IP Law Daily, TRADE SECRETS—Ariz. App.: Tort claims against company’s former president not preempted by Arizona Uniform Trade Secrets Act, (Oct 18, 2013)

By Peter Reap, J.D., LL.M.

An Arizona state trial court erred in dismissing Orca Communications Unlimited LLC’s claims for tortious interference with business expectancies and breach of fiduciary duty and duty of loyalty claims against its former president Ann Noder because they were not preempted by the Arizona Uniform Trade Secrets Act (“AUTSA”), an Arizona appellate court has decided (Orca Communications Unlimited, LLC v. Ann Noder, October 17, 2013, Howe, R.). Neither claim alleged the misuse of confidential or trade secret information. In addition, the trial court’s dismissal of Orca’s unfair competition claim was reversed to the extent that the claim was not based on trade secrets.

Background. Orca provides public relations services primarily to companies in the United States. From July 1, 2002, until May 1, 2009, Noder served as Orca’s president.

As part of her employment, Noder executed a Confidentiality, Non-Solicitation, and Non-Competition Agreement (“the Agreement”). The Agreement consisted of four restrictive covenants that prohibited Noder from using or disclosing confidential information for any purpose other than to benefit the company without the company’s consent.

On May 1, 2009, Noder resigned from Orca and formed Pitch Public Relations, LLC, an Arizona limited liability company that offered the same or similar services as Orca. On August 18, 2010, Orca filed suit against Noder, alleging claims for breach of contract, breach of fiduciary duty and loyalty, breach of the covenant of good faith and fair dealing, fraud, tortious interference with business expectancies, and unfair competition.

In count two, breach of fiduciary duty and duty of loyalty, Orca alleged that Noder established a competing business while employed, took Orca’s corporate opportunities for herself and her new business, and worked on her new business during work time while using Orca’s resources. In count five, tortious interference with business expectancies, Orca alleged that Noder interfered with its business expectations with its customers by taking those customers. In count six, unfair competition, Orca alleged that Noder established Pitch Public Relations using confidential and trade secret information.

The trial court dismissed the breach of duty, tortious interference, and unfair competition claims because AUTSA preempted them.

AUTSA preemption. AUTSA “displaces conflicting tort, restitutionary and other laws of this state providing civil remedies for misappropriation of a trade secret.” A.R.S. § 44-407(A). The trial court found that this preemption “extends even to ‘confidential information’ which is not asserted to rise to the level of a trade secret, as is the case here,” and dismissed all three of Orca’s tort claims.

Whether preemption extends to “confidential information” is an issue of first impression for Arizona. The court did not need to answer this question for Orca’s tortious interference with business expectancies and breach of fiduciary duty and duty of loyalty claims because neither claim alleged the misuse of confidential or trade secret information, according to the court.

Orca’s breach of fiduciary duty and duty of loyalty claim alleged that Noder engaged in improper conduct, including establishing a competing business and working on that new business while still working at Orca. Orca’s tortious interference with business expectancies claim alleged Noder’s interference with Orca’s business by “taking customers or potential customers” from it. While Orca could allege the misuse of “confidential information” at trial to prove these claims, in which case the preemption question would arise, Orca’s complaint did not do so. Accordingly, the trial court erred in dismissing Orca’s tortious interference with business expectancies, breach of fiduciary duty, and duty of loyalty claims.

Orca’s unfair competition claim, however, did allege the misuse of both confidential and trade secret information. To the extent Orca’s claim alleged the taking of trade secret information, the AUTSA preempted it. But to the extent Orca’s claim alleged the taking of confidential information, the court had to decide whether AUTSA would preempt that claim.

The AUTSA provides:

1. Except as provided in subsection B, this chapter displaces conflicting tort, restitutionary and other laws of this state providing civil remedies for misappropriation of a trade secret.

2. This chapter does not affect:

   1. Contractual remedies, whether or not based on misappropriation of a trade secret.

   2. Other civil remedies that are not based on misappropriation of a trade secret.

   3. Criminal remedies, whether or not based on misappropriation of a trade secret.

A.R.S. § 44-407

The AUTSA’s preemption provision is identical to the provision adopted by most states, the court noted. Courts that have reviewed the UTSA are divided on the preemption issue. A majority of courts that have considered this issue interpreted the UTSA to preempt all common law tort claims that are based on the misappropriation of information, regardless of whether the information reached the level of a trade secret.

The AUTSA’s preemption provision states that the AUTSA does not affect “other civil remedies that are not based on misappropriation of a trade secret.” A.R.S. § 44-407(B)(2) (emphasis added). The statute defines trade secret as information that has independent economic value from not being generally known or readily ascertainable to others “who can obtain economic value from its disclosure or use” and is the subject of reasonable efforts to maintain its secrecy. A.R.S. § 44-401(4). Under AUTSA, a trade secret has a specific meaning and not all information will rise to this level, the court observed.

The legislature’s inclusion of a trade secret in the preemption provision, and its specific definition of a trade secret in the statute, confirmed that the legislature did not intend the statute to preempt civil remedies that were not based on misappropriation of a trade secret, the court reasoned. Thus, the statute did not preempt a claim based on the misappropriation of confidential information that did not rise to the level of trade secretion information, the court held.

The decisions that relied on the AUTSA’s purpose of uniformity did not persuade the court to the contrary. The AUTSA did not contain the same statement of purpose directive that other state statutes contained.

Thus, based on the plain language of the statute, the AUTSA did not preempt a claim based on the misuse of confidential information that did not rise to the level of trade secret. Accordingly, the trial court’s determination on Orca’s unfair competition claim was reversed to the extent that the claim was not based on trade secrets.

The case is No. 1 CA-CV 12-0183.

David B. Earl for Orca Communications Unlimited, Inc. Monica A. Limon-Wynn for Ann Noder.

Companies: Orca Communications Unlimited, LLC

Cases: TradeSecrets ArizonaNews