A federal court in California has held that a state law claim that a competitor engaged in unfair competition by creating infringing work after hiring former employees who stole proprietary information is preempted by the federal Copyright Act. Metabyte, Inc. v. NVidia Corp., et al., Case No. 12-0044 SC (N.D. Cal. April 22, 2013.
Metabyte employed individuals to develop computer code for 3D stereoscopic technology software, which is designed to enable a three-dimensional display by presenting images separately to the left and right eye through specialized eyeglasses that a viewer wears to look at a computer screen. The employees had access to Metabyte’s source code and were bound by employee confidentiality agreements that prohibited them from disclosing Metabyte’s confidential information and required them to return all of Metabyte’s property in their possession upon leaving its employ. The employees resigned and went to NVidia, a competitor. Metabyte alleged that when they left, the employees copied its computer code and then took it to NVidia, who used it to create copies of Metabyte software and derivative works. Metabyte sued NVidia for copyright infringement, unfair competition, trade secret misappropriation, and other causes of action. NVidia moved to dismiss the unfair competition claim on the ground it was preempted by the Copyright Act. NVidia did not move to dismiss the trade secret misappropriation claim. The court agreed with NVidia’s copyright preemption argument, and accordingly dismissed the unfair competition claim.
The court noted that state law causes of action are preempted under the Copyright Act if two elements are present: (1) the rights that a plaintiff asserts under state law must be rights that are equivalent to those protected by the Copyright Act, and (2) the work involved must fall within the subject matter of the Copyright Act. The court held both elements were satisfied. The court reasoned the sole allegation underlying Metabyte’s unfair competition claim was that ”NVidia created and sold products…that [were] substantially similar to the Metabyte Software and that included Plaintiff’s proprietary information by way of direct copies and derivative works, acquired through the Individual Defendants’ alleged theft and copying of Metabyte Software.” However, “[r]eproduction of copyrighted works, preparation of derivative works, and distribution of copies to the public are all rights granted under the Copyright Act.” As a result, the unfair competition claim was dismissed.
This decision is a reminder that employers should give careful thought to the causes of action they plead against competitors or former employees who have committed wrongdoing. In an analogous context, a California court has held that an unfair competition claim is preempted by the Uniform Trade Secrets Act when the alleged wrongdoing consists of trade secret misappropriation. K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., (2009) 171 Cal. App.4th 939. Employers should analyze potential preemption issues before seeking relief under unfair competition or other state common law causes of action, to avoid wasted time and resources on motions to dismiss preempted claims.