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Court of Appeals of Tennessee Issues Important Decision Regarding Preemptive Effect of Tennessee Uniform Trade Secrets Act

In the recent case of Ram Tool & Supply Company, Inc. v. HD Supply, the Court of Appeals of Tennessee adopted a rule which sets forth the circumstances under which a common law breach of fiduciary duty claim will be preempted by the Tennessee Uniform Trade Secrets Act (“TUTSA”).  Before going into the facts of the case, let’s review what TUTSA protects and why it was enacted in 2000 by the Tennessee legislature.

TUTSA allows a business (or an individual) to file a lawsuit and to recover damages where its trade secrets have been misappropriated.  To be considered a trade secret: (1) the information must be valuable because it is not known and is kept secret; (2) the information must have economic value to others if they were to have it; and (3) efforts must have been made to keep the information secret.   One reason Tennessee adopted the Uniform Trade Secrets Act was to prevent a plaintiff from recovering twice for the same act of trade secret misappropriation.  This was possible where a plaintiff could set up separate causes of action such as, for example, conversion and breach of fiduciary duty, and base them both on the same facts related to trade secret misappropriation.

The Ram Tool case involved two competing construction supply companies.  Ram Tool, the plaintiff, was based in Nashville and employed a Mr. Pruitt.  Although the parties disputed Mr. Pruitt’s position at Ram Tool, it is apparent that he was employed at the managerial level. White Cap, which operated in Alabama, desired to start a branch in Nashville. To that end, it recruited Pruitt to help it which he did all the while being employed by Ram Tool.

Pruitt’s and White Cap’s alleged conduct was pretty despicable for anyone with even a modicum of business ethics.  Ram Tool alleged that Pruitt, with the knowledge and participation of White Cap, used information which would be considered trade secrets to help White Cap gain a competitive advantage and that Pruitt funneled that information to White Cap so that it could do the same.   It also alleged that Pruitt, with the participation, inducement and encouragement of White Cap, had, while he was employed by Ram Tool, breached his fiduciary duties to Ram Tool by attempting to recruit Ram Tool employees to go to work for White Cap.

Ram Tool’s fourth and final amended complaint did not set forth any cause of action under TUTSA (for some inexplicable reason).  It did set forth a common law claim for breach of fiduciary duty.  Seizing on federal case law wherein common law claims which arose from the misappropriation of trade secrets were dismissed because they were held to be preempted by TUTSA, the defendants filed a motion for summary judgment. The trial court granted the motion and dismissed Ram Tool’s common law breach of fiduciary duty claims. It reasoned that those claims were preempted by TUTSA.

Ram Tool appealed. The Court of Appeals observed that different federal courts had applied different standards in determining when claims were preempted by the Uniform Trade Secrets Act.  It decided that the standard adopted by a federal district judge for the Eastern District of Tennessee should be adopted in Tennessee. That standard was set forth in the Hauck Manufacturing case which was decided in 2004.  What is the Hauck standard?

Under the Hauck standard, called the “same proof” test, if the proof of the breach of fiduciary duty claim would also prove a claim for misappropriation of trade secrets under TUTSA, the breach of fiduciary duty claim is preempted and cannot be brought (or, if brought, it must be dismissed).   For example, if a plaintiff were to allege that a defendant had breached his fiduciary duty by disclosing valuable, secret and closely guarded chemical formulas, such a claim would be preempted by TUTSA.

In the Ram Tool case, the Court of Appeals reversed the trial court’s grant of summary judgment because it found that it was possible that, at trial, Ram Tool could prove a breach of fiduciary duty by relying on facts that had nothing to do with trade secrets.  You can see from the facts of the case how that might happen.  For example, it was possible that Ram Tool could prove a breach of fiduciary duty just by relying on the fact of Pruitt trying to recruit employees of Ram Tool to go to work for White Cap while he was still employed by Ram Tool. In that alleged act, Pruitt was not using or relying on any trade secrets, much less misappropriating any trade secrets.

For attorneys who handle trade secret cases and breach of fiduciary duty cases, the lesson of Ram Tool is that you had better allege a cause of action under TUTSA if trade secrets are involved, in any way, in the conduct for which you are filing a lawsuit. If you do not, you might be left with no remedy when the defendant successfully has your breach of fiduciary duty claims dismissed by tying them in with some trade secret.  If a defendant can tie your breach of fiduciary duty claims tight enough to some facts related to the misappropriation of trade secrets, the preemptive force of TUTSA might leave you on the wrong end of a summary judgment order.