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Arizona Supreme Court Bucks Majority in Critical Decision Interpreting Arizona Uniform Trade Secrets Act

Nov.25.2014

Against the majority of courts to have considered the issue, the Arizona Supreme Court held last week that the Arizona Uniform Trade Secrets Act (AUTSA) does not preempt (or displace) common-law claims when the claim is based on the misappropriation of confidential information as opposed to a trade secret. In other words, where the information that is alleged to have been misappropriated does not rise to the level of a "trade secret" within the meaning of the AUTSA, can a plaintiff nonetheless assert a claim based on some other theory (for example, unfair competition) under the common law? In Arizona, the answer is yes.

In Orca v. Noder, et al. Case No. CV-13-0351-PR (11/19/14), Noder, the president of Orca Communications Unlimited, LLC (Orca), had unsuccessfully tried to buy Orca, a public relations company. According to the opinion, when negotiations failed, Noder left to form a competing company, and urged the customers of Orca to do business with her new company. Orca then sued Noder, asserting that she had "learned confidential and trade secret information about Orca," including "information about Orca's business model, operating procedures, techniques, and strengths and weaknesses." Orca also alleged Noder intended to "steal[]" and "exploit" that information and Orca's customers to gain a competitive advantage for her company. 

Although unclear from the Supreme Court opinion, it appears that Orca asserted a single claim for common law unfair competition against Noder. Noder then moved to dismiss it on the grounds that the claim was preempted by the AUTSA even as to information "not asserted to rise to the level of a trade secret." The superior court dismissed Orca's complaint, but the court of appeals reversed. 

At issue before the Arizona Supreme Court was the following language from the AUTSA: "this chapter displaces conflicting tort, restitutionary and other laws of this state providing civil remedies for misappropriation of a trade secret" and that "[t]his chapter does not affect … [o]ther civil remedies that are not based on misappropriation of a trade secret." 

The Supreme Court rejected the trade secret preemption defense—and allowed the common law unfair competition claim to stand—for three primary reasons:

  • The text of the statute, on its face, "displaces only conflicting tort claims for 'misappropriation' of a 'trade secret'" and "leaves undisturbed claims ‘that are not based on misappropriation of a trade secret'"; 
  • If the Arizona legislature intended the AUTSA to cover a broader swath of common law claims that are not based on a trade secret per se, then it "should say so explicitly"; and 
  • The AUTSA does not contain the Uniform Act's directive that "[t]his [Act] shall be applied and construed to effectuate the general purpose to make uniform the law with respect to the subject of this [Act] among states enacting it." 

Noder argued that the narrow reading of the preemptive effect of the AUTSA would lead to "absurd results" when, for example, a plaintiff could recover punitive damages on a common law-based claim when the AUTSA only provides for double damages in the case of "willful and malicious misappropriation." The Supreme Court disagreed. Noting that punitive damages awards get overturned "quite often," and that "willful and malicious" conduct is likely easier to prove than the required clear and convincing evidence of a defendant's "evil mind," the Supreme Court concluded that from a policy perspective, Noder's argument was "not persua[sive]." 

The Court then turned again to the text of the statute, explaining that Noder's argument – that a literal reading of the AUTSA would undermine the Uniform Act's purpose to create a single, uniform tort action governing the misuse of allegedly confidential information – was also unpersuasive. In reaching that conclusion, the Court relied on a 1985 comment accompanying the text of the AUTSA that provides, in relevant part, that the Uniform Act "is not a comprehensive statement of civil remedies." 

Significantly, the Noder decision goes against the majority of courts that have tackled this issue, including a prior federal court decision in Arizona, Firetrace USA, LLC v. Jesclard, 800 F.Supp. 2d 1042, 1048 (D. Ariz. 2010) (concluding that AUTSA displaces claims based on the misappropriation of confidential information that falls outside AUTSA's definition of trade secret). 

Although the Supreme Court tried to ease the concerns of the defendant in Noder, and those who will litigate trade secret cases in the future in Arizona, it is doubtful the Supreme Court's reasoning will be of much comfort. The Court said that it remained to be decided what aspects of Orca's confidential information might rise to the level of a trade secret and, therefore, be displaced. But as another court, much earlier in this debate regarding displacement, has already explained:  this "theory would render [the displacement provision] meaningless, for it would forbid preemption of state law claims until a final determination has been made whether the confidential information at issue rises to the level of a trade secret." Thomas & Betts Corp. v. Panduit Corp., 108 F.Supp. 2d 968, 971 (N.D. Ill. 2000). 

Finally, the implications of the Noder case extend farther than the increased exposure to tort damages (i.e., beyond what is expressly provided by the Uniform Act). For example, allowing common law claims to co-exist with a trade secret claim clouds issues such as whether a plaintiff will be required to identify the confidential information that it alleges was misappropriated before the plaintiff can commence discovery. The majority of jurisdictions, with respect to trade secret claims, require such identification because it prevents, among other things, "fishing expeditions" into the other side's processes and procedures (including its confidential information) without first laying out what the plaintiff alleges was misappropriated (and thereby helping the courts to understand what the reasonable scope of discovery should be).

In light of Noder, it is incumbent on clients that have been accused of misappropriation of confidential information, whether they rise to the level of a trade secret or not, to carefully consider how best to deal with the effects of Noder and identify other available avenues to address any common law and AUTSA-based claims. 

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Mark A. Romeo
Partner – Orange County, Los Angeles
Phone: +1 949.798.1316, +1 213.622.4750
Email: mromeo@crowell.com
Christine Cwiertny
Counsel – Orange County
Phone: +1 949.798.1334
Email: ccwiertny@crowell.com