United States: Tennessee Adopts Expansive Trade Secret Preemption Standard

In a case of first impression decided August 19, 2014, the Tennessee Court of Appeals has decided the standard for determining the scope of preemption under the Tennessee Uniform Trade Secrets Act (TUTSA). The court adopted a "same proof" standard under which a claim will be preempted when it necessarily rises or falls based on whether the defendant is found to have "misappropriated" a "trade secret" as those terms are defined in TUTSA. Ram Tool & Supply Co. v. HD Supply Construction Supply, Ltd., No. M2013-02264-COA-R3-CV, 2014 WL 4102418 (Tenn. Ct. App. Aug. 19, 2014).

Adopted in 2000, TUTSA was intended to bring uniformity and simplicity to the business torts arena by abolishing freestanding alternative causes of action for the taking or misuse of confidential or proprietary information falling short of trade-secret status (such as misappropriation of "confidential business information"). TUTSA does so by providing, through Tenn. Code Ann. § 47-25-1708, that it "displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret." However, since TUTSA also provides that it does not preempt "other civil remedies that are not based upon misappropriation of a trade secret," courts have had to determine whether common law tort claims in cases involving allegations of trade secret misappropriation are preempted by TUTSA. Courts across the country have offered differing interpretations of how to determine if such claims are preempted under the uniform act, which 47 states have adopted. Although no Tennessee appellate court had interpreted TUTSA's preemption provision, courts in each of Tennessee's three federal districts, as well as the Sixth Circuit, have applied the so-called "same proof" standard adopted in Hauck Manufacturing Co. v. ASTEC Industries, Inc., 375 F. Supp. 2d 649 (E.D. Tenn. 2004). See, e.g., PartyLite Gifts, Inc. v. Swiss Colony Occasions, 246 Fed. Appx. 969 (6th Cir. 2007).

The issue in the Ram Tool case was whether the plaintiff's claims of breach of fiduciary duty/loyalty, aiding and abetting breach of fiduciary duty/loyalty, and conspiracy to unlawfully recruit were preempted because they were, according to the defendants, based on alleged misappropriation of trade secrets. Ram Tool was a construction supply business that lost several at-will employees to a competitor. It claimed the defendants had used trade secrets and confidential business information of Ram Tool in recruiting employees. Over the course of seven pleadings in Alabama state and federal court, then in Tennessee chancery and circuit court proceedings, Ram Tool had alleged a variety of common law business tort claims, including conversion of confidential customer information and proprietary business information, breach of fiduciary duties, unfair competition, violation of the Alabama Trade Secrets Act, intentional interference with business relations, trespass, and civil conspiracy. As the case progressed, Ram Tool dropped its TUTSA count and recast its claims as breach of fiduciary duty/loyalty and conspiracy to unlawfully recruit, asserting it was entitled to present to the jury much the same facts on which it had based its abandoned TUTSA claims. The defendants argued that Ram Tool's remaining claims were still based on allegations that constituted misappropriation of trade secrets under TUTSA and were, therefore, preempted. The trial court agreed with the defendants that Ram Tool had grounded all its claims on allegations of misappropriation of trade secrets, even after it abandoned its TUTSA claims, and granted summary judgment to the defendants.

In an opinion authored by Judge Alan E. Highers, the Tennessee Court of Appeals adopted the "thorough and well-reasoned analysis set forth in Hauck." The court quoted extensively from Hauck, including its key holding: "perhaps a better formulation of the UTSA preemption standard would be a 'same proof' standard under which a claim will be preempted when it necessarily rises or falls based on whether the defendant is found to have 'misappropriated' a 'trade secret' as those two terms are defined in the UTSA. Stated another way, if proof of a non-UTSA claim would also simultaneously establish a claim for misappropriation of trade secrets, it is preempted irrespective of whatever surplus elements or proof were necessary to establish it." The court went on to hold that, "[w]e find the 'same proof' test set forth in Hauck provides a workable standard for applying TUTSA's preemption provision while furthering TUTSA's stated goals of providing a uniform standard of liability and avoiding duplicative recovery. Accordingly, we hereby adopt the Hauck 'same proof' standard as the test for TUTSA preemption in this State."

Turning to the facts of the case, the court found that, "[c]learly, Ram Tool has primarily, if not wholly, relied upon the misappropriation of trade secrets and/or confidential information as the factual basis for its allegation of unlawful recruitment and resulting claim of breach of fiduciary duty/loyalty." Accordingly, the court found that, "Ram Tool's common law breach of fiduciary duty/loyalty claims, and its derivative claims, based upon the misappropriation of trade secrets are preempted by TUTSA." Because the case was governed by a legacy summary judgment standard that permits a plaintiff to come up with evidence to support its claim at trial, the court reversed the trial court's granting of summary judgment, finding that it "must assume that, at trial, Ram Tool may be able to present evidence of unlawful recruitment untied to the misappropriation of trade secrets." In adopting Hauck and finding that a plaintiff's claims must be "untied to the misappropriation of trade secrets" to avoid preemption, the Tennessee Court of Appeals has adopted an expansive standard for preemption under TUTSA. In the wake of the decision, which clarifies that TUTSA provides the sole means of protection for civil trade secret misappropriation claims under Tennessee State law, Tennessee businesses should review their trade secret protection programs to enhance the prospects that such intellectual property assets are subject to protection under TUTSA.

Bradley Arant Boult Cummings initiated the process that led to TUTSA's adoption in 2000 and was co-counsel for the appellees in the Ram Tool decision.

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