REDUCING RISKS: Court Finds Copyright Act Does Not Preempt State Trade Secret Claim

2 minute read | September.23.2016

Over the years, it has proven difficult to fit software in any one category of IP protection. And while software’s ability to seemingly transcend patents, copyright, and trade secrets provides software developers and technology companies with options, it also makes it challenging to decide which will provide the best way to enforce those rights. There are obviously risks and benefits to each form of protection. However, the courts have reduced at least one risk: preemption of state trade secret laws by the Copyright Act.

Copyright preemption, if applied, often applies broadly and “transforms a state-law complaint asserting claims that are preempted . . . into . . . a federal claim for purposes of the well-pleaded complaint rule.” Faced with this issue, the Fifth Circuit recently upheld a $15 million judgment in a trade secret misappropriation case brought by software manufacturer GlobeRanger Corp. against competitor Software AG.

Software AG had appealed the district court’s judgment arguing, among other things, that GlobeRanger’s trade secret claim was preempted by copyright law. Even though GlobeRanger did not accuse Software AG of violating its copyright, the court recognized that the Copyright Act could still preempt a state law claim if two conditions were 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.

In analyzing the first condition, the court noted that allegations of the misappropriation of things such as procedures, processes, or methods could potentially remove a trade secret claim from the possibility of preemption. However, because GlobeRanger’s misappropriation claim was limited to its software, this undoubtedly fell within the scope of work protected under the Copyright Act.

Nonetheless, the court found that the misappropriation claim was not preempted because the second condition was not satisfied. The Copyright Act provides owners the right to reproduce, make derivative works, distribute, perform, and display. In contrast, Texas trade secret law protects against the taking of protected information “through a breach of a confidential relationship or . . . improper means.” To show this, GlobeRanger provided evidence of inducement to break a nondisclosure agreement, Software AG’s knowledge that disclosure was prohibited, and its installment and exploration of the computer lab using GlobeRanger’s software. The court found such conduct went beyond the copying or transmitting that the Copyright Act protects against.

In coming to its conclusion, the Fifth Circuit joined the ten other Circuits that had considered whether the Copyright Act preempts trade secret misappropriation claims—all found it does not. So despite the varied debates about how to best protect software, it seems the courts are at least in agreement about one thing: trade secrets remains a viable option.