Lingering Doubts, Trade Secrets and Copyright Preemption

In the United States elements of software have traditionally been protected by patent law, copyright law and trade secret law. The overlapping protection provided by multiple disciplines of intellectual property over software is relatively routine.  However, copyright preemption--federal copyright law essentially blocking an overlapping state claim--can sometimes preempt a trade secret claim covering software.  To the extent there is lingering doubt about copyright preemption of trade secret claims covering software, federalizing a private cause of action for trade secret misappropriation through the Defend Trade Secrets Act likely removes any remaining doubt.

A recent U.S. Court of Appeals decision, Spear Marketing v. Bank Corp South, concerning copyright preemption and trade secrets, has received a lot of attention in the blogosphere, for example here and here.  However, the decision does not apply copyright preemption in a way (without substantial extension) that may jeopardize trade secrecy protection of software under a trade secret misappropriation claim.  The court's decision concerning copyright preemption concerned a common law conversion claim and a claim under a Texas state statute for theft.  The subject matter of those claims included trade secrets; however, the court dismissed trade secret misappropriation claims on other grounds.

The DTSA: A good idea?

If copyright preemption did regularly apply to state trade secret misappropriation claims, the copyright right claim would essentially remove the state trade secret claim.  Federal law is supreme under the U.S. Constitution and can block or preempt state law in certain circumstances, for example, expressly or impliedly.

Section 301(a) of the U.S. Copyright Act provides for preemption of state law:

"On and after January 1, 1978, all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103 . . . whether published or unpublished, are governed exclusively by this title.  Thereafter, no person is entitled to such right or equivalent right in any such work under the common law or statutes of any State." 

In Spear Marketing v. Bank Corp South, the Fifth Circuit Court of Appeals held that a conversion claim and statutory claim for theft based on trade secrets concerning software was preempted by the Copyright Act.  In applying Section 301(a), the Fifth Circuit used the following two prong test:

1. "The claim is examined to determine whether it falls 'within the subject matter of copyright' as defined by 17 USC 102. " 

A trade secret owner can argue the claim is not preempted because it does not cover copyrightable material--specifically it covers ideas or methods of operation that are exempted from protection under 102(a) and not whether it includes non-copyrightable elements.  Importantly, the Fifth Circuit noted that it would follow the Second, Fourth, Sixth, Seventh and Ninth Circuits and hold that "ideas fixed in tangible media fall within the subject matter of copyright."  The Fifth Circuit declined to follow the Eleventh Circuit which held that, "'[i]deas are substantively ineligible for copyright protection and, therefore, are categorically excluded from the subject matter of copyright' even if 'expressed in a tangible medium.'"

2. "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, as provided in 17 USC 106."

The Fifth Circuit found, with respect to the statutory claim, that, "Copying, communicating, and transmitting are equivalent acts to reproducing and distributing."  Similarly, the court determined that the conversion claim consisted of equivalent acts of exercising dominion and control over intangible information and trade secrets.  Thus, the second prong was satisfied.

I guess so!

Importantly, the Fifth Circuit ultimately dismissed the trade secret misappropriation claim on other grounds.  While most courts hold that trade secret misappropriation claims are not preempted because they include at least an extra element such as breach of confidence or secrecy (under the second prong concerning equivalence of rights), at least two district courts, Jobscience v. CV Partners, 2014 WL 852477 (N.D. Cal. 2014) and Videotronics v. Bend Electronics, 564 F.Supp. 1471 (D. Nev. 1983), dismissed a trade secret misappropriation claim for preemption based on copying of some elements of software. In those cases, copyright preemption could have possibly been avoided through emphasizing the relevant factual differences in the case that distinguish the requirements of copyright infringement from trade secret misappropriation in the complaint, for example, the secret nature of the information. 

Notably, copyright preemption concerning the use of trade secrecy to protect software likely disappears once the trade secret action is federalized.  Thus, any fear that trade secrecy may not protect software is likely removed.  This is a benefit of the Defend Trade Secrets Act (for more on the Act, see here and here) for sure (as long as you don't have a problem with overlapping rights).