Virginia Court Limits Reach of Preemption Provision of Uniform Trade Secrets Act

Does the Virginia Trade Secrets Act preempt all related business tort claims? Not necessarily, according to a recent unfair business practices case from the Eastern District of Virginia. In E.I. DuPont de Nemours and Co.v. Kolon Industries, Inc., 2009 U.S. Dist. LEXIS 76795, 2009-2 Trade Cas. (CCH) P76,728 (E.D. Va. August 27, 2009), click here, DuPont alleged that the defendant, Kolon, had hired one of its former employees, Michael Mitchell, and enticed him to reveal DuPont’s trade secrets not only relating to the development of KEVLAR aramid fiber, but also as to DuPont’s pricing and rebate practices. In addition, it alleged that Kolon had recruited other DuPont employees who possessed knowledge regarding the aramid fiber manufacturing process. And Kolon allegedly had solicited DuPont’s long-standing customers by using confidential pricing and rebate information and informing the customers that Kolon had hired former DuPont employees who had assisted Kolon in making significant improvements to its product.

DuPont included six counts in its complaint: (1) violation of the Virginia Trade Secrets Act, Va. Code §59.1-341; (2) statutory business conspiracy, Va. Code §18.2-499 et seq.; (3) tortious interference with contract; (4) tortious interference with business expectancy; (5) conversion; and (6) civil conspiracy. Kolon moved to dismiss the complaint in its entirety.

First, Kolon argued that the preemption provision of the Trade Secrets Act required dismissal of all counts in the complaint other than the one alleging a violation of the Act itself because all of the counts were based entirely upon a misappropriation of trade secrets theory. The court rejected this argument pointing out that Kolon disputed that the information at issue was a trade secret. As the court noted: “unless it can be clearly discerned that the information in question constitutes a trade secret, the Court cannot dismiss alternative theories of relief as preempted by the VUTSA,” quoting Stone Castle Fin., Inc. v. Friedman, Billings, Ramsey & Co., 191 F. Supp.2d 652, 659 (E.D. Va. 2002). Thus, as long as Kolon contended that the information at issue was not a trade secret the court could not consider the preemptive effect of the Trade Secrets Act based upon the pleadings alone.

Next, Kolon argued that, under the statute, all claims arising from the same nucleus of facts as the misappropriation of trade secrets claim were preempted by the Trade Secrets Act. The court rejected this argument also, holding that, under the prevailing interpretation in the Eastern District of Virginia, the preemption provision does not bar all claims that could arise out of factual circumstances that may involve a trade secret. Instead, preemption would apply only to claims that were predicated “entirely” upon the misappropriation of trade secrets.

Applying these principles to the separate counts for tortious interference with contract and business expectancy the court found that DuPont had pled facts separate from the trade secrets allegations in support of those counts. Notably DuPont alleged that Kolon had “used DuPont’s confidential information and trade secrets.” Because the allegations were phrased in the conjunctive and were not predicated solely upon the misappropriation of trade secrets, the court refused to dismiss those counts. Likewise, it denied the motion to dismiss the conspiracy counts on the basis that the concerted action included allegations separate from misappropriation of trade secrets.

Finally, Kolon argued, unsuccessfully, that the conversion count was subject to dismissal because conversion could not apply to the taking of electronic copies of a document, only to the original. The court, again, sided with DuPont, finding that even though Virginia courts have not addressed whether the possession of “copies” of documents can constitute conversion, the courts have “demonstrated a distinct willingness to expand the scope of the doctrine of conversion in light of advancing technology.” Thus, it held that “the purloining of copies of documents would constitute conversion because such action is an act of ‘dominion’ inconsistent with the true owner’s property rights.”