California employers who lose a team to a competitor have long faced a frustrating defense: CUTSA displacement. Under that argument, the California Uniform Trade Secrets Act (CUTSA) displaces every business tort arising out of the same conduct, leaving the employer with a single trade secret claim and nothing else. A published Court of Appeal decision issued on May 27, 2026 substantially narrows that defense.
In Guild Mortgage Company LLC v. CrossCountry Mortgage LLC (Cal. Ct. App., 4th Dist., Div. One, May 27, 2026) 120 Cal. App. 5th 885, the California Court of Appeal, Fourth Appellate District (San Diego County), reversed the trial court’s dismissal on all grounds and held that CUTSA does not displace claims for breach of the duty of loyalty, breach of fiduciary duty, tortious interference, or violation of California’s computer fraud statute, where those claims rest on conduct beyond the taking of trade secrets. For California businesses that have been raided from the inside, the decision restores a set of remedies that trial courts had been steadily reading out of the California trade secrets law.
The Underlying Facts
Guild Mortgage and CrossCountry Mortgage are direct competitors in residential property lending. Guild alleged that, over roughly eighteen months, CrossCountry recruited employees at Guild’s Kirkland, Washington branch, including the branch manager and other senior staff, while those employees remained on Guild’s payroll. But the recruiting alone was not legally problematic.
What was a problem, however, was that, according to the complaint, the still-employed insiders solicited their colleagues to leave their employment with Guild Mortgage, diverted customers and pending loan applications to the defendant, and accessed Guild’s computer systems to remove confidential and proprietary information. Guild ultimately lost substantially all of its branch workforce. Guild first arbitrated against the individual ringleaders and prevailed, then sued CrossCountry in San Diego County Superior Court.
The trial court sustained CrossCountry’s demurrers to the complaint and dismissed the case, concluding that the alleged disloyal employees owed Guild no actionable tort duty and that the trade secret statute displaced the balance of Guild’s claims. The Court of Appeal reversed the judgment of dismissal.
The Three Holdings That Matter
Employees Owe an Undivided Duty of Loyalty While Still Employed
The Court of Appeal reaffirmed that California employees owe their employer an undivided duty of loyalty for as long as the employment relationship lasts. An employee may prepare to compete, but may not secretly assist a competitor, recruit coworkers for that competitor, or divert their employer’s business while still drawing a paycheck from that employer. Labor Code sections 2860 and 2863 supply statutory support for this duty of loyalty.
Managers and Other Employees with Significant Corporate Responsibilities May Owe Full Fiduciary Duties
The Court of Appeal further held that a branch manager entrusted with running a business unit may owe fiduciary duties beyond the ordinary statutory duty of loyalty, depending on the scope of the manager’s responsibilities and discretion. That distinction matters because fiduciary breach opens the door to broader remedies and to aiding-and-abetting liability against the competitor (CrossCountry) who knowingly participates in, knowingly condones, or supports the breach, or benefits from the resulting harm. As the appellate court noted, “[i]n determining the existence of an employee’s fiduciary duty arising by operation of law, what matters is not one’s title, but rather the levels of trust, confidence, and discretion reposed by the employer.” (Guild Mortg. Co. LLC v. CrossCountry Mortg. LLC, 120 Cal. App. 5th at 895.)
CUTSA Displacement Does Not Override California Comprehensive Computer Data Access and Fraud Act Claims
First, a brief discussion on the proper nomenclature here. The Court of Appeal noted that some case law authorities use the terms “preempt” and “preemption” to refer to CUTSA’s displacement of certain other provisions of California law. But, in keeping with a preference expressed by the California Supreme Court in prior opinions such as Zengen, Inc. v. Comerica Bank (2007) 41 Cal.4th 239, 247, fn. 5, the Guild Court used the terms “displace” and “displacement” in its opinion.
Displacement is the rule holding that Section 3426.7, subdivision (b), of CUTSA displaces common law claims that are based on the same nucleus of facts as a jointly pled misappropriation of trade secrets claim.
Most significant for trade secrets practitioners, the Court of Appeal in Guild Mortgage Company held that the rule of CUTSA displacement does not override claims under the Comprehensive Computer Data Access and Fraud Act, Penal Code section 502. This appears to be the first published California Court of Appeal decision to resolve that question, which federal district courts had answered inconsistently for years. Because a section 502 claim turns on unauthorized access to a computer system rather than on the secrecy of what was taken, it survives independently of the trade secret analysis.
The court likewise revived Guild’s interference claims and its derivative unfair competition claim under Business and Professions Code section 17200.
Why CUTSA Displacement Matters So Much in California
California does not enforce employee noncompete agreements. Business and Professions Code section 16600 holds them void on their face, and recent legislation has strengthened that prohibition. That makes the surviving common law and statutory tools the entire arsenal for a plaintiff in Guild’s position. If CUTSA displacement could sweep away loyalty, fiduciary, interference, and computer fraud claims, an employer whose workforce and customer pipeline were taken would effectively have no remedy, unless it could prove classic trade secret misappropriation.
Guild Mortgage rejects that outcome. The decision draws the line at the conduct itself: where the wrong is the disloyalty, the unauthorized system access, or the interference with the plaintiff’s business, and not merely the appropriation of or access to trade secrets or proprietary information, CUTSA does not displace claims based on that misconduct.
What California Businesses Should Do Now
- Review employment agreements for express confidentiality provisions, provisions barring solicitation of employees to access or acquire the employer’s trade secrets and proprietary information, and computer-use provisions consistent with Business and Professions Code section 16600.
- Implement access controls and written authorization policies, since Penal Code section 502 claims depend on access exceeding the employer’s permission granted to the employee.
- Preserve forensic evidence immediately when a coordinated departure is suspected, including access logs, file transfer records, and messaging data.
- If possible, plead loyalty, fiduciary, interference, and Section 502 claims separately from any CUTSA claim, and tie each to conduct beyond mere misappropriation of trade secrets.
Key Takeaways on CUTSA Displacement
Guild Mortgage is now a leading California authority — and the first published decision to address the Penal Code section 502 question — for the proposition that CUTSA displacement has limits in the pleading of business tort actions arising from employee raiding. Employers confronting a raid or an employee who was disloyal while still on the payroll should not accept a demurrer based on displacement as the end of the analysis, and competitors recruiting an intact team should understand that the exposure is no longer confined to a trade secret claim. Counsel on both sides of these fights should read the appellate opinion closely and confirm its subsequent history before relying on it in litigation.
Speak With a Los Angeles Business Litigation Attorney
The Law Office of Shanen R. Prout represents California businesses in trade secret, employee raiding, unfair competition, and business tort litigation. If your company has lost a team, a customer pipeline, or confidential data to a competitor, or if your company has been accused of doing so, we can help you evaluate the claims and defenses that Guild Mortgage has now clarified.
Shanen R. Prout, Law Office of Shanen R. Prout: 21 Miller Alley, Ste. 210, Pasadena, CA 91103
Telephone: (626) 529-3022
Email: info@srplawyer.com
Website: www.srplawyer.com
This article is provided for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Case authority should be independently verified before it is relied upon.