Trade Secret Misappropriation Defeats Maze of Copyright Preemption Claims

GlobeRanger is a software company that specializes in radio frequency identification (RFID) technology.  GlobeRanger RFID solutions focus on inventory management, allowing users to filter, process and store inventory information in real time.  Pursuant to a contract through the Department of Defense, GlobeRanger installed RFID technology solutions at three Navy bases.  The Navy then decided to consolidate into an enterprise-wide RFID solution to be run from one location.  The Navy awarded the contract to Software AG and ordered GlobeRanger to stop its work.  GlobeRanger sued Software AG for misappropriating its trade secrets, alleging that Software AG accessed some of GlobeRanger’s data, manuals and software while working on the Navy contract.

GlobeRanger initially filed its lawsuit against Software AG in federal court.  Software AG objected, arguing lack of federal court jurisdiction, so GlobeRanger dismissed its federal lawsuit and filed in state court.  Software AG then decided that the lawsuit belonged in federal court and removed the case to federal court.  The district court denied GlobeRanger’s motion to remand and ruled that GlobeRanger’s misappropriation claims were preempted by the Copyright Act.  GlobeRanger appealed that decision to the Fifth Circuit, which reversed and remanded the case to the district court. (GlobeRanger I).  Software AG appealed to the Fifth Circuit in the second appeal after a $15 million jury verdict in GlobeRanger’s favor.  Software AG argued that GlobeRanger’s trade secret claim was preempted by federal copyright right law, but that even if the trade secret claim was not preempted, the federal court lacked jurisdiction due to the lack of a federal law claim.  The Fifth Circuit ruled that GlobeRanger’s trade secret claim was not preempted, but that GlobeRanger’s dropped conversion claim was preempted and supported the required federal jurisdiction.

Software AG appeals on the following grounds: (1) the trade secret misappropriation claim is preempted by copyright law; (2) if this claim is not preempted, then the district court lacked jurisdiction; (3) if the court did have jurisdiction, GlobeRanger failed to prove its claim or its damages; (4) the trial court’s damages award was erroneously calculated and excessive; and (5) the district court abused its discretion in formulating the jury charge.

(Opinion pdf page 5).

This blog post discusses the first two grounds for appeal.

Software code creators can register their works for copyright protection.  However, to enforce their copyrights, software code creators must register their works with the Copyright Office.  Copyright registration requires a certain amount of public disclosure.  Software code creators might prefer to protect their code as a trade secret. 

Copyright is one of the areas in which federal law takes precedence over state law.  The Copyright Act preempts state law when two conditions are met.  Firstly, the work for which protection is sought must come within the subject matter of copyright.  Preemption does not apply to uncopyrightable property.  Secondly, the right the author seeks to protect must be equivalent to one of the exclusive copyright rights. 

In other words, is state law protecting the same rights that the Copyright Act seeks to vindicate, or is it protecting against different types of interference? If state law offers the same protection, then the state law claim is preempted and must be dismissed. Copyright grants creators the exclusive right to copy their work, so this second requirement is met when the conduct for which the plaintiff is seeking protection under state law amounts to the copying that copyright law also proscribes.  For example, copying, communicating, and transmitting are equivalent acts to reproducing and distributing. In that situation, allowing a state law to provide the same protection as copyright law would undermine the federal copyright system, which also requires public registration of the work before a lawsuit can be brought. As a result, the Copyright Act preempts state claims that seek to provide copyrightable subject matter with the same protections that federal law provides.

(Opinion pdf pages 7 – 8).

In this case, GlobeRanger conceded that its misappropriation claim concerned copyrightable software and not uncopyrightable procedures, processes, systems or methods of operations.  The equivalency of rights was therefore the only disputed question before the Fifth Circuit. 

The test to determine equivalency is the ‘extra element test’:

If the act or acts of the defendant about which the plaintiff complains would violate both misappropriation law and copyright law, then the state right is deemed ‘equivalent to copyright.’ If, however, one or more qualitatively different elements are required to constitute the state-created cause of action being asserted, then the right granted under state law does not lie within the general scope of copyright, and preemption does not occur.

Whether a claim is equivalent requires looking to the actual alleged misconduct and not merely the elements of the state cause of action.

(Opinion pdf pages 8 – 9).

