Fifth Circuit Revisits Copyright Preemption of Trade Secret Law

by Orrick - Trade Secrets Group
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The United States Court of Appeals for the Fifth Circuit recently revisited the issue of the Copyright Law preemption of trade secrets claims in Spear Marketing, Inc. v. Bancorpsouth Bank. The decision not only resolved the scope of Copyright Law preemption in the Fifth Circuit, but also made clear that the Fifth Circuit “join[s] the majority position” to hold that state law claims based on ideas fixed in tangible media are preempted by §301(a). The decision creates greater clarity and uniformity in Copyright Law preemption and should help litigants avoid wasting resources by filing actions based on state law claims that are preempted.

Prior to the Spear Marketing decision, the Fifth Circuit had addressed the same issue in GlobeRanger Corp. v. Software AG (which has been covered by Trade Secrets Watch here). In the GlobeRanger case, the plaintiff had filed claims for conversion, trade secret misappropriation, and tortious interference in state court. The case was removed from state court to the U.S. District Court for the Northern District of Texas, which granted Software AG’s motion to dismiss on copyright preemption grounds. On appeal, the Fifth Circuit reversed in part and remanded in part, clarifying that the district court had made only the modest conclusions that 1) plaintiff’s allegations fell, at least in part, outside of the scope of Copyright Law; and 2) defendants had provided sufficient basis for the claim to remain in federal court. Instead of defining the scope of Copyright Law preemption, the Fifth Circuit remanded the issue for decision on a more developed record. The district court then rejected defendants’ argument that the trade secrets claim should be preempted by Copyright Law and refused to vacate a $15 million trade secrets judgment.

Now, just weeks later, in the Spear Marketing decision, the Fifth Circuit has revisited the issue by finding that “state law claims based on ideas fixed in tangible media are preempted by § 301(a).” This later case involved Spear Marketing’s computer program, VaultWorks, which was leased to BancorpSouth Bank for approximately 12 years. During this time, ARGO Data Resource Corporation (“ARGO”) became familiar with Spear Marketing’s software by working with BankcorpSouth and by expressing interest in acquiring Spear Marketing. BankcorpSouth eventually allowed the VaultWorks agreement to expire and began working with ARGO’s product. Spear Marketing claimed that the ARGO product was created with the use of Spear Marketing’s trade secrets and filed suit against BankcorpSouth and ARGO in Texas state court, asserting trade secrets misappropriation claims.

BankcorpSouth and ARGO removed the case to federal court on the ground that Spear Marketing’s claims were preempted by the federal Copyright Act. The district court ultimately granted BankcorpSouth and ARGO’s summary judgment motion, and Spear Marketing appealed, challenging federal jurisdiction.

On appeal, the Fifth Circuit analyzed preemption in two steps. First, the court determined “whether [the claim] falls within the subject matter of copyright.” Second, “the cause of action is examined to determine if it protects rights that are ‘equivalent’ to any of the exclusive rights of a federal copyright.” The Fifth Circuit joined other circuit courts (including the First, Third, Seventh, and Ninth Circuits) in finding that “state law claims based on ideas fixed in tangible media are preempted by § 301(a).” It found that the Spear Marketing’s claims were within this scope of preemption because: 1) computer software is a tangible medium; and 2) input/output data from VaultWorks is a trade secret. When addressing the second prong, the court found that the allegations of copying, communicating, and transmitting were equivalent to the reproduction and distribution rights under Copyright Law.

This is undoubtedly good news for Software AG, which filed a notice of appeal on June 17, 2015 on the question of preemption, and for other litigants presented with preemption issues in the Fifth Circuit.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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