Judge: Nathan Vu, Case: 2022-01255944, Date: 2022-09-12 Tentative Ruling
Demurrer
The demurrer of Defendant Christopher Morse to the Complaint is SUSTAINED as to the sixth cause of action, with 21 days leave to amend, and OVERRULED as to the first, second, and third causes of action.
Defendant Christopher Morse demurs to the first, second, third, and sixth causes of action of the Complaint filed by Plaintiff Brown & Brown Insurance Services of California Inc.
Third Cause of Action (Unfair Competition) and Sixth Cause of Action (Unjust Enrichment)
Defendant argues that the third and sixth causes of action are preempted by the California Uniform Trade Secrets Act (CUTSA). (See Civil Code, §§ 3426-3426.11). Defendant relies upon K.C. Multimedia, Inc. v. Bank of Am. Tech & Ops., Inc. (2009) 171 Cal.App.4th 939, in which the Court of Appeal held that “section 3426.7, subdivision (b), preempts common law claims that are ‘based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.’” (Id. at p. 958, quoting Digital Envoy, Inc. v. Google, Inc. (N.D. Cal., 2005) 370 F.Supp.2d 1025, 1035.)
CUTSA defines “trade secret” to mean “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (Civil Code, § 3426.1, subd. (d).)
The third cause of action of the Complaint alleges that Defendant committed acts of unfair competition by 1) “collecting Client Account information under the guise of processing their policy renewals”; 2) “misappropriating Confidential Information, including highly sensitive and competitively valuable loss run data, pricing information, and marketing proposals”; and 3) “deleting client-related files from Brown & Brown’s network and/or his assigned work computer to try to conceal his unlawful activities and to render the information inaccessible to Brown & Brown . . . .” (Compl., ¶ 66.) The sixth cause of action asserts the Defendant “misappropriated Brown & Brown’s Confidential Information.” (Compl., ¶ 85.)
The Complaint defines the term “Confidential Information” by reference to the Confidential Information and Non-Disclosure Agreement dated 04/29/2013 (Agreement). Under the Agreement, “Confidential Information” means:
[A]ll information, whether or not reduced to written or recorded form, that is related to the Company or an Affiliate . . . and that is not generally known or accessible to members of the public and/or competitors of the Company or an Affiliate nor intended for general dissemination and as to which the Company and its Affiliate takes reasonable steps to remain confidential, whether furnished by the Company or an Affiliate or compiled by [Defendant], including but not limited to, the financial condition, results of operations, compensation and other information regarding the Company or its Affiliates, the personnel of the Company or an Affiliate, information regarding the potential or completed merger, acquisition, or sale of business assets, lists of Client Accounts, Prospective Client Accounts, insurance carriers, policy forms and/or rating information, expiration dates, information on risk characteristics, information concerning insurance markets for large or unusual risks, and records pertaining thereto.
(Compl., ¶ 11 & Exh. 1.)
Thus, it appears that the term “Confidential Information” as used in the Complaint means the same thing as a “trade secret” under CUTSA. (See Silvaco Data Sys. v. Intel Corp. (2010) 184 Cal.App.4th 210, overruled in part on other grounds, Kwikset Corp. v. Super. Ct. (2011) 51 Cal.4th 310, 337, [“Indeed a trade secret may consist of . . . a fact (an empirical datum), such as a customer’s preferences, or the location of a mineral deposit. . . . . Trade secret law, in short, protects only the right to control the dissemination of information.”].) Thus, claims for unfair business competition and unjust enrichment based on allegations of misappropriation of “Confidential Information” are pre-empted by CUTSA. (See id. at pp. 240-241 [pre-emption of unfair competition claim]; upon K.C. Multimedia, Inc. v. Bank of Am. Tech & Ops., Inc., supra, 171 Cal.App.4th at p. 959 [preemption of unjust enrichment claim].)
However, even if the “Confidential Information” described in the Complaint does not rise to the level of trade secrets under CUTSA, claims based on misappropriation of information that is less than a trade secret are still pre-empted by CUTSA. (See Silvaco Data Sys. v. Intel Corp., supra, 184 Cal.App.4th at p. 239, fn. 22 [“We emphatically reject the Cenveo court’s suggestion that [CUTSA] was not intended to preempt ‘common law conversion claims based on the taking of information that, though not a trade secret, was nonetheless of value to the claimant.’” (Id. at 239, fn. 22, citing Cenveo Corp. v. Slater (2007 E.D. Penn.) 2007 WL 527729, *4.)
