Texas Federal Court: Copyright Law Doesn’t Preempt Trade Secrets Claim Where “Extra” Elements Exist

4 minute read | July.02.2015

We’ve blogged on trade secret preemption before (here and here, for instance), but we’ve usually focused on trade secrets claims preempting other types of claims, and not the other way around.

But, as the cowboy in the cult-classic film The Big Lebowski noted, “Sometimes you eat the bear, and sometimes, well, he eats you.” So, this time, we are discussing a recent case that involved the question of when trade secret claims are preempted by Copyright Law.

On June 11, 2015, a federal district court in Texas refused to vacate a $15 million trade secrets judgment, rejecting the defendants’ argument that the trade secrets claim should be preempted by Copyright Law. This case involved a software system used in connection with radio frequency identification (RFID) tagging that GlobeRanger Corp. developed. The RFID tags were placed on consumer goods in a particular location (e.g., in a grocery store), and the goods could then be tracked with an RFID reader as they moved around that location. GlobeRanger licensed its system to the U.S. Navy for use in tracking the Navy’s high-value goods. GlobeRanger alleged that Software AG USA, Inc. and Software AG, Inc. wrongfully obtained copies of its software system as used at the Navy depots, and then reverse-engineered the trade secrets from the software to create a competing product. GlobeRanger filed claims in state court alleging conversion, trade secret misappropriation, and tortious interference. After the case was removed to the U.S. District Court for the Northern District of Texas, the court granted Software AG’s motion to dismiss on Copyright preemption grounds.

Courts in the Fifth Circuit use a two-pronged test to determine whether a claim is preempted by the Copyright Act. First, the claim must “fall within the subject matter” of Copyright as defined by 17 U.S.C. § 102. Second, the claim must protect rights that are “equivalent” to the rights protected by federal Copyright Law.

The district court concluded that the first prong was satisfied because the case was focused “on the software and not the process” and was thus within the scope of Copyright. As to the second prong, the court held that GlobeRanger’s allegations (that defendants had wrongfully copied and misused GlobeRanger’s software and destroyed its competitive advantage in the market) protected the same interests that are protected by Copyright Law, and therefore held that GlobeRanger’s trade secrets claims were preempted.

On appeal, the Fifth Circuit reversed, concluding that the first prong of the preemption analysis was not satisfied because GlobeRanger had pled facts that fell “at least in part” outside the scope of Copyright protection. The Fifth Circuit specifically noted that it only intended to reach “modest conclusions” and that the district court should take a fresh look at the preemption question on remand, with the benefit of a more developed record.

In November 2014, a jury returned a $15 million verdict in favor of GlobeRanger. On a motion for judgment as a matter of law, or in the alternative, for a new trial, Software AG argued that the $15 million judgment should be set aside because the claims were preempted by Copyright Law. GlobeRanger had conceded that its claim for misappropriation of trade secrets embedded in software was within the subject matter of Copyright and therefore satisfied the first prong of the preemption test.

For that reason, the court focused on the second prong: whether the trade secrets rights asserted were “equivalent” to rights protected by Copyright. The court applied the “extra element” test, which holds that state law claims are not preempted by Copyright if the state law claim at issue has “one or more qualitatively different elements” from a Copyright claim.

The court reasoned that trade secret misappropriation requires that the use be “improper” and that the information be “secret”, which are “extra elements” not required under Copyright Law. Thus, the district court found that the trade secrets claim was not preempted by Copyright Law.

For now, this verdict remains intact. On June 17, 2015, Software AG filed a notice of appeal, which will give the Fifth Circuit a chance to take a closer look at the preemption question and address, for the first time under Texas trade secrets law, the second prong of the Copyright preemption analysis. It remains to be seen whether the Fifth Circuit will join the circuit courts (including the First, Third, Seventh, and Ninth Circuits) cited by GlobeRanger in finding against preemption, or whether it will fall in line with the Texas state and federal district court opinions cited by Software AG and apply preemption.