GlobeRanger argued that the Texas trade secret law it sought to enforce prevents acquisition through a breach of a confidential relationship or improper means, which goes beyond the anti-copying principle of federal copyright law.  “The evidence that Software AG accessed its Navy Solution through persons and entities that were in a confidential relationship with GlobeRanger means, according to GlobeRanger, that the trade secret claim involves an extra element not found in copyright law.”  (Opinion pdf page 9).

The Fifth Circuit found conduct by Software AG supported GlobeRanger’s extra element argument:

Software AG’s inducement of a former GlobeRanger employee to break his nondisclosure agreement in order to obtain source code; Software AG’s knowledge from technical manuals it obtained that end user agreements prohibited disclosure; and its installment and exploration of the Navy Solution in a computer lab—given Software AG’s stated purpose of ‘replicating current GlobeRanger functionality’ and GlobeRanger’s insistence that its software and license keys only be used for ‘direct support’ of the existing Navy installments. Software AG’s actions go beyond the copying, communicating, and transmitting alleged in cases where preemption was found.

(Opinion pdf page 11).

The Fifth Circuit concluded that the state tort provides substantially different protection than copyright law and that GlobeRanger’s trade secret claim was not preempted. 

The Fifth Circuit next considered Software AG’s argument that no federal question jurisdiction exists, so the case should have been remanded to state court.  The Fifth Circuit’s response to that argument depended on whether some of GlobeRanger’s previously dismissed state law claims were preempted by the Copyright Act.

Federal jurisdiction is determined based on the time of removal from state court. 

It would be inefficient for the court, as well as for litigants, if the power of the court to decide a case could exist at the outset, but later disappear based on changed circumstances.

One of the changed circumstances that does not undo an initial determination of jurisdiction is the dismissal of claims. We have applied this principle before when the original jurisdiction in a removed case flowed from complete preemption. Hook v. Morrison Milling Co., 38 F.3d 776, 779–80 (5th Cir. 1994). In Hook, we explained that the plaintiff’s post-removal dismissal of a wrongful discharge claim that the district court had found to be preempted by ERISA ‘does not divest the district court of its properly triggered subject matter jurisdiction.’ The sole jurisdictional question is thus whether the Copyright Act preempted any of the claims pending at the time of the removal.

(Opinion pdf pages 15 – 16).

In this case, GlobeRanger dismissed its conversion claim after the case was remanded to district court following the first appeal.  A conversion claim is a state law claim that punishes taking or copying. 

A finding that a claim is completely preempted at the time of removal supports federal jurisdiction even if the claim is later dismissed. 

Consistent with that well-established principle as well as GlobeRanger I’s holding that removal jurisdiction existed, we read that opinion’s language about a later jurisdictional determination as contemplating only that the conversion claim might not have ended up being governed by federal copyright law. Contrary to Software AG’s central premise, GlobeRanger I did not say that the district court had to make a renewed jurisdictional finding on remand. Instead, it gave GlobeRanger the option of proving that its claim relates to physical property contrary to the panel’s understanding of the claim. It made sense to not give Software AG that opportunity, as at that time only GlobeRanger had any interest in disproving GlobeRanger I’s finding of preemption based on the pleadings. Recall that the parties’ positions have switched—in this case’s first visit to our court, GlobeRanger was arguing against preemption so it could go back to state court; Software AG was arguing for it so the case could stay in what was then its preferred federal forum.

If GlobeRanger had accepted that invitation and produced evidence to show that its conversion claim related only to physical property so as not to be preempted, then GlobeRanger I was recognizing it could ultimately pursue that claim under state law. In that case, the copyright claim that was read into the pleading via complete preemption would have gone away. That situation would be no different than one in which a federal claim fails at the Rule 12(b)(6) stage, is found to lack evidentiary support at the summary judgment stage, or is voluntarily dismissed as actually happened in this case. In any of those scenarios, the court no longer has federal question jurisdiction over any pending claim, but the presence of the federal claim at the outset of the case supports supplemental jurisdiction over the remaining state claims.

That is what happened here. As the complaint alleged only conversion of intangible property for which there is equivalency between the rights protected under that state tort and federal copyright law, complete preemption converted the conversion claim into one brought under the Copyright Act that supported federal question jurisdiction at the time of removal and supplemental jurisdiction after it was dismissed.

(Opinion pdf pages 18 – 20). 

This case is GlobeRanger Corporation v. Software AG, No. 15-10121, Fifth Circuit Court of Appeals.

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