The Silvaco Data Sys. Court also noted that, a claim for misappropriation of information that did not rise to the level of a trade secret would fail on the merits: “But ‘information’ cannot be ‘stolen’ unless it constitutes property. And information is not property unless some law makes it so. If the plaintiff identifies no property right outside of trade secrets law, then he has no remedy outside that law . . . .” (Silvaco Data Sys. v. Intel Corp., supra, 184 Cal.App.4th at p. 239, emphasis original; see also Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 506 [ “In general, the acquisition, disclosure or transfer of information that does not fit UTSA’s definition of a trade secret does not give rise to any liability, even when that liability is couched in terms of a separate tort or statutory violation.”].) (fn.1)
Thus, the Court concludes that Plaintiff’s claims based on the misappropriations of “Confidential Information” are preempted by CUTSA, or they fail to state a claim upon which relief may be granted since they do not allege the misappropriation of items over which the Plaintiff has a property right.
However, the third cause of action also is based upon allegations that Defendant collected “Client Account Information” using deceptive means and deleting client-related files from Plaintiff’s network and/or Defendant’s assigned work computer. The collection of “Client Account Information” may not amount to misappropriation of trade secrets if the information was collected from parties other than Plaintiff. (See Civil Proc. Code, § 452 [pleadings should be construed liberally with view to substantial justice between parties].) In addition, the deletion of computer files does not constitute misappropriation of trade secrets. The third cause of action is therefore not preempted by CUTSA to the extent it relies on those allegations and the demurrer may not be sustained to the third cause of action. (See Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119 [“A demurrer must dispose of an entire cause of action to be sustained.”].)
The Court shall therefore overrule the demurrer as to the third cause of action and sustain the demurrer as to the sixth cause of action, with 21 days leave to amend.
First Cause of Action (Breach of Contract)
Defendant also demurs to the first cause of action, relying upon the dicta in Silvaco Data Sys. that there are no property rights over confidential information that does not rise to the level of a trade secret. However, that reasoning applies in the context of a misappropriation claim. It is inapposite in a breach of contract claim. In other words, a party cannot misappropriate information that belongs to no one, but a party may breach a contract to not take or use that same information, even if the information belongs to no one.
Consistent with this, CUTSA makes clear that it “does not affect . . . contractual remedies, whether or not based upon misappropriation of a trade secret…” (Civil Code, § 3425.7, subd. (b).) Indeed, the “UTSA by its terms does not displace a contract claim, even if it is based on the misappropriation of a trade secret.” (Angelica Textile Services, Inc. v. Park (2013) 220 Cal.App.4th 495, 506.)
Defendant also argues that the confidentiality provision of the Agreement is void as a matter of law, pursuant to Business & Professions Code section 16600. That provision mandates that “every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” (Business & Prof. Code, § 16600.)
Defendant cites to Retirement Group v. Galante (2009) 176 Cal.App.4th 1226 and American Credit Indemnity Co. v. Sacks (1989) 213 Cal.App.3d 622, in support of this contention.
However, Retirement Group did not involve a confidentiality agreement or, specifically, whether such an agreement violates Business & Professions Code section 16600. Instead, the Court of Appeal in Retirement Group was analyzing whether the trial court properly issued an injunction which broadly prevented former employees from “[d]irectly or indirectly soliciting any current TRG [customers] to transfer any securities account or relationship from TRG to [employees] or any broker-dealer or registered investment advisor other than TRG.” (Retirement Group v. Galante, supra, 176 Cal.App.4th at p. 1232).
In addition, American Credit Indemnity Co. did not involve Section 16600 at all and only stands for the proposition that a trial court may issue an injunction against use of a trade secret under CUTSA. (See American Credit Indemnity Co. v. Sacks, supra, 213 Cal.App.3d at p. 625.) Neither case applies here.
Defendant also relies upon Brown v. TGS Mgmt. Co. (2020) 57 Cal.App.5th 303, in which the Court of Appeal held that a confidentiality provision that broadly defined confidential information to include all information relating to securities trading violated Section 16600. (Id. at pp. 315-318.) The Brown Court reasoned that, “[c]ollectively, these overly restrictive provisions operate as a de facto noncompete provision; they plainly bar Brown in perpetuity from doing any work in the securities field, much less in his chosen profession of statistical arbitrage. Consequently, we conclude the confidentiality provisions are void ab initio and unenforceable.” (Id. at 319.)
