Misappropriation Versus the Copyright Act: Round 2 in the Fifth Circuit

by Orrick - Trade Secrets Group
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A few months ago, Trade Secrets Watch covered the GlobeRanger Corp. case in which the Fifth Circuit joined 10 other circuits in determining that the Copyright Act does not preempt state trade secret misappropriation claims. The court used a two-prong test in its analysis, establishing that the Copyright Act could preempt a state law claim if two conditions are met: (1) if the work at issue fell within the subject matter of copyright; and (2) if the right that the litigant sought to protect was equivalent to any of the exclusive rights within the general scope of copyright.

Applying this analysis to the Texas trade secret law at issue, the court came to the conclusion that (1) although allegations of misappropriation of things such as procedures, processes or methods could potentially remove a trade secret claim from the possibility of preemption, GlobeRanger’s misappropriation claim was limited to software and thus fell within the scope of work protected under the Copyright Act; and (2) Texas trade secret law protects acts beyond the copying or transmitting that the Copyright Act protects against. Thus, failing to meet the second element of the test, the Fifth Circuit found that the Texas trade secret misappropriation law was not preempted by the Copyright Act.

On January 25, 2017, the Fifth Circuit handed down another copyright preemption ruling in Ultraflo v. Pelican Tank. Ultraflo manufactures butterfly valves used in the transportation industry. After Ultraflo employee Thomas Mueller left Ultraflo to work for Pelican—a competing valve manufacturer—he registered several valve drawings with the U.S. Copyright Office. Ultraflo then filed a federal action alleging tort claims, including an unfair competition by misappropriation claim, and a claim under the Copyright Act. The unfair competition by misappropriation claim was dismissed in pretrial based on preemption grounds.  Ultraflo then appealed the pretrial dismissal. In considering this issue, the Fifth Circuit used the same two-prong test as it did in GlobeRanger.

First, the court asked whether the valve design and design drawings fell within the subject matter of copyright. Although the design drawings definitely fell within the scope of the Copyright Act, the question of the valve design was more complicated. Because the Copyright Act does not protect useful articles or ideas, the court held that “[a]llowing state law to protect such works would undermine the ‘deliberate exclusion’ of such subject matter from the federal copyright scheme.”

Second, the court asked if the state law sought to protect rights equivalent to any of the exclusive copyright rights. The court first noted that the law “protects a right that federal copyright does not: exclusive use of the copyrightable design drawings to make the depicted valves.” Nonetheless, the court found that the state law was preempted because Ultraflo’s argument focused on using its drawings to make a useful article, but the Copyright Act does not grant Ultraflo the exclusive right to make the useful article depicted in the drawing. Thus, “to allow state law protection in this area that Congress excluded from the ambit of copyright thus would run afoul of the familiar doctrine that the federal policy may not be set at naught, or its benefits denied by the state law.”

On these grounds, the court found that Ultraflo’s unfair competition by misappropriation claim was preempted by the Copyright Act.

Lessons Learned

While the Fifth Circuit previously held that state trade secret misappropriation law is not necessarily preempted by the Copyright Act, Ultraflo makes clear that certain claims will nonetheless be preempted. The Fifth Circuit will not only focus on what the Copyright Act expressly protects, but will also make determinations based on the protections that are carved out of the Copyright Act. Plaintiffs should be careful when choosing to include specific misappropriation claims in their suits.

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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