August 4, 2016
Law360
Authored by John M. Williamson
With the passage of the federal Defend Trade Secrets Act, trade secret owners can choose to pursue actions for misappropriation under state law in state court, under federal law in federal court, or under both state and federal law in federal court. In many ways, the Defend Trade Secrets Act complicates a trade secret owner’s litigation strategy at the outset of the case, presenting complex choices between different laws and venues. Trade secret owners must carefully consider their specific objectives, facts and circumstances when evaluating any relevant differences between state and federal substantive law (e.g., statute of limitations, available remedies, etc.) as well differences between applicable state and federal procedure (e.g., time to trial, pretrial motions, preliminary relief, enforceability of judgments, etc.). This article focuses on only one of the myriad issues facing trade secret owners when choosing between parallel laws and venues—copyright preemption. Where the facts surrounding trade secret misappropriation might give rise to a challenge based on federal copyright preemption, a claim under the Defend Trade Secrets Act (as opposed to a claim under state law exclusively) should ensure that the trade secret claim survives a preemption challenge.
Courts and litigants have grappled with the issue of federal copyright preemption of state trade secret misappropriation claims for decades. The scope of preemption is set forth in Section 301 of the Copyright Act, which has been characterized as a "sweeping displacement of state law."1 Namely, Section 301(a) of the Copyright Act preempts "all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright."2 This preemption extends to everything that falls within the scope of copyright, including material that is excluded from protection under the Copyright Act (e.g., ideas fixed in a tangible medium of expression).3 As observed by the Fourth Circuit, "the shadow actually cast by the Act’s preemption is notably broader than the wing of its protection."4 The scope of copyright preemption is, however, limited by Section 301(b), providing that "[n]othing in this title annuls or limits any rights or remedies under the common law or statutes of any State with respect to… activities violating legal or equitable rights that are not equivalent to any of the exclusive rights within the general scope of copyright."5 The "exclusive rights" referenced in Section 301 are those set forth in Section 106 of the Copyright Act (reproduction, preparation of derivative works, distribution, performance, display).6
The Second Circuit thoroughly evaluated the interplay between the Copyright Act’s preemption clause and a Texas state law trade secrets misappropriation count in a series of opinions in Computer Associates.7 Acknowledging the legislative history of the Copyright Act, the court indicated that "as a general matter, section 301 was not intended to preempt state trade secret law."8 Yet the court held, in its original opinion, that "[w]e have no doubt that, in the appropriate copyright case involving computer programs, a trade secret claim may remain either a viable alternative or supplementary cause of action. However, this is not such a case."9 Rather, the court found the trade secrets claim preempted by the Copyright Act where "the very same act"—copying of a computer program—formed the basis for both the copyright infringement claim and the trade secret misappropriation claim.10 The court created a dichotomy between "misappropriation by copying" (which is preempted) and misappropriation by "wrongful acquisition" (which would not be preempted).11
But in a later, amended opinion on a petition for rehearing, a split panel reached the opposite conclusion on the preemption issue. In its amended opinion, the court centered its analysis on the "extra element" test for preemption: "if an 'extra element' is 'required instead of or in addition to the acts of reproduction, performance, distribution or display, in order to constitute a state-created cause of action, then the right does not lie within the general scope of copyright, and there is no preemption.'"12 With respect to trade secret misappropriation claims, the court seized on the fact that a "breach of a duty of trust or confidence" is an element of state law trade secret misappropriation claims.13 Such a breach, the court held, is an "extra element" not required to establish copyright infringement, qualitatively distinguishing the two claims and thus foreclosing copyright preemption.14
