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The Northern District of California denied defendants’ motion to dismiss based on UTSA preemption and denied plaintiff’s motion for preliminary injunction.  Kovesdy v. Kovesdy, C 10-02012 SBA, 2010 WL 3619826 (N.D. Cal. Sept. 13, 2010) (slip op.). Plaintiff Eric Kovesdy (“Eric” or “Plaintiff”) sued his stepmother, Defendant Hedy Kovesdy (“Hedy”) for, inter alia, for misappropriation of trade secrets under California’s Uniform Trade Secrets Act (“UTSA”), Cal. Civ. Code §§ 3426-3426.11, and trademark infringement under the Lanham Act, 15 U.S.C. § 1125(a). Id. (1) Defendants moved to dismiss; and (2) Plaintiff moved for preliminary injunction.

Background

Peter Kovesdy (“Peter”) opened a professional tax practice known as Humex Income Tax (“Humex”).  In 1997, Peter married Hedy, who subsequently became a Certified Tax Professional and performed income tax preparation work for Humex from between 2003 through 2009. Id. Peter’s son Eric also worked at Humex. Id. Another individual, Defendant Suzanne Nagy (“Nagy”), also worked at Humex as an administrative assistant and part-time bookkeeper. Id.

After Peter died, Hedy challenged Peter’s will in probate court, claiming that it improperly favored others, including Eric, over her. Id. The special administrator overseeing Peter’s estate requested that Eric continue to operate Humex pending resolution of the probate dispute. Id. Thus, Eric continued to run Humex from May 10, 2009, through October 31, 2009. Id. According to Hedy, Eric also began operating a separate income tax preparation service called Kovesdy Income Tax, and allegedly began to divert Humex customers to his new business. Id.

In November 2009, Hedy and the special administrator reached a written agreement resolving the dispute concerning Peter’s will. Id. The agreement included an acknowledgement that Humex was Peter’s separate property, and that Hedy retained the right to object to the estate’s proposed sale of Humex to Eric. Id. On November 16, 2009, the special administrator provided notice to Hedy and the other beneficiaries of the estate’s intention to sell Humex to Eric. Id. Hedy did not object. Id. And on December 1, 2009, the probate court approved the sale of Humex to Eric, which included all of Humex’s client lists, files and records. Id. Eric shut down Humex and began operating exclusively under the name Kovesdy Income Tax.

In the meantime, Hedy and Nagy launched their own tax preparation business under the name Humex Income Tax, Inc. (“HITI”). Id. *2. Eric claimed that Defendants improperly accessed Humex’s computers to obtain the company’s client contact information, and began soliciting Humex’s clients to switch to their new company. Id. Eric also alleged that Defendants advised Humex clients to cancel their appointments with him, and told them that he was “unqualified,” “uncertified,” and “unprofessional,” and had been the subject of complaints. Id. Defendants claim that they legitimately sought new clients by distributing flyers throughout the local Hungarian community (many of whom were Humex clients) and at Laundromats, apartment complexes, dinners and social gatherings. Id. They deny targeting Humex clients specifically, deny representing themselves as being affiliated with Humex and deny “disparaging” Eric. Id.

Defendants’ Motion to Dismiss: UTSA Preemption

Defendants contend that Plaintiff’s claims for intentional interference with contractual relationship, intentional interference with prospective economic advantage, conversion and unfair competition under the UCL are preempted by the UTSA. Id. *3 (citing Silvaco Data Systems v. Intel Corp., 184 Cal.App.4th 210, 236 (2010); K.C. Multimedia, Inc. v. Bank of Am. Tech. & Operations, Inc., 171 Cal. App. 4th 939, 958 (2009); Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1035 (N.D. Cal. 2005).  Preemption generally applies where “there is no material distinction” between the wrongdoing underlying the UTSA claim and the non-UTSA claim. Id. (citing Phoenix Techs. Ltd. v. DeviceVM, No. C 09-04697 CW, 2009 WL 4723400, at *4-5 (N.D. Cal. Dec. 8, 2009)). The court noted that neither “other civil remedies that are not based upon misappropriation of a trade secret” nor contractual or criminal remedies are preempted. Id. (citing Cal.  Civ. Code § 3426.7(b)).

