IP Law Daily, TRADE SECRETS—D. Ariz.: Preemptive force of Arizona trade secrets law sweeps less broadly than in other jurisdictions, a court observes, (Sep 22, 2023)

By Matthew Hersh, J.D.

Common law claims based on the misappropriation of confidential information were not preempted because they did not amount to statutory trade secrets.

A financial technology company’s common law claims that a contractor misused confidential information it obtained during its work by sharing it with a competitor were not preempted by the Arizona Uniform Trade Secrets Act because the confidential information that formed the basis of the complaint went beyond information that was strictly defined as trade secrets, the federal court for the District of Arizona has held. The court, in rejecting the contractor’s motion to dismiss, relied on a unique version of Arizona trade secrets law that sweeps less broadly than other state trade secrets law in terms of preemption (Modulus Global Inc. v. Quintzy FZE LLC, September 20, 2023, Snow, G.).

The lawsuit takes place in the context of the booming market for digital currencies and fintech products. Modulus Global is a provider of proprietary enterprise fintech products. The company alleges that it began developing a digital currency by 2018, which required developing a digital currency exchange and a blockchain payment solution. In order to do so, the company claims, it entered into agreements with software company Efficacious and its owner Ankit Singha. The agreements contemplated that the software company would develop and write code for the currency exchange and payment solution.

But things went awry shortly thereafter. The fintech company claims that the software developer used the code that it wrote in order to develop a digital currency exchange for a company called Quintzy FZE LLC—a direct competitor. The fintech company sued the software company, its owner, and its competitor for a wide range of alleged misconduct, including breach of contract, misappropriation of trade secrets, civil conspiracy, breach of duty of loyalty and fiduciary duty, trespass to chattels, intentional interference with a business expectancy, unfair competition and false designation of origin under the Lanham Act, false advertising under the Lanham Act, and common law unfair competition and trademark infringement.

Several of the defendants moved to dismiss the complaint, leading to this opinion.

Trade secrets preemption. The court rejected—for the most part—the moving defendants’ effort to argue preemption of certain common law claims under Arizona law. Most states, following the uniformity directive included in the Uniform Trade Secrets Act, hold that state trade secrets law broadly displaces “all common-law claims for misuse of confidential information that does not fall within AUTSA’s definition of a trade secret.” But Arizona law is unique, the court noted. Under Arizona trade secrets law, the court observed, preemption applies only to conflicting tort claims for misappropriation of a trade secret—leaving undisturbed claims that based on misappropriation of confidential information that falls short of a trade secret. Did that save the common law claims here? To a large part, they court held, they did.

Many of the common law claims were saved from preemption under state trade secrets law, the court reasoned, because they alleged conduct that went beyond statute-defined trade secrets. Specifically, the court noted, the breach of duty of loyalty, breach of fiduciary duty, and trespass to chattels claims were based not only on the software company’s conduct related to the allegedly misappropriated source code, but also its conduct in failing to return and safeguard other documentation and related software. To the extent those claims were based on misappropriation of trade secrets, the court noted, they were of course preempted. However, “as pleaded,” the court noted, “these claims could plausibly encompass information or broader conduct than that created under the trade secret definition.” Thus, the claims could not be found preempted at the motion to dismiss stage.

But while those common law claims would survive, the court held, one would not. The claim of conspiracy to commit trade secrets, in particular, the court noted “appears directed only at trade secrets and does not encompass any conduct or information beyond the source code.” To be sure, the court noted, the fintech company suggested at oral argument that there were aspects of those claims that alleged fell outside of the scope of Arizona trade secrets. But the company “did not include any information relevant to this claim”—leaving the claim therefore preempted.

False advertising under the Lanham Act. The court also dismissed the false advertising claim—albeit with leave to amend. False advertising under the Federal Lanham Act requires pleading (1) a false statement of fact in a commercial advertisement; (2) the statement actually deceived or has the tendency to deceive; (3) the deception is material; (4) the defendant caused its false statement to enter interstate commerce; and (5) the plaintiff has been or is likely to be injured as a result. But at least for now, the court noted, “there is not, in this court’s judgment at least at this point, sufficiently clear factual allegations as to some of the elements, to make the claim plausible.” However, the company would be given leave to replead.

Intentional interference with business expectancy. Finally, the court found that the fintech company adequately alleged a claim of intentional interference with a business expectancy. The company adequately alleged the existence of a valid business expectancy by identifying a class of clients with which it claims the contractor and competitor interfered. Moreover, the court noted, the fintech company adequately alleged improper conduct as well as causation. While the complaint’s allegations were “perhaps not as detailed as they could be,” the court noted, the allegation that its competitor sold misappropriated product to existing or prospective customers were sufficient to survive the motion to dismiss.

The Case is No. 2:22-cv-01457-GMS.

Attorneys: Aaron K. Haar (Jaburg & Wilk PC) for Modulus Global Inc. Kenneth Michael Motolenich-Salas (MotoSalas Law PLLC) for Quintzy FZE LLC.

Companies: Modulus Global Inc.; Quintzy FZE LLC

Cases: TechnologyInternet TradeSecrets ArizonaNews