Virtual Learning: The Scope of Preemption Under the California Uniform Trade Secrets Act

3 minute read | February.12.2016

Companies seeking protection under the California Uniform Trade Secrets Act (“CUTSA”) should consider the effects of CUTSA preemption on their litigation strategy. Under the well-known Silvaco Data System v. Intel Corporation case and its progeny, CUTSA provides the exclusive civil remedy for trade secret misappropriation and supersedes other tort claims based on the same nucleus of facts as any trade secret claims that are or could be pled.

The recent decision by Judge William Alsup in the Northern District of California in a dispute between virtual reality companies Total Recall Technologies and Oculus VR, LLC provides important lessons on the strategic implications of CUTSA preemption. In 2011, Total Recall founder Thomas Seidl engaged Palmer Luckey to develop a prototype head-mounted 3D display, at which point Seidl and Luckey entered into a non-disclosure and exclusivity agreement. Later, in 2012, Luckey began commercializing his own virtual reality head-mounted display as the now well-known Oculus Rift. In 2014, Facebook acquired Oculus VR for over two billion dollars.

Total Recall, which never launched its own head-mounted display, sued Oculus and Luckey in 2015, asserting breach of contract and tort claims including conversion, constructive fraud, and unfair competition. Total Recall did not assert a trade secret claim. Defendants moved to dismiss. While Total Recall’s contract claims survived, Judge Alsup dismissed all of Total Recall’s common law tort claims as being superseded by CUTSA, rejecting Total Recall’s attempt to avoid preemption by arguing that its tort claims were based on conduct other than misappropriation of information:

Conversion. Total Recall’s conversion claim was based on the fact that Luckey initially sent Seidl a prototype headset, which Seidl sent back to Luckey for further improvement. Luckey did not then return the prototype to Seidl, nor did Seidl ask for it back. Since conversion of intangible confidential information is superseded by CUTSA, Judge Alsup found that the lack of a request for return of the prototype was fatal to the conversion claims because of the lack of wrongful dispossession.

Constructive Fraud. Total Recall’s constructive fraud claim was based on the allegation that Luckey entered into an agreement with Seidl without intending to abide by its terms. Judge Alsup found that Total Recall did not plead facts showing that Luckey intended to breach the contract at the time it was made. Moreover, Judge Alsup found that, even if Total Recall could show such intent, the claim would be superseded by CUTSA, except to the extent that a disclosure of information would breach Luckey’s contractual obligations.

Actual Fraud. Total Recall sought to add a claim for actual fraud based on allegations that Luckey asked Seidl’s permission to open-source the prototype when he had in fact taken steps to launch that prototype as Oculus Rift. Judge Alsup found that any injury to Total Recall would be based on Luckey’s alleged disclosure of confidential information to marketing and development partners, and therefore this proposed claim was superseded by CUTSA as well.

Unfair Competition. Finally, Total Recall alleged unfair competition under Section 17200 of the California Business and Professionals Code, based on contentions that Oculus Rift originated with Total Recall, and that Oculus mislead the public regarding this design origin. Judge Alsup found, however, that any injuries stemming from such a claim was based on an alleged misappropriation of the Rift design, which again was superseded by CUTSA.

Judge Alsup was disturbed, however, about the result, finding “the preemptive sweep of Silvaco extraordinarily surprising as a development in California law.” As the Defend Trade Secrets Act continues its way through the legislature, courts may soon face the question of whether any new federal trade secret law similarly preempts state tort claims. In the meantime, given the broad sweep of tort preemption under California trade secret law, employers are advised to be sure that adequate contractual provisions exist to safeguard a company’s valuable intellectual property and confidential information.