Fifth Circuit Decision Adds to Growing Body of Case Law on the Scope of Uniform Trade Secrets Act Preemption

Your New Orleans restaurant has never been more successful.  Business is booming.  People cannot get enough of your famous crawfish étouffée.  With your success, you’re planning to expand into the lucrative retail hot sauce market.  You have all the supply, manufacture, and distribution contracts lined up.  Suddenly, Judas, your trusted sous chef for ten years, quits your business, takes your secret hot sauce recipe and your business plans, and starts his own hot sauce brand.  How are you protected?

The Fifth Circuit’s recent decision in Brand Servs., L.L.C. v. Irex Corp., 909 F.3d 151 (5th Cir. 2018) addresses this issue and adds to a growing list of cases addressing whether state enactments of the Uniform Trade Secrets Act (“UTSA”) preempt common law claims for conversion of confidential business information.

The common law recognizes a tort claim for conversion of confidential business information.  See Restatement (First) of Torts § 759.  This claim provides protection for confidential information “whether or not it constitutes a trade secret,” so long as the information was “procured by improper means.”  Id. at cmt. b.  The Restatement provides examples of types of information that would be covered by the common law claim: “the state of one’s accounts, the amount of his bid for a contract, his sources of supply, his plans for expansion or retrenchment, and the like.”  Id.  The focus of the common law claim is less on the competitive value of the information (a critical element of a trade secret claim) and more on whether the defendant procured the confidential information by “improper means.”  The common law therefore provided a distinct, though possibly overlapping, claim for misappropriation of confidential business information.

The original 1979 text of the UTSA provided for broad preemption, saying that the UTSA “displaces conflicting tort, restitutionary, and other law of this State pertaining to civil liability for misappropriation of a trade secret.”  Some states have interpreted the preemption language of their versions of the UTSA to cover claims for common law misappropriation of confidential business information.  See, e.g., Spitz v. Proven Winners N. Am., LLC, 759 F.3d 724, 733 (7th Cir. 2014) (Illinois); Unique Paving Materials Corp. v. Fargnoli, 361 F. App’x 689, 690 (6th Cir. 2010) (Ohio); Mortg. Specialists, Inc. v. Davey, 153 N.H. 764, 904 A.2d 652, 664 (2006); BlueEarth Biofuels, LLC v. Hawaiian Elec. Co., 235 P.3d 310, 323 (Haw. 2010).  In doing so, those states limited the legal protection available for confidential business information that does not meet the stringent definition of a trade secret under UTSA.

The 1985 Amendments to the UTSA attempted to clarify the ambiguity by revising the language of Section 7 of the UTSA and adding an exclusion: “this Act does not affect . . . other civil remedies that are not based upon misappropriation of a trade secret.”  In keeping with that clarification, courts in other states have ruled that the UTSA does not preempt common law claims of conversion of confidential business information.  See, e.g., Am. Biomedical Grp., Inc. v. Techtrol, Inc., 374 P.3d 820, 827 (Okla. 2016); Orca Commc’ns Unlimited, LLC v. Noder, 236 Ariz. 180, 337 P.3d 545, 547 (2014); Robbins v. Supermarket Equip. Sales, LLC, 290 Ga. 462, 722 S.E.2d 55, 58 (2012).

In Brand Services, the Fifth Circuit predicted that the Louisiana Supreme Court would reject an interpretation of the Louisiana UTSA (“LUTSA”) that would preempt a claim for theft of confidential business information that is not a trade secret.  There, the plaintiff, an industrial scaffolding company, claimed that its former employee stole “trade secrets and confidential and proprietary information” and used them for the benefit of his new employer, a competing scaffolding company.  The decision did not articulate whether there was a factual difference between the plaintiff’s claims for trade secret misappropriation under LTUSA and the plaintiff’s claims for theft of confidential business information.

The district court granted summary judgment for the defendant on the LUTSA claim on the ground that the plaintiff failed to proffer evidence of its unjust enrichment damages related to the defendants’ use of the alleged trade secrets.  The district court then entered summary judgment against the plaintiff on its conversion claim on the ground that LUTSA preempts that claim.

The Fifth Circuit reversed the grant of summary judgment on the conversion claim and predicted that the Louisiana Supreme Court would hold that LUTSA does not preempt a common law claim for theft of confidential business information that does not rise to the level of a trade secret.  The Fifth Circuit based its decision on two prior decisions of the Louisiana Court of Appeals, each of which held that LUTSA does not preempt common law claims for theft of confidential business information.

So what can you do about Judas, your new hot sauce competitor?  You may have a claim against him for misappropriation of your secret hot sauce recipe, so long as you took reasonable measures to keep it secret.  The other business information, like the research you have done into the strength of the retail hot sauce market and your distribution plans, could be a closer call under the LUTSA.  Judas would argue that it is well known and not secret that people love hot sauce and are willing to pay for it.  You may ultimately be able to make out a LUTSA claim for that information.  Under the Fifth Circuit’s Brand Services decision, though, you may also assert a common law claim for theft of confidential business information because that claim is not preempted by the LUTSA.