K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc.
2009 Cal. App. LEXIS 276, 171 Cal. App. 4th 939, 90 Cal. Rptr. 3d 247 (2009)
Rule of Law:
California's Uniform Trade Secrets Act (CUTSA) broadly preempts common law claims that are factually predicated on the same alleged misappropriation of trade secrets, rejecting a 'something more' test adopted in some other Uniform Trade Secrets Act (UTSA) jurisdictions.
Facts:
- K.C. Multimedia, Inc. (KCM) developed prototypes for two banking applications, 'Palm VII' and 'Gating,' which were derived from its preexisting 'Wirelessproxy' core technology.
- KCM claimed the software for both applications, derived from Wirelessproxy source code, as a trade secret.
- KCM entered into two written contracts with Bank of America Technology & Operations, Inc. (BATO) and related entities in 1998 and 2000 for technology services.
- KCM alleged that its former employee, Allen Tam, took the trade secrets to the Bank of America (BA) in exchange for employment.
- KCM alleged that BATO, Bank of America National Association (BAÑA), and Bank of America Corporation (BA) aided and abetted Tam in disclosing KCM's wirelessproxy trade secrets and encouraged him to misappropriate them.
- KCM alleged that BATO, BA, and BAÑA's actions constituted unlawful, unfair, oppressive, and immoral business practices by knowingly misappropriating KCM’s wirelessproxy trade secrets.
Procedural Posture:
- K.C. Multimedia, Inc. (KCM) filed an action in June 2001 against BATO and its former employee, Allen Tam, asserting causes of action for misappropriation of trade secrets, conversion, breach of contract, and unjust enrichment in state trial court.
- The litigation involved an extensive pretrial procedural history, including multiple demurrers and complaint amendments.
- KCM filed a fifth amended complaint, asserting causes of action against BATO, Bank of America Corporation (BA), Bank of America National Association (BAÑA), and Allen Tam for trade secret misappropriation, breach of confidence, conversion (against Tam only), breach of contract, tortious interference with contract, and unfair competition.
- In February 2006, just prior to trial, the state trial court, on its own motion, heard arguments on statutory preemption raised in respondents' trial brief and dismissed KCM's second cause of action (breach of confidence), fifth cause of action (interference with contract), and sixth cause of action (unfair competition), finding them preempted by CUTSA.
- KCM then filed a sixth amended complaint, asserting a single cause of action for misappropriation of trade secrets against respondents.
- After an approximately eight-week jury trial, the jury returned special verdicts for BATO, BA, and BAÑA (respondents), finding KCM failed to prove ownership of trade secrets and made its misappropriation claims in bad faith.
- The state trial court entered judgment for BATO, BA, and BAÑA in May 2006.
- KCM moved for judgment notwithstanding the verdict, or, in the alternative, for a new trial, which the state trial court denied in July 2006.
- In August 2006, BATO, BA, and BAÑA moved for attorney fees, which the state trial court granted in September 2006, awarding over $1.1 million.
- KCM filed an appeal (H030494) from the judgment to the California Court of Appeal (intermediate appellate court) in August 2006, challenging both the jury's verdict and the court's preemption ruling.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does California's Uniform Trade Secrets Act (CUTSA) preempt common law tort claims for breach of confidence, interference with contract, and unfair competition when those claims are based on the same factual allegations as a trade secret misappropriation claim?
Opinions:
Majority - McAdams, J.
Yes, California's Uniform Trade Secrets Act (CUTSA) preempts common law claims for breach of confidence, interference with contract, and unfair competition when those claims are based on the same factual allegations as a claim for trade secret misappropriation. The court affirmed the trial court's preemption ruling. Procedurally, the court found that KCM forfeited its challenge to the pretrial procedure by failing to object in the trial court. Even assuming procedural error, it was harmless because the trial court was well-informed by the extensive history of the case, including prior pleadings and concessions, and acted within its inherent authority to control litigation and conserve judicial resources. The court emphasized that reversal for procedural error requires a demonstration of prejudice, which KCM failed to provide, especially since the substantive preemption ruling was correct. Substantively, the court interpreted Civil Code section 3426.7, subdivision (b)(2), which states CUTSA 'does not affect... (2) other civil remedies that are not based upon misappropriation of a trade secret,' to implicitly preempt alternative civil remedies that are based on trade secret misappropriation. The court rejected KCM's argument for a narrow interpretation of preemption, holding that CUTSA’s 'comprehensive structure and breadth' indicates a legislative intent to 'occupy the field' of trade secret law in California. It explicitly distinguished California’s preemption provision from the Uniform Trade Secrets Act (UTSA) Section 7, which 'displaces conflicting' law and leads to a 'something more' test in other jurisdictions, noting that California deliberately adopted different language. Therefore, decisions from other jurisdictions applying a 'something more' test are not persuasive. Instead, the court adopted the view that common law claims are preempted if they are 'based on the same nucleus of facts' as the trade secret misappropriation claim. Applying this construction to KCM's fifth amended complaint, the court concluded that the claims for breach of confidence, interference with contract, and unfair competition all factually hinged upon the alleged misappropriation of trade secrets. For instance, the breach of confidence claim was based on Tam disclosing trade secrets (which is legally misappropriation); the interference with contract claim was based on inducing Tam to misappropriate trade secrets; and the unfair competition claim directly cited 'Misappropriation of trade secrets under Civil Code § 3426.1(b)' as an 'unlawful' business act. Thus, these claims were preempted.
Analysis:
This case significantly clarifies the scope of preemption under California's Uniform Trade Secrets Act (CUTSA), establishing a strict 'same nucleus of facts' test for preemption. By explicitly rejecting the 'something more' test used in some other UTSA jurisdictions, the decision affirms a broad preemptive effect, limiting a plaintiff's ability to plead alternative common law tort claims when the underlying factual basis is trade secret misappropriation. This ruling encourages litigants to streamline their claims under CUTSA, reinforcing the Act's role as the comprehensive statutory scheme for trade secret disputes in California and potentially reducing the complexity of such litigation.
