The Arizona federal district court has weighed in twice in the past two weeks over the unique preemptive force of the Arizona Uniform Trade Secrets Act. Litigators bringing trade secrets claims in Arizona courts—whether under the AUTSA or its federal counterpart, the Defend Trade Secrets Act, will want to take notice. The lesson in both cases: draft your complaints with precision.
The issue traces back to the Uniform Trade Secrets Act, a model trade secrets law developed by the Uniform Laws Commission (readers can find the current version of that Act here). The preemption clause of that model act expressly “displaces conflicting tort, restitutionary and other laws of this state providing civil remedies for misappropriation of a trade secret.” Arizona has adopted precisely this language in the Arizona Uniform Trade Secrets Act, 44 A.R.S §§ 401-407.
But what if a common law claim is based on the misappropriation of confidential information that falls short of a trade secret? Is that preempted too? Most jurisdictions that have implemented the UTSA have said “yes.” But in 2014, in the landmark case of Orca Commc’ns Unlimited, LLC v. Noder, 337 P.3d 545 (Ariz. 2014), our Supreme Court said “no.” The AUTSA displacement provision was “expressly limited to ‘claims providing civil remedies for misappropriation of a trade secret,’” the Court noted. To be sure, the Court noted, the UTA contains a so-called “uniformity” provision requiring the model act to be “applied and construed to effectuate its general purpose to make uniform the law” with respect to trade secrets.” But Arizona did not incorporate that uniformity provision into its version of the UTSA. “[I]ts absence from AUTSA suggests that the legislature intentionally omitted it,” the Court reasoned. Thus, there would be no need for the Supreme Court to go with the majority rule on the issue.
The uniquely preemptive effect of the AUTSA was illustrated in two federal court decisions here in Phoenix in recent weeks. In Modulus Glob. Inc. v. Quintzy FZE LLC, CV-22-01457-PHX-GMS, 2023 WL 6147567 (D. Ariz. Sept. 20, 2023), a Scottsdale-based fintech company claimed that a contractor shared its proprietary information with a competitor in violation of Arizona and federal trade secrets law as well as several common law duties. The contractor argued that the common law claims—breach of duty of loyalty, breach of fiduciary duty, and trespass to chattels—were preempted by the AUTSA. Not so under the Orca doctrine, the federal court held. Those claims were based not only on the software company’s conduct related to the allegedly misappropriated source code, but also its conduct in failing to return and safeguard other documentation and related software. To the extent those claims were based on misappropriation of trade secrets, the court noted, they were of course preempted. However, “as pleaded,” the court found, “these claims could plausibly encompass information or broader conduct than that created under the trade secret definition.” Thus, the claims could not be found preempted at the motion to dismiss stage.
The Orca doctrine also came up this past Friday in Smoketree Holding LLC v. Daniel Apke, et al., CV-22-02123-PHX-DLR, 2023 WL 6377272 (D. Ariz. Sept. 29, 2023)—but here the outcome was different. In that case, an Arizona educational company that teaches the art of “flipping” real estate—based in Scottsdale too, as it happens—claimed that a competitor purloined what it described as a “very specific way of identifying, buying and selling land.” The federal court found that this ambiguous description did not describe information that, by nature, would “plausibly cross over from matters of general knowledge to trade secrets.” But the court, perhaps adding insult to injury, then found that the fact that the company failed to adequately plead a trade secret didn’t prevent its common law claims from being preempted as well. To be sure, the court noted, the AUTSA does not displace common-law claims based on alleged misappropriation of confidential information that falls short of being a trade secret. But here, the court noted, the complaint identified nothing that would fall into this category. The category of information on which the complaint was based—the Arizona company’s “very specific way of identifying, buying and selling land”—was expressly pleaded as a trade secret, and not as any other form of confidential information. “Nowhere does that paragraph even hint that this ‘very specific way of identifying, buying, and selling land’ includes confidential information that is not a trade secret,” the court held.