California Appellate Court Reaffirms the Trade Secret Displacement (Preemption) Doctrine

Courts continue to define the scope of the emerging trade secret displacement doctrine, (commonly referred to as preemption) which stems from California's Uniform Trade Secrets Act ("UTSA").  The UTSA contains a relatively conflicting provision that explicitly provides contractual and other claims “that are not based upon misappropriation of a trade secret” are not displaced.  However, the UTSA also implicitly precludes claims based on trade secret misappropriation.

Note

Preemption technically concerns whether federal law has superseded a state law or a state law has superseded a local law, not whether a provision of state law has displaced other provisions of state law.

Recently, California’s Fourth District Court of Appeal held in Angelica Textile Services, Inc. v. Park (--- Cal.Rptr.3d ----, Cal.App. 4 Dist., October 15, 2013), that causes of action which are based on facts distinct from those supporting a claim for misappropriation of trade secrets under the UTSA are not displaced by the UTSA.

In this unfair competition lawsuit, the plaintiff, Angelica Textile Services ("Angelica"), sued Jaye Park (“Park”), its former employee, and Emerald Textiles (“Emerald”), a new competitor, on a variety of theories, including a claim under the UTSA.  Angelica alleged claims for misappropriation of trade secrets, unfair competition, interference with business relationships, breach of contract and breach of fiduciary duty.  Defendants moved for summary judgment and adjudication.  The trial court granted defendants’ summary adjudication, ruling all non-UTSA claims were displaced by the UTSA.  Angelica appealed.

Factual Background

Park began working for Angelica, a provider of linen and laundry services to hospitals and healthcare facilities, in 1982.  During his employment with Angelica, Park signed a noncompetition agreement and promised to "give his best endeavors, skill and attention to the discharge of his duties with the Company.”  Park also agreed he would not, during his employment, "become interested, directly or indirectly, as a partner, officer, director, stockholder, advisor, employee, independent contractor or in any other form or capacity, in any other business similar to Angelica."

In 2008, while still employed by Angelica, Park developed a plan and began communicating with two of Angelica's largest customers, Sharp Healthcare ("Sharp”) and Scripps Health ("Scripps"), about forming a competing linen and laundry enterprise.  In 2009, a competing enterprise called Emerald Textiles, LLC ("Emerald") was formed based upon Park’s plan.  Also in 2009, Park disparaged Angelica to a local bank, the same bank with which he was meeting to obtain financing for Emerald.  Park also negotiated new contracts with large customers, including Sharp and Scripps, providing a cancellation without cause provision that is not customarily found in the industry.  These contracts permitted Angelica’s customers to cancel their contracts without early termination penalties and take their business to Emerald.  In 2010, Park resigned from his position at Angelica and became chief operating officer at Emerald.  Emerald thereafter successfully bid for contracts with former Angelica customers, and subsequently recruited more than 40 former Angelica employees.

The Appellate Court’s Rationale

The appellate court ruled that Angelica's claims, other than misappropriation of trade secrets, were not displaced by the UTSA.

The court reasoned that Angelica's breach of contract claim relied upon the terms of the noncompetition agreement, and testimony that Park was actively engaged in promoting a competing enterprise while employed by Angelica.  Therefore, the court found this conduct was outside the scope of the UTSA.  The same is true of Angelica's breach of fiduciary duty claim, which was based on Park’s obligations to Angelica during his employment, and not on the misappropriation of any trade secret.  The court found that all of Angelica's claims were based upon Park’s conduct while he was employed by Angelica.  Case law provides that while an employee has the right to seek other employment and make preparations for new employment before resigning, "California law does not authorize an employee to transfer his loyalty to a competitor.  During the term of employment, an employer is entitled to its employees' undivided loyalty."

Therefore, none of Angelica's claims, other than misappropriation of trade secrets, were displaced by the UTSA and all non-UTSA claims were reversed.