The court found that the claims at issue are largely based on conduct unrelated to Plaintiff’s claim for relief for misappropriate of trade secrets.

Plaintiff’s second and third claims for intentional interference with contractual relationship and prospective economic advantage, respectively, allege that Defendants interfered with and disrupted Eric’s business relationships by soliciting his clients and misleading his them into believing that he was affiliated with HITI. Compl. ¶¶ 25, 31. His fourth claim for conversion alleges that Defendants are maintaining possession of Eric’s computer without his authorization. Id. ¶¶ 37-38. In his eighth claim under the UCL, Plaintiff avers that Defendants engaged in unfair competition by diverting “substantial amounts of business” from Eric to themselves. Id. ¶ 64. These claims do not appear to rely on Defendants’ alleged misappropriation of trade secrets, and hence, are not preempted by the UTSA.

Id.

The court rejected Defendants’ argument that because each of those claims incorporates by reference each of the preceding paragraphs of the Complaint, the allegations regarding Defendants’ misappropriation of trade secrets necessarily form at least part of the other claims. Id. The court reasoned that it had an obligation on a Rule 12(b)(6) motion to construe the allegations in a light most favorable to Plaintiff, and thus construed Plaintiff’s claims as being based on conduct not governed by the UTSA.  Id. (citing Phoenix Techs. Ltd., 2009 WL 4723400, at *5 (construing plaintiff’s tort and UCL claims as being based only on conduct outside the scope of the UTSA, notwithstanding apparent overlap with trade secrets claim)).

Plaintiff’s Motion for Preliminary Injunction

The court recited the standard for obtaining preliminary injunctive relief as follows:

[T]he moving party must show: (1) a likelihood of success on the merits; (2) a likelihood of irreparable harm to the moving party in the absence of preliminary relief; (3) a balance of equities tips in the favor of the moving party; and (4) that an injunction is in the public interest. Winter v. Natural Res. Def. Council, Inc., — U.S. —-, 129 S .Ct. 365, 376 (2008). This is an “extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” Id. This “clear showing” requires Plaintiffs to show more than a mere “possibility” of irreparable harm, but instead they must “demonstrate that irreparable injury is likely in the absence of an injunction.” Id. at 375 (emphasis in original); See Am. Trucking Ass’ns Inc. v. City of Los. Angeles, 559 F.3d 1046, 1052 (9th Cir.2009).

Id. *5.

The court noted that “determination depends in large part on whose resources were used to generate the list.” Id. *6 .  A customer list which is the product of a “substantial amount of time, expense and effort” on the part of the employer, has commercial value, and is not readily ascertainable to other competitors is generally considered trade secret information. Id. (citing Courtesy Temporary Serv., Inc. v. Camacho, 222 Cal.App.3d 1278, 1287-88 (1990)).  But where a customer list which is the product of a former employee’s personal efforts, it is not a trade secret of the employer. Id. (citing Moss, Adams & Co. v. Shilling, 179 Cal.App.3d 124, 129 (names and addresses on a confidential customer list were not trade secrets where the defendants had knowledge of those names and addresses through “personal contact”)). Id.

The court found that Plaintiff made no effort to establish that the Humex’s customer list and data were the result of substantial amount of time, expense and effort on the part of Humex. Id. *7. Nor did Plaintiff show that the list has commercial value and is not readily ascertainable by competitors. Plaintiff’s supporting declaration was silent as to what efforts, if any, Humex made to maintain the confidentiality of its customer database. Id. Plaintiff admitted that he allowed Nagy to borrow the Humex computer containing customer information so that she could work from home. Id. Thus, the Court found that Plaintiff did not made a sufficient showing for a preliminary injunction. Id.

Judge

District Judge Saundra Brown Armstrong.

By CHARLES JUNG