However, the Brown decision qualified its holding: “Our conclusion these particular provisions are void does not prevent TGS from enforcing a properly drawn confidentiality agreement which preserves an employee’s right to compete after leaving TGS’ employ.” (Id. at p. 317). Thus, Brown expressly acknowledged that a properly drafted confidentiality provision would not violate Business & Professions Code section 16600.
Defendant also cites to AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018) 28 Cal.App.5th 923. In that case, it was held that that a non-solicitation provision in an employment contract was void, as it violated Business & Professions Code section 16600. (Id. at 936). The AMN Healthcare Court noted that the “broadly worded provision prevents individual defendants, for a period of at least one year after termination of employment with AMN, from either ‘directly or indirectly’ soliciting or recruiting, or causing others to solicit or induce, any employee of AMN.” (Id.) The Court of Appeal ruled that “[t]his provision clearly restrained individual defendants from practicing with Aya their chosen profession . . . .” (Ibid.).
However, the AMN Healthcare decision only invalidated the non-solicitation provision and not the confidentiality provision. (Id. at p. 928 [identifying confidentiality provision]; id. at p. 939 [invalidating non-solicitation provision].)
In this case, the confidentiality provision of the Agreement limited Defendant’s use of “Confidential Information,” which was defined consistent with “trade secrets” under CUTSA. The Court can find no authority for the proposition that a contract provision that bars the use of trade secrets under CUTSA violates Section 16600.
Further, the confidentiality provision of the Agreement does not bar the Defendant in perpetuity from doing any work in his chosen field nor is it a broadly worded provision that prevents the Defendant from practicing in his chosen profession. In contrast to Brown, the definition for confidential information in this case is not so broad as to encompass all knowledge in the industry and prevent any future employment in that field.
The First Cause of Action also asserts a breach of contract on the basis of a violation of the notice provision of the Agreement, alleging that Defendant failed “to provide Brown & Brown with proof that he delivered proper notice of the terms of the Confidentiality Agreement to C3,” as required by Section 3(c)(v) of the Agreement. (Compl., ¶54).
Defendant asserts the notice provision also runs afoul of section 16600, but this argument fails for the reasons stated above.
Lastly, while Defendant asserts Plaintiff cannot allege causation or damages since the Plaintiff already availed itself of the remedies permitted under the notice provision of the Agreement, the Complaint in fact alleges causation and damages. (See Compl., ¶ 55.) Defendant cites no authority which requires greater specificity at this early stage of the pleadings.
Second Cause of Action (Breach of the Implied Covenant of Good Faith and Fair Dealing)
Defendant argues that the second cause of action is duplicative of the first and, consequently, is subsumed by the first cause of action. (See Careau & Co. v. Sec. Pac. Bus. Credit, Inc. (1990) 222 Cal.App.3d 1371, 1395).
While some of the allegations as to the second cause of action overlap with those of the first cause of action, Plaintiff also asserts that Defendant committed a breach of the covenant of good faith and fair dealing by “gathering highly sensitive, confidential Client Account information in the final days of his employment using deceptive means; misleading colleagues regarding the purpose for which the information would be used; and . . . attempting to delete [the information] from Brown & Brown’s network, to make it unavailable or more difficult for Brown & Brown to access after his departure.” (Compl., ¶ 62.) These allegations are different from and not duplicative of the allegations in the first cause of action that Defendant misappropriated Confidential Information.
Motion to Strike
The motion to strike of Defendant Christopher Morse is GRANTED, with 21 days leave to amend.
Defendant Christopher Morse moves to strike portions of the Complaint which reference the misappropriation of “Confidential Information”, on the basis that claims based on these allegations are pre-empted by CUTSA.
For the reasons explained in its ruling on the demurrer, the Court finds that CUTSA preempts all claims arising from the misappropriation of “Confidential Information.”
Consequently, the following language is stricken:
Defendant shall give notice of this ruling.
(fn.1) These pronouncements in Silvaco Data Sys. v. Intel Corp. were dicta as there was no dispute that the complaint in that case alleged the misappropriation of “trade secrets”. However, the reasoning is persuasive and the court is not aware of any binding contrary authority. The parties cite to a number of federal district court decisions, some of which follow Silvaco and others that are contrary to Silvaco. However, none of those decisions are binding on this court or other federal courts.
(fn.2) This allegation is contained in the third cause of action. While the Defendant did not seek to strike allegations in the third cause of action, the Court interprets Defendant’s demurrer as to the third cause of action to include a motion to strike in the alternative.