In July 2006, the New Hampshire Supreme Court held that the Uniform Trade Secrets Act ("UTSA") provided the sole legal avenue to redress employer claims of alleged misappropriation of trade secrets and the alleged misuse of non-trade secret "confidential information." In deciding this case, Mortgage Specialists, Inc. v. Davey, [1] the Court joined the majority of the nation's courts in interpreting the so-called "preemption" provision of the UTSA to preclude — with important exceptions — most common law claims against departed employees if such claims are based on the alleged taking of an employer's trade secrets and confidential information.
In Mortgage Specialists, two former independent contractors left the employer after some three years working at the company, when their boss presented them for the first time with a non-disclosure agreement. This agreement would have, among other things, provided that any and all information coming into the former contractors' hands was "the property" of Mortgage Specialists and could not be used for any purpose outside of Mortgage Specialists' business. The two contractors, who paid their own taxes, hired their own assistants and worked their own long, long hours, walked away — carrying with them documents that contained customer contact and other information. Several months later, Mortgage Specialists sued them, obtained an injunction based on the alleged misappropriation of "trade secrets and confidential and proprietary information."
In all, Mortgage Specialists brought five separate claims in addition to its claim of trade secret misappropriation under the UTSA — claims for common law conversion, interference with contract, breach of fiduciary duty, and a statutory unfair trade practices claim. After the injunction issued, and after hiring new counsel, the Defendants moved to dismiss the additional claims based on the preemption provision. This section of the UTSA, RSA 350-B:7, is identical to the Uniform Act that has been adopted in 44 states, and provides as follows:
I. Except as provided in paragraph II, this chapter displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret [as defined under the Act].
II. This chapter shall not affect:
(a) Contractual remedies, whether or not based upon misappropriation of a trade secret; [or]
(b) Other civil remedies that are not based upon misappropriation of a trade secret.
The Defendants argued that this provision meant that Mortgage Specialists' other claims were preempted, and should be dismissed because Mortgage Specialists had asserted that they were based on misappropriation of a trade secret or confidential information. Subsection II(a) simply did not apply; Mortgage Specialists had never obtained a contract to protect its trade secrets and confidential information.
In response, Mortgage Specialists first argued that the Motion to Dismiss was "premature," and that the court should not rule on the Motion "unless it can be clearly discerned that the information in question constitutes a trade secret." Mortgage Specialists also argued that in the event the court — or jury — later concluded that the information did not constitute a trade secret under the statute, its common law and other claims could survive based on the alleged misuse of non-trade secret, confidential information.
The Defendants responded by arguing that the claim was not "premature," and that the Uniform Act was intended, through the preemption provision, to provide a single, uniform and comprehensive mechanism to remedy claims of information piracy. As one leading case from another state concluded, "the UTSA did not establish a parallel statutory regime to complement the common law; rather, it abolished common law theories of misuse of such information….Unless defendants misappropriate a statutory trade secret, they do no legal wrong."
The trial court dismissed all of the other claims, because Mortgage Specialists, in seeking and obtaining a preliminary injunction, had represented that its remaining claims were derived from the Defendants' alleged taking and misuse of "trade secrets and confidential and proprietary information." Because Mortgage Specialists had never obtained an agreement — a non-competition or non-disclosure agreement — that might have provided a "contractual remedy," it was left with only the trade secret claim to take to the jury — a claim it eventually lost for its failure to take any reasonable steps to preserve the confidentiality of the information.
On appeal, the New Hampshire Supreme Court upheld the jury verdict, holding that a reasonable jury could have found (and did find) that Mortgage Specialists had failed to take reasonable steps to preserve the secrecy and confidentiality of the very information taken by the Defendants when they ended their independent contractor relationship with the company. The Court also held that the other claims were preempted to the extent those claims were based on the misappropriation of either a statutory trade secret or some species of non-trade secret "confidential information." Importantly, the Court held that the UTSA was intended to "create a uniform business environment that created more certain standards for protection of commercially valuable information," to preserve a "single tort action under state law" and to "codify all of the various common law remedies for theft of ideas." In fact, the Court concluded that with the enactment of the UTSA in New Hampshire and elsewhere, "confidential information not rising to the level of a statutory trade secret was left largely unprotected by the law."
However, this last statement — that "confidential information not rising to the level of a statutory trade secret was left largely unprotected by the law" — is not entirely true. In enacting the UTSA, the various states' legislatures made a deal with employers and employees, embodying a careful compromise between the crucial and often conflicting interests of employees and employers. In essence, Section 7 of the Act, quoted above, instructs employers to obtain contractual undertakings from employees (and, as in this case, independent contractors), or be satisfied with protections provided by the expansive definition of trade secrets under the Act. To the extent that the information was, first, not a trade secret and, second, not covered by a contractual obligation of secrecy, that information became part of the employee's general skills and knowledge, to take with her or him and use in the larger economy.
The Mortgage Specialists case is fundamentally a warning to employers: if you fail to take steps to protect sensitive business information, and to identify and maintain the confidentiality of competitively significant information, you risk losing your intellectual capital in the marketplace when employees depart. Companies adopting a comprehensive plan for the protection of such information, including but not limited to requiring non-disclosure agreements and stamping documents "Confidential," will have the benefit of the statute's broad definition of a trade secret, its substantial remedies in the form of injunctive relief, compensatory damages and punitive damages, and the remedies available for the breach of any contract intended to protect the employer's confidential business information.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
[1]The author, along with Sheehan Phinney litigation partner Robert R. Lucic, was counsel for the Defendants in this case.
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