4/2/2012 Federal Patent Law Preempts Minnesota Trade Secrets Law
A recent case decided by the Minnesota Court of Appeals stresses the difficulties in prevailing in litigation asserting the misappropriation of trade secrets. In C.G.H., Inc. v. Nash Finch, Inc., Civ. No. A11-1598, 2012 Minn. App. Unpub. LEXIS 266 (Minn.Ct. App. Apr. 2, 2012), the Court of Appeals affirmed the dismissal of claims for breach of contract and violation of the Minnesota Uniform Trade Secrets Act (“MUTSA”) (Minn. Stat. Ch. 325C et seq.) on the basis that the claims were preempted by federal patent law. The Court held that federal patent law preempted the claims because, as plead in the complaint, the claims were equivalent to a patent infringement claim under 35 U.S.C. § 271(a). While federal patent law does not ordinarily preempt state law claims for misappropriation of trade secrets, because the plaintiff in C.G.H., Inc. failed to identify any wrongdoing by the defendant other than copying its patent, the trade secrets claim failed. While the C.G.H., Inc. case involved a very narrow and technical defense, it serves as a reminder to employers and their counsel of the importance of properly asserting claims under the MUTSA.
In C.G.H., Inc. v. Nash Finch, Inc., appellant C.G.H., Inc. d/b/a Refrigerator Media Advertising (“CGH”) provided magnetic coupon advertising cards, including RMA Refrigerator Savings Cards (“advertising cards”), to certain food industry segments which are placed on consumers’ refrigerators. Id. at *1. Nash Finch, Inc. (“Nash Finch”), is a wholesale food distributor. Id. Nash Finch entered into a Confidentiality Agreement and Non-Compete Agreement with CGH in February 2008 in anticipation of future distribution and sale of the advertising cards. Id. at *2. Under the Agreements, CGH agreed to furnish confidential information regarding the advertising cards to Nash Finch under certain conditions and prohibited Nash Finch from distributing or duplicating the advertising cards or derivative works unless authorized through CGH. Id. at *2-3. CGH held a United States patent on the advertising cards. Id. at *1.
In October 2010, CGH sued Nash Finch, alleging claims for breach of contract and violation of the MUTSA (Minn. Stat. Ch. 325C et seq.). CGH alleged that in the summer of 2010, notwithstanding the Agreements, Nash Finch began to produce “its own advertising cards which were virtually identical to [CGH’s] proprietary product.” C.G.H., Inc., at *3. Although the complaint alleged that the advertising cards were protected under U.S. patent law, it did not allege a claim for patent infringement. Id. CGH sought a monetary judgment, a prohibitory injunction, costs, and attorney fees. Id.
Nash Finch argued that CGH’s claims were preempted under federal patent law. C.G.H., Inc., at *3-4. The district court agreed, holding that “the cause of action and the damages sought are the equivalent of a patent claim.” Id. at *4. The district court dismissed CGH’s complaint for failure to state a claim upon which relief can be granted under Minn. R. Civ. P. 12.02(e). CGH appealed to the Minnesota Court of Appeals. Id.
Breach of Contract Claim
The Court of Appeals affirmed the district court’s dismissal of the breach of contract claim, holding that the claim was preempted by federal patent law. C.G.H., Inc., at *9. The Court noted that under the Supremacy Clause of the United States Constitution (U.S. Const. art. VI, cl. 2), federal laws preempt contrary state laws, and any state law that conflicts with federal law is without effect. Id. at *5. The Court examined the purposes of the federal patent system and related laws, and held that any state law that frustrates such purposes is preempted. Id. at *7.
Based on the claims alleged in CGH’s complaint, the Court determined that:
[T]he only wrongdoing alleged in the complaint is that [Nash Finch] ‘began to produce its own advertising cards which were virtually identical to [CGH’s] proprietary product.’ Proof of this would likely require comparison of the advertising cards that [Nash Finch] allegedly produced to the patent and to the advertising cards CGH produces. This is equivalent to a patent-infringement claim. See 35 U.S.C. § 271(a) (2006).
Id. at *7. Therefore, the Court determined that CGH’s breach of contract claim was preempted because to allow such a state law claim to proceed would give additional rights and remedies for the same alleged conduct. See id. at *8. Further, the remedies that CGH sought in its complaint are also available under a patent infringement claim. See 35 U.S.C. § 283; 35 U.S.C. § 284, cl. 1.
Violation of Minnesota Uniform Trade Secrets Act
The Court also affirmed the district court’s dismissal of CGH’s claim under the MUTSA (Minn. Stat. Ch. 325C et seq.), holding that the claim was preempted by federal patent law. C.G.H., Inc., at *11. Similar to the breach of contract claim, the Court examined the purposes of the federal patent system. Id. at *10. Unlike CGH’s breach of contract claim, however, the Court held that state trade secret laws, such as the MUTSA, are not preempted by federal patent law and that “[s]tate protection of trade secrets does not frustrate the objectives of the federal patent system to encourage invention and promote disclosure of inventions because the public remains free to independently discover and exploit a trade secret.” Id. Despite this holding, the Court affirmed the district court’s dismissal of CGH’s MUTSA claim:
Here, however, the complaint does not allege that [Nash Finch] either acquired a trade secret by improper means or disclosed or used a trade secret without consent. The only assertion in regard to violation of [MUTSA] is that [Nash Finch’s] alleged actions (that is, beginning to produce its own advertising cards which were virtually identical to [CGH’s] proprietary product) ‘constitute misappropriation and trade secret violation.’ No new facts are alleged. As already discussed, these alleged actions amount to a patent-infringement claim.
Id. at *10-11; see also Minn. Stat. § 325C.01, subd. 3 (defining misappropriation). For this reason, the Court of Appeals affirmed the dismissal of the complaint. The Court remanded the case back to the district court to determine if the dismissal was with or without “prejudice” (i.e., whether the plaintiff would be given another opportunity to amend its complaint to allege additional information).
The standard for establishing the existence of a trade secret can be difficult to satisfy as evidenced by other cases dismissing claims for misappropriation of trade secrets based on the plaintiff’s failure to adequately describe the purported trade secret. The C.G.H., Inc.case adds additional hurdles for companies attempting to protect trade secrets developed in conjunction with a patented invention. While the C.G.H., Inc. decision involved a narrow and technical legal issue, it highlights the importance of thoroughly describing the facts giving rise to a trade secrets claim when bringing lawsuits under the MUTSA. If you feel that your company’s trade secrets have been misappropriated, it is wise to discuss your potential claims and legal options with an attorney who is well versed in trade secrets law. For additional information on trade secrets protection, you may contact any of the Trepanier & MacGillis P.A. business attorneys.
About the Author:
Trepanier & MacGillis P.A. attorney Kelly M. Fiege focuses her practice on business law, trade secrets law, copyright law, and employment law. Kelly may be reached at 612-455-6238 or firstname.lastname@example.org. The attorneys at Trepanier & MacGillis P.A. routinely represent businesses in commercial litigation matters, including trade secrets, non-competition, and intellectual property disputes.