The analysis and result of the Second Circuit’s amended opinion—holding that a breach of trust or confidence supplies the "extra element" to avoid preemption by the Copyright Act—has been widely accepted and applied by other courts.15 And given that a breach of a duty of trust or confidence, in some fashion, seems to be required under all state law trade secret misappropriation claims, the "extra element" test essentially forecloses copyright preemption in many trade secret misappropriation cases. But in certain factual circumstances some courts nevertheless continue, after the Computer Associates opinion, to find trade secrets counts preempted by federal copyright law. These courts often cite Computer Associates, reasoning that there are two distinct types of trade secret misappropriation, (1) misappropriation based solely on "use" of a trade secret—preempted by copyright and (2) misappropriation based on disclosure of a trade secret in breach of a duty—not preempted by copyright.16 Whether "use" alone, without an attendant breach of a duty of trust or confidence in some form, can amount to misappropriation of a trade secret is debatable. Nevertheless, under this theory copyright preemption remains a viable challenge that must be litigated and decided in certain situations.17
The Defend Trade Secrets Act should finally foreclose preemption of trade secret misappropriation claims under the Copyright Act, whether the trade secret misappropriation claims are fundamentally based on "use," disclosure, or any other theory. This is because the Copyright Act, while representing a "sweeping displacement of state law," does not displace any federal law. Section 301(d) confirms that "[n]othing in this title annuls or limits any rights or remedies under any other Federal statute."18 And the Defend Trade Secrets Act is just such a federal statute. So even if the Copyright Act could preempt a state law claim for trade secret misappropriation based on one of the narrow remaining theories of preemption, that same trade secret misappropriation claim should nonetheless survive a preemption challenge if brought under the Defend Trade Secrets Act. Accordingly, trade secret owners concerned about defending against potential preemption challenges should weigh the interplay between the Copyright Act, applicable state law and the Defend Trade Secrets Act in their overall evaluation of the appropriate law and venue for their trade secret misappropriation action.
1 Computer Assoc. Int’l v. Altai, Inc., 982 F.2d 693, 716 (2d Cir. 1992) (amended opinion).
2 17 U.S.C. § 301(a).
3 Spear Marketing, Inc. v. BancorpSouth Bank, 791 F.3d 586, 59495 (5th Cir. 2015).
4 U.S. ex rel. Berge v. Board of Trustees of the University of Alabama, 104 F.3d 1453, 1463 (4th Cir. 1997).
5 17 U.S.C. § 301(b).
6 17 U.S.C. § 106.
7 Computer Assoc. Int’l v. Altai, Inc., Nos. 91-7893(L), 1992 WL 139364 (2d Cir. June 22, 1992) (withdrawn); Computer Assoc. Int’l, Inc. v. Altai, Inc., 982 F.2d 693, 716 (2d Cir. 1992) (amended opinion).
8 Computer Assoc. Int’l v. Altai, Inc., Nos. 91-7893(L), 1992 WL 139364 at *25 (2d Cir. June 22, 1992) (withdrawn).
9 Id.
10 Id. at *26.
11 Id. at *27.
12 Computer Assoc. Int’l v. Altai, Inc., 982 F.2d 693, 716 (2d Cir. 1992) (amended opinion) citing 1 Nimmer § 1.01[B], at 1-14-15.
13 Id. at 717.
14 Id. at 719.
15 See, e.g., Stromback v. New Line Cinema, 384 F.3d 283, 303-04 (6th Cir. 2004); Dun & Bradstreet Software Services, Inc. v. Grace Consulting, Inc., 307 F.3d 197, 218 (3d Cir. 2002); Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1164-65 (1st Cir. 1994); Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 659-60 (4th Cir. 1993); Gates Rubber Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823, 847-48 (10th Cir. 1993).
16 Long v. Quality Computers and Applications, Inc., 860 F.Supp. 191, 197 (M.D. Pa. 1994) citing Computer Assoc. Int’l v. Altai, Inc., 982 F.2d 693, 716-19 (2d Cir. 1992); see also Idema v. Dreamworks, Inc., 162 F.Supp.2d 1129, 1194-95 (C.D. Cal. 2001); Gemel Precision Tool Co. v. Pharma Tool Corp., Civ. A. No. 94-5305 1995 WL 71243 at *7 (E.D. Pa. Feb. 13, 1995).
17 William M. Howard, Annotation, Preemption of State Law Claim by Federal Copyright Act—Nature or Type of Claim Asserted, 77 A.L.R. 6th 543 at § 14 (2012).
18 17 U.S.C. § 301(d).
Originally printed in Law360 (www.law360.com). Reprinted with permission. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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