In its recent Spear Marketing, Inc. v. BancorpSouth Bank1 decision, the Fifth Circuit Court of Appeals joined the majority of courts in favoring a broader scope for copyright preemption, holding that works do not have to be copyrightable for the doctrine to apply. This is good news for defendants, who may use copyright preemption to remove a state claim to federal court. Normally, in order to remove a claim to federal court, diversity jurisdiction or federal question jurisdiction must be established. Federal court can provide several advantages to defendants, including predictability and a readiness to handle complex litigation issues, such as trade secret claims. For cases involving software and other materials that fall within the subject matter of copyright, defendants may wish to consider using copyright preemption as an alternative avenue to federal court.
The case at hand involves Spear Marketing (“SMI”), a small business that offers a software program for banks to manage their cash inventories. BancorpSouth Bank (“BankcorpSouth”) used SMI’s software, as well as an automatic teller transaction solution offered by ARGO Data Resource Corporation (“ARGO”), for many years. During that time, ARGO independently developed a cash management software that would supplement its existing services and render SMI’s software unnecessary. Eventually ARGO convinced BancorpSouth to use its software and, as a result, BancorpSouth allowed its agreement with SMI to expire. Shortly thereafter, SMI brought suit against BancorpSouth and ARGO in Texas state court, alleging, among other things, that the two had misappropriated trade secrets pertaining to SMI’s software and used the trade secrets to develop and implement ARGO’s software in violation of the TTLA (Texas Theft Liability Act). When BancorpSouth and ARGO removed the case to federal court on the basis of preemption by the Copyright Act, SMI amended its complaint to delete references to copying and distribution and filed a motion to remand. The district court denied SMI’s motion and ultimately granted summary judgment in favor of BancorpSouth and ARGO, based, in part, on SMI’s lack of evidence of trade secret use. SMI appealed both decisions to the Fifth Circuit Court of Appeals.
The Fifth Circuit affirmed the lower court’s rulings on both jurisdiction and summary judgment. The Court noted that, in order to establish copyright preemption, a party must show (1) that the claim falls within the subject matter of copyright and (2) that the claim protects rights that are equivalent to any of the exclusive rights of a federal copyright.2 For the first prong, SMI argued that its trade secrets in connection with its software included only “know-how, ideas, procedures, processes, systems, methods of operation, and concepts,”3 which are generally excluded from copyright protection under Section 102(b).4 Given that its ideas are not entitled to copyright protection, SMI reasoned, the claim does not fall within the subject matter of copyright.
The Fifth Circuit disagreed. Siding with the majority of circuits, including the Second, Fourth, Sixth, Seventh and Ninth Circuits,5 the Court determined that, for the purposes of preemption under Section 301(a),6 ideas fixed in tangible media fall within the subject matter of copyright. The Court reasoned that there is a clear difference between the purpose of federal copyright preemption and that of federal copyright protection, citing the Fourth Circuit’s observation that “the shadow actually cast by the Act’s preemption is notably broader than the wing of its protection.”7 The Court also looked to legislative intent, finding that an important function of copyright preemption is to “prevent states from giving special protection to works of authorship that Congress has decided should be in the public domain.”8 Here, the Court found that, because computer software is a tangible medium protected by the Copyright Act, SMI’s software and related trade secrets fall within the subject matter of copyright, even if the software incorporates ideas that may not be entitled to copyright protection.9
The Fifth Circuit proceeded to determine that the second prong of the copyright preemption test had also been satisfied, holding that SMI’s conversion and TTLA claims involving theft of trade secrets, including copying, communicating, and transmitting trade secrets, are equivalent acts to reproducing and distributing under the Copyright Act. As such, the Court found that SMI’s state claims were properly preempted by the Copyright Act and the removal of the case to federal court was justified.10 The Fifth Circuit concluded by affirming the lower court’s judgment dismissing SMI’s action with prejudice.11
In conclusion, the Fifth Circuit’s decision strengthens the copyright preemption doctrine by clarifying and broadening its scope. With only the Eleventh Circuit on the other side of the split, the overwhelming majority of courts supports the notion that material need not be copyrightable in order for copyright preemption to apply, making the doctrine a more appealing defensive tool.