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Attorneys

Intentional Interference Claims and Preemption by the California Uniform Trade Secrets Act

May 22, 2008

By: James Kachmar

On March 5, 2008, the United States District Court for the Northern District of California (“District Court”) in First Advantage Background Services Corp. v. PrivateEyes, Inc., (“First Advantage”) found, inter alia, that the California Uniform Trade Secrets Act, California Civil Code section 3426, et seq. (“CUTSA”) preempts common law claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets. The First Advantage opinion holds that claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets may be preempted by CUTSA.

PrivateEyes, a California corporation who conducts background checks for employers, entered into an agreement with First Advantage’s predecessor, whose duties First Advantage assumed. First Advantage agreed not to use confidential information received from PrivateEyes to solicit business from vendors with whom PrivateEyes was in contract. First Advantage solicited business despite the agreement not to, and also disclosed PrivateEyes’ confidential and proprietary information to the same vendor. After First Advantage sued PrivateEyes alleging a number of claims related to their agreement, PrivateEyes filed a counterclaim asserting various causes of action. First Advantage filed a motion to dismiss some causes of action found in PrivateEyes’ counterclaim. The District Court granted First Advantage’s motion in part, allowing PrivateEyes leave to amend some of the claims, which PrivateEyes did when it filed its First Amended Counterclaim. Thereafter, the District Court entertained First Advantage’s motion to dismiss.

The District Court began its discussion by addressing First Advantage’s motion to dismiss PrivateEyes’ fifth cause of action: intentional interference with prospective economic advantage. Citing Korea Supply Co. v. Lockheed Martin Corp., the District Court noted that PrivateEyes would need to satisfy the following elements in order to prevail: “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.”

In dismissing PrivateEyes’ intentional interference claim in PrivateEyes’ initial counterclaim, the District Court found that the intentional interference claim failed to “allege an independently wrongful act outside a simple breach of contract,” a necessary requirement to satisfy the intentional interference claim’s third element.[1] To survive a motion to dismiss, PrivateEyes would have to “plead and prove that the defendant’s acts are wrongful apart from the interference itself.” An independently wrongful act is one that “is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” PrivateEyes’ amended counterclaim alleged three specific independently wrongful acts in an attempt to satisfy the third element of the intentional interference claim: misappropriation of trade secrets, breach of confidence, and trade libel.[2]

PrivateEyes alleged that First Advantage misappropriated trade secrets in violation of CUTSA because it improperly disclosed PrivateEyes’ confidential information, including PrivateEyes’ profit margins. First Advantage argued, however, that CUTSA preempted PrivateEyes’ intentional interference claim because CUTSA preempts any common law claim based on conduct which could support a trade secret claim. Relying on Reeves v. Hanlon, a California Supreme Court case, PrivateEyes argued that trade secrets misappropriation can form the basis of an intentional interference claim.

In Reeves, the court found the defendants “violated CUTSA for stealing a confidential client list, and found to have committed intentional interference based on wrongful acts including destruction of the plaintiffs’ computer files, misappropriation of confidential information, and improper solicitation of plaintiffs’ clients.” The District Court disagreed with PrivateEyes’ reading of Reeves. Specifically, the District Court stated that although Reeves discussed misappropriation in its analysis of the intentional interference claim, that discussion in and of itself did not “foreclose preemption” for a number of reasons. First, the District Court noted that the defendant in Reeves had not raised the issue of preemption. This was important because in San Jose Constr., Inc. v. S.B.C.C., Inc., the appellate court refused to rule on CUTSA preemption because the issue of preemption had not been raised below. Second, Reeves is distinguishable as it was specifically limited to whether an employer could bring an intentional interference claim against a competitor that hired the employer’s former at-will employees. Lastly, because there was no dispute as to the wrongful acts beyond misappropriation, the preemption analysis would have had no impact on the court’s decision. The District Court recognized that in Cadence Design Sys., Inc. v. Avant! Corp., the only other California Supreme Court decision on point, the court suggested that CUTSA preempted all common law claims based on trade secret misappropriation.

The District Court also discussed California Civil Code section 3426.7(b), which identified the three categories of cases not preempted by CUTSA. Specifically, in addition to cases based on breach of contract and criminal remedies, any claims not based on trade secret misappropriation are not preempted by CUTSA. As a result, courts have interpreted this statute to mean that all claims which are based on trade secret misappropriation are preempted by CUTSA.

Applying this rule to PrivateEyes’ allegations in their First Amended Counterclaim, the District Court recognized that PrivateEyes had specifically alleged a CUTSA violation. Because the intentional interference claim was a common law claim based on trade secret misappropriation, the District Court held that CUTSA preempted the claim.

The District Court also addressed PrivateEyes’ additional support of its intentional interference claim. Specifically, PrivateEyes alleged that First Advantage had engaged in a common law breach of confidence because it had improperly disclosed PrivateEyes’ “confidential and proprietary information to CCE in violation of its agreement to maintain the confidential nature of this information.” However, the District Court was critical of PrivateEyes’ breach of confidence claim because the language and facts used “in support of its allegation of breach of confidence are identical to those [PrivateEyes] offered in support of its misappropriation claim.” Further, the District Court noted that the only other difference between the two claims was the existence of a contract, which by itself is inadequate to avoid preemption. Thus, the District Court held that CUTSA preempted the intentional interference claim based on breach of confidence because this was “still a common law claim based on facts which would amount to the misappropriation of trade secrets.”

The District Court’s decision in the First Advantage case suggests that CUTSA will preempt any claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets. Although the plaintiff in First Advantage attempted to avoid preemption by CUTSA by basing its intentional interference claim on misappropriation of trade secrets and breach of confidence, the District Court followed an increasing body of authority holding that any common law claims based on trade secret misappropriation are preempted by CUTSA.