California Court Outlines Boundaries Of UTSA Preemption

The Court of Appeals for the Fourth District of California recently outlined the preemption boundaries of the California Uniform Trade Secrets Acts (“CUTSA”). The Court held that common law claims that are based on independent, but related, factual grounds are not preempted by the CUTSA. The issue becomes relevant in cases where a former employee arguably uses company trade secrets to establish or assist a competing business. More after the break.

Angelica Textile Services, Inc. (“Angelica”) hired Park in conjunction with its acquisition of his former employer. Park signed a non-competition agreement requiring him to use his best efforts in discharging his duties for Angelica’s benefit. From 2008 through 2010, Park entered into negotiations with one of Angelica’s competitors and two of its largest clients to create a company that would directly compete with Angelica. When Park resigned in 2010, he immediately began working for this new competitor in the same capacity as he had for Angelica. In response, Angelica brought suit against Park raising claims of misappropriation under CUTSA, breach of contract, breach of fiduciary duty, unfair competition and violations of Section 16600 of the California Business and Professions Code. Park argued that CUTSA preempted all of Angelica’s non-misappropriation claims because they all related to the same nucleus of facts: Park’s formation of a competing company during his employment.

The Court disagreed and held that Angelica’s claims were not preempted, because the non-CUTSA claims were based on related, but not the identical facts, forming the basis of the misappropriation claim. The Court outlined several bases for this conclusion. First, CUTSA has a specific carve out for contract claims, so they were not preempted. With regard to the fiduciary duty, competition, and conversion claims, the Court found that these claims were based on violating Park’s non-competition agreement and forming a competing company during his employment, not on the misappropriation of trade secrets when he left Angelica. According to the Court, the conversion claim specifically could continue because the documents Park took with him constituted tangible property, and therefore were subject to a conversion claim. Finally, Park argued that Angelica’s breach of contract claim could not continue because Section 16600 of the Business and Professions Code prohibited agreements that unreasonably interfere with an employee’s ability to compete with the former employer. The Court disagreed, holding that the statute only prohibits restrictions on an employee’s actions after his employment, not limitations on his conduct during employment. Therefore, Section 16600 did not bar Angelica’s claims.