the statutory definition of a ‘trade secret’ ”); Savor, Inc. v. FMR Corp., 812 A.2d 894, 898 (Del. 2002) (concluding that Delaware’s UTSA preempted common law unfair competition and conspiracy claims where they were based on the same alleged wrongful conduct as the trade secret claims); Mortg. Specialists, Inc. v. Davey, 153 N.H. 764, 904 A.2d 652, 664 (2006) (“[T]he [New Hampshire UTSA] preempts claims that are based upon the unauthorized use of information, regardless of whether that information meets the statutory definition of a trade secret.”); Frantz v. Johnson, 116 Nev. 455, 999 P.2d 351, 357–58, 357 n.3 (2000) (concluding that Nevada’s UTSA preempted various common law tort claims that “arose from a single factual episode, namely misappropriation of bidding and pricing information”); Weins v. Sporleder, 605 N.W.2d 488, 491 (S.D. 2000) (concluding that South Dakota’s UTSA “prevents a plaintiff from merely restating their trade secret claims as separate tort claims”); Fred’s Stores of Miss., Inc. v. M & H Drugs, Inc., 725 So.2d 902, 908 (Miss. 1998) (concluding that the state’s UTSA only preempts claims that would fall with a failed UTSA claim).

FN 5:  Both of these cases concern breach of fiduciary duty claims, an area specifically excepted from LUTSA’s preemption provision. We see no reason, however, that Louisiana courts would think differently about a conversion claim.

Brand Services, L.L.C. v. Irex Corp., No. 17-30660, 2018 WL 6073675 (5th Cir. Nov. 21, 2018). 

    Given the UTSA comment that preemption does not apply to “duties imposed by law that are not dependent upon the existence of competitively significant secret information, such as an agent’s duty of loyalty,” I still wonder how some courts (see, e.g., Omnitech in footnote 4 above) conclude that breach of fiduciary duty claims -- even ones that do involve misappropriation of trade secrets -- are preempted?  Hmmm . . . .

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