No Preemption Where Misappropriation Claims Extend Beyond Copyrighted Software

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By Tamlin H. Bason  

A complaint that assets trade secret misappropriation claims based in part on the alleged theft of software code is not entirely preempted by the Copyright Act if some of the claims are beyond the scope of copyright, the U.S. District Court for the Northern District of Texas held July 1 (Spear Marketing Inc. v. BancorpSouth Bank, N.D. Tex., No. 3:12-cv-03583-B, 7/1/13).

The decision is seemingly at odds with the court's refusal in May to remand the case back to state court based on its determination that at least some of the plaintiff's state law claims were preempted. In the instant order, the court said that in fact none of the state law claims are federally preempted. Nonetheless, the court said that it would retain jurisdiction over the case for “the interests of justice and judicial economy.”

Software Helps Manage ATM Cash Flow

Spear Marketing Inc. of Dallas had developed a cash management system that allowed banks to optimize the amount of cash needed in individual automated teller machines in order to satisfy customer demand. In 2003, Spear began licensing that system, called VaultWorks, to BancorpSouth Bank of Tupelo, Miss.

In 2010, Spear demonstrated its VaultWorks system to several representatives from Argo Data Resource Corp. of Richardson, Texas. During that demonstration, Spear informed Argo that BancorpSouth was already using the system. BancorpSouth, at the time, was one of Argo's largest clients.

Argo expressed interest in VaultWorks and conveyed to Spear that it did not currently have, nor was it planning on developing, any system similar to VaultWorks. However, no agreement between the parties was ever reached.

In January 2012, BancorpSouth terminated its relationship with Spear. In a complaint filed in a Texas state court in August 2012, Spear alleged that after seeing the VaultWorks demonstration Argo and BancorpSouth had collaborated to steal Spear's trade secrets. The complaint also asserted claims of conversion, unjust enrichment, fraud, breach of contract, and a violation of the Texas Theft Liability act.

BancorpSouth and Argo filed a notice of removal, arguing that Spear's claims were preempted by Section 301 of the Copyright Act, 17 U.S.C. §301. In response, Spear filed an amended complaint, and it also filed a motion seeking remand back to state court. That motion was denied in May (102 PTD, 5/28/13).

GlobeRanger Test Precluded Remand

When considering Spear's motion for remand, Judge Jayne J. Boyle looked to a two-prong test articulated in GlobeRanger Corp. v. Software A.G., 691 F.3d 702, 103 U.S.P.Q.2d 1859 (5th Cir. 2012)(161 PTD, 8/21/12), for determining whether a plaintiff's state law claim is preempted by the Copyright Act.

The first prong of the test requires a court to determine whether the state law claims fall within the subject matter of copyright law. If that prong is met, then a court must next determine whether the state law action protects rights that are “equivalent” to any of the exclusive rights protected under Section 106 of the Copyright Act, 17 U.S.C. §106.

BancorpSouth argued that because the original complaint alleged that they had “copied objects, materials, devices or substances, including writings,” the claims were preempted by the Copyright Act. The court disagreed. Relying on both GlobeRanger and another Fifth Circuit case, Engineering Dynamics Inc. v. Structural Software Inc., 26 F.3d 1335, 1341, 31 U.S.P.Q.2d 1641 (5th Cir. 1994), the court determined that some of Spear's claims related to categories that arguably fall outside of the scope of copyright. Thus, the court found those claims were not necessarily preempted.

However, some of Spear's other claims were at least partially preempted, and therefore the court determined that the defendants were entitled to litigate in federal court. The defendants' motion to dismiss was filed in September, before the court had ruled on Spear's motion to remand to state court. In their motion, the defendants argued that all of the state law claims were preempted by the Copyright Act.

No Complete Preemption of Misappropriation Claims

The court noted that its instant order ”largely repeats” its analysis from it earlier order. Specifically, the court once again looked to GlobeRanger and Engineering Dynamicsto determine whether Spear's misappropriation claims were preempted by the Copyright Act.

At issue in GlobeRanger was a software system developed by GlobeRanger Corp. for use in radio frequency identification tagging. The RFID tags were placed on consumer goods, for instance in a grocery store, and the goods were then able to be tracked as they passed through an area with an RFID reader. The system also included business processes that helped GlobeRanger make decisions in implementing a customized RFID system for each customer.

GlobeRanger filed claims in state court against a former client, alleging conversion, misappropriation, and tortious interference. The case was removed to federal court, which found the claims preempted.

GlobeRanger pointed to a number of exclusions to copyrightable subject matter listed in 17 U.S.C. §102(b) that it claimed foreclosed preemption. Specifically, processes, systems, and methods of operation are not copyrightable, GlobeRanger noted. Its RFID system met those exclusions, and thus its claims were not preempted, it argued. The appeals court partially agreed.

Quoting from Engineering Dynamics Inc. v. Structural Software Inc., 26 F.3d 1335, 1341, 31 U.S.P.Q.2d 1641 (5th Cir. 1994), GlobeRanger said, “[A]s one moves away from the literal code to more general levels of a program, it becomes more difficult to distinguish between unprotectable ideas, processes, methods or functions, on one hand, and copyrightable expression on the other.”

The appeals court then distinguished GlobeRanger's claims from the computer manuals and data cards that were deemed “about software,” and thus preempted, in Engineering Dynamics.

Unlike the “nonliteral elements of input” that were subject to the plaintiff's claims in Engineering Dynamics, GlobeRanger had “alleged the copying of its business practices that are not necessarily limited to specific expressions,” the Fifth Circuit said. Thus, GlobeRanger's claims “include the types of procedures, processes, systems, and methods of operation that are excluded from copyright protection under Section 102(b).”

Similar toGloberRanger, Section 102(b) is also relevant here, the court said. It said:  

At least some of SMI's alleged trade secrets are “not necessarily limited to specific expressions” such as customer lists, business plans, marketing strategies, and customer preferences. Insofar as SMI is alleging claims based on these types of trade secrets, the claims do not fall under the subject matter of copyright and are therefore not preempted by the Copyright Act.  




The court declined to determine at this point in the litigation which of Spear's trade secret claims were preempted and which were not. With respect to the defendants' motion to dismiss, the court said the motion could be denied based solely on the determination that not all of the trade secret claims were preempted. However, “[T]he Court recognizes that once the factual record is developed, the parties' evidence may show that some or all of the state law claims are in fact preempted, and thus the Court may revisit the issue of preemption later in the case.”

Supplemental Jurisdiction Exercised

The court then determined on a claim by claim basis that none of Spear's other claims were preempted. Spear argued that federal jurisdiction was inappropriate if none of the state law claims were preempted. “Generally,” the court noted, “once all federal claims have been dismissed from an action, these factors counsel in favor of dismissing the state causes without prejudice.”

The court, however, said that “the particular circumstances of this case” weigh in favor of it exercising supplemental jurisdiction over the state law claims.

Spear was represented by Steven E. Ross of Ross Joyner, Dallas. BancorpSouth was represented by Tonya M. Gray of Andrews Kurth, Dallas. Argo was represented by David H. Harper of Haynes & Boone, Dallas.


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