Case Report: SunPower v. SolarCity

Factual Background – Defendants’ Employment History and Alleged Misappropriation

The individual defendants were employed in sales positions at SunPower before being recruited by SolarCity, and signed agreements at SunPower agreeing not to disclose “confidential or proprietary information” to third parties and to return such information to SunPower at the end of their employment. In December 2011 SunPower discovered that one of the defendants had accessed his company email after he was terminated and had forwarded emails containing customer information, price lists, and market reports to his personal email address. SunPower launched an investigation and computer forensic analysis that revealed that, shortly before leaving SunPower, each of the defendants had used USBs and external hard drives to store SunPower files containing contact information, sales histories, potential new sales, status, market and business analysis, quotes, forecast analysis, cash flow analysis, and project economics. SunPower alleged that this information was delivered to defendant SolarCity and that defendants benefitted from the data. SunPower’s resulting complaint asserted causes of action for both misappropriation of trade secrets and misappropriation of “non-trade secret proprietary information,” listed above.

Defendants’ Partial Motion to Dismiss

On August 2, 2012, Defendants moved to dismiss the claims for misappropriation of “non-trade secret proprietary information,” arguing that these claims are preempted by the California Uniform Trade Secrets Act (CUTSA). CUTSA includes a savings clause (Section 3426.7) that preempts claims based on the same nucleus of facts as trade secret misappropriation. The preemption inquiry looks at whether the non-trade secret claims “are not more than a restatement of the same operative facts supporting trade secret misappropriation,” and whether there is any “material distinction between the wrongdoing alleged in a [C]UTSA claim and that alleged in a different claim.” Convolve, Inc. v. Compaq Comp. Corp., No. 00 CV 5141 (GBD) 2006 WL 839022, at 6 (S.D.N.Y. Mar. 31, 2006) (applying California law).

District Court Dismissal

On December 11, 2012, the Court granted defendants’ partial motion to dismiss and held that SunPower’s non-trade secret claims were preempted by CUTSA. The Court cited Silvaco Data Systems v. Intel Corp., 184 Cal. App. 4th 210 (2010), which held that the UTSA superseded claims for conversion, common law unfair business practices, and intentional and negligent misrepresentation where such claims were based on the misappropriation of trade secrets. The Court agreed with the rationale in Silvaco, stating that “in order to state a claim based on the taking of information, a plaintiff must show that he has some property right in such information… If the basis of the alleged property right is in essence that the information is… ‘not… generally known to the public,’ (Cal. Civ. Code § 3426.1(d)(1)) then the claim is sufficiently close to a trade secret claim that it should be superseded notwithstanding the fact that the information fails to meet the definition of a trade secret. To permit otherwise would allow plaintiffs to avoid the preclusive effect of CUTSA (and thereby plead potentially more favorable common-law claims) by simply failing to allege one of the elements necessary for information to qualify as a trade secret.”

The Court refused to follow the Southern District of California’s reading of Silvaco in Leatt Corp. v. Innovative Safety Tech., LLC, 09-CV-1301-IEG (POR), 2010 WL 2803947, at *6 n. 5 (S.D. Cal. 2010) (holding that Silvaco stands for the notion that the UTSA only preempts additional claims that depend on the misappropriation of a trade secret, and not otherwise confidential or proprietary information). The Court also held that the Ninth Circuit’s rulings in Imax Corp. v. Cinema Technologies, Inc. and City Solutions, Inc. v. Clear Channel Communications, which suggested that a plaintiff who fails to show that information constitutes a legally protectable trade secret may nevertheless prevail on non-trade secret claims based on the misappropriation of the same information, predate Silvaco and failed to consider the question of preemption, and should not be followed to the extent that they conflict with Silvaco’s holding that plaintiffs may not bring claims based on confidential or proprietary information that does not satisfy the definition of trade secret and is not made property by “some provision of positive law.”

Applying the Silvaco rationale to SunPower’s claims, the Court found that SunPower failed to show it had property rights in its non-trade secret information. The Court noted that SunPower never defined the term “non-trade secret proprietary information;” and that it used the terms “confidential information” and “non-confidential proprietary information” in its complaint to refer to the same computer files, indicating that the distinction SunPower was attempting to draw was merely superficial. The Court found that there was “no material difference between the wrongdoing alleged in support of SunPower’s Trade Secret Claim and the wrongdoing alleged in support of SunPower’s Non Trade Secret Claims.” The Court dismissed SunPower’s non-trade secret claims, and granted it leave to amend its complaint to show that it has some property interest in the non-trade secret information by virtue of some “positive law,” and that that interest is qualitatively different from any property interest conferred by CUTSA. The parties settled shortly after the dismissal.

The Court’s decision clarified the law on preemption in California and set a strict standard for avoiding CUTSA preemption. Plaintiffs bringing claims based on confidential or proprietary information must be able to show that the information either constitutes a trade secret or is protected by a distinct property right granted by statutory or common law. Plaintiffs seeking to bring both trade secret claims and non-trade secret claims based on the same information must be able to show that the non-trade secret claims allege wrongdoing that is materially distinct from the wrongdoing alleged in the CUTSA claim in order to survive preemption.