Morgan Miller Blair

Courts of appeal issued two key decisions in March 2009, illuminating important developments in California trade secret law.  In the first case, the court found that California’s Uniform Trade Secrets Act preempts a number of collateral claims which plaintiffs often bring along with their trade secret claims.  In the second case, the court clarified the level of specificity with which a trade secret plaintiff needs to identify its trade secret in order to proceed with discovery.

K.C. Multimedia v. Bank of America
Common Law Claims Based On Trade Secret Misappropriation Are Preempted

On March 2, 2009, the Sixth District of the California Court of Appeal published K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., a decision holding that tort, contract, and even unfair competition claims that are factually based on trade secret misappropriation are preempted by California’s Uniform Trade Secrets Act.  In other words, if someone steals your trade secrets, you might only be able to pursue one claim – for trade secret misappropriation – and not a handful of other “piggyback” claims.

In K.C. Multimedia, the plaintiff (K.C.) developed wireless banking applications, which improved bank customers’ access to online banking services.  K.C. claimed that its applications constituted a trade secret, and that those secrets were stolen by a former employee and given to defendant (Bank of America).  K.C. asserted several claims, including trade secret misappropriation, breach of confidence, interference with contract, and unfair competition.  During pre-trial motions, the trial court dismissed all of those claims except for trade secret misappropriation on the grounds that they were preempted under the California Uniform Trade Secrets Act.  K.C. went to trial on its sole remaining claim for trade secret misappropriation, and the jury returned a defense verdict.  K.C. appealed, arguing among other grounds that its non-trade secret claims were not preempted and should not have been dismissed before trial.

The court of appeal affirmed the judgment.  Noting the “comprehensive structure and breadth” of the California Uniform Trade Secrets Act, and the Act’s specific preemption provision (Civil Code section 3426.7), the court ruled that the trial court correctly dismissed the claims for breach of confidence, interference with contract, and unfair competition on the grounds of preemption.  Observing differences in scope between the California version of the Uniform Trade Secret Act and the model Act (which other States have adopted without changing), the court determined that California’s Act “preempts common law claims that are based on the same nucleus of facts as the misappropriation of trade secrets claim[.]”  The court held that the other claims asserted by K.C. all focused, at their core, on the trade secret theft.  For example, the claim for breach of confidence centered on the former employee’s disclosure of trade secrets to Bank of America in violation of his contractual duties of confidentiality; the claim for interference with contract focused on Bank of America’s encouragement of the former employee’s theft of trade secrets; and the claim for unfair competition was expressly based on the alleged trade secret misappropriation. 

In light of the K.C. Multimedia decision, a California plaintiff whose trade secrets have been stolen likely has only one claim for relief – for trade secret misappropriation under the California Uniform Trade Secrets Act.  Other claims and theories of liability will be dismissed, unless they are supported by facts independent from the trade secret theft.  The decision provides a lesson for trade secret plaintiffs (plead alternative claims by highlighting different facts unrelated to the trade secret theft), and strong ammunition for trade secret defendants seeking to surgically remove alternative claims that are preempted.

Brescia v. Angelin
Plaintiffs Need Only Identify Their Trade Secret With Reasonable Particularity At The Outset Of A Case

On March 17, 2009, the Second District of the California Court of Appeal published Brescia v. Angelin, a decision clarifying what level of disclosure a plaintiff must make in identifying his trade secret at the outset of a misappropriation case.  In short, a plaintiff must describe the trade secret with reasonable particularity, so the court can fashion appropriate discovery, and so the opponent can identify the boundaries of the trade secret and have a meaningful opportunity to investigate and defend the claim.

In Brescia, the cross-complainant William Brescia alleged that a group of cross-defendants including actor Sylvester Stallone (collectively Angelin) stole and used his trade secret recipe for a high protein pudding.  In his cross-complaint, Brescia described his trade secret as “a formula, manufacturing process, marketing plan, funding plan and a distribution and sales plan for a high protein, low carbohydrate pudding with an extended shelf life and a stable and appealing consistency and most important, when mass produced, an appetizing flavor.”  Brescia alleged that he brought his recipe to Angelin so they could jointly sell and distribute the product, but Angelin took the recipe and began producing and selling the pudding without Brescia. 

Early in the litigation, Angelin invoked a trade secret-specific provision of the California Civil Discovery Act requiring the trade secret holder to “identify the trade secret with reasonable particularity” before starting discovery.  (Code of Civil Procedure section 2019.210.)  In response, Brescia first filed 305 pages under seal, which he categorized into different types of trade secrets – e.g., marketing strategies, formula, and manufacturing process.  The trial court found this disclosure inadequate, holding that Brescia’s inclusion of voluminous documents “obscured rather than refined the description” of the trade secret.  Brescia tried again, this time filing a disclosure including two short exhibits:  the first exhibit was a single page listing the 15 specific ingredients in his pudding formula (including the supplier and brand name, and the percentages each ingredient constituted of the total formula), and a second exhibit was a single page describing the manufacturing process for his pudding (including details of mixing, testing, and code marking).  The trial court held that Brescia’s second disclosure was still inadequate because it failed to explain why the pudding formula was unique and not known to others.  The trial court then dismissed Brescia’s trade secret claim, and Brescia appealed.

The court of appeal reversed the judgment, holding that Brescia’s second trade secret disclosure was adequate.  The court determined that the disclosure standard imposed by section 2019.210 is flexible, and takes into account the nature of the alleged trade secret.  The court also emphasized that the purpose of the disclosure was to allow the trial court to fashion appropriate discovery and to allow the defendant to investigate and defend the claim – not to force the plaintiff to substantively prove that the alleged trade secret “actually exists.”  Only where the plaintiff’s disclosure fails to adequately inform the court and the defendant about the boundaries of the alleged trade secret will the plaintiff be required to make an additional showing of how the trade secret differs from matters generally known to persons in the field.  Against this backdrop, the court held that Brescia’s second disclosure was adequate, and reinstated his case.

After the Brescia decision, trade secret plaintiffs will have an easier time keeping their claim alive during the initial stages of litigation.  As long as the plaintiff provides an adequately specific description of what the alleged trade secret consists of at the outset of the case, so that the court and the defendant can identify its boundaries, the case should survive into the discovery process.  Trade secret defendants will not be able to use the initial disclosure requirements of section 2019.210 as a substitute for a summary judgment motion or trial on the merits.