Overlooking the Obvious "Extra Element" of Secrecy in Avoiding Copyright Preemption of Trade Secret Misappropriation Claims

Reprinted with permission from the IP Litigator, Published by Aspen Law & Business

In Dun & Bradstreet Software Services, Inc. v. Grace Consulting, Inc., 307 F.3d 197 (3rd Cir. 2002), the U.S. Court of Appeals for the Third Circuit recently reaffirmed the long-standing "extra element" test by holding that the federal Copyright Act did not preempt state-law claims for misappropriation of software trade secrets. Consistent with case law from other jurisdictions, the Court reasoned that, unlike the asserted copyright claims, the state-law trade secret claims required proof of such extra elements as a breached duty or improper means in acquiring the trade secret. Id. at 216-19. Because the preemption clause of the Copyright Act, 17 U.S.C. § 301, contemplates the coexistence of copyright claims with qualitatively different state-law claims, the extra elements saved the trade secret allegations from preemption. Id. at 216-17.

The Third Circuit relied upon the oft-cited decision in Computer Associates Int'l, Inc. v. Altai, Inc., 982 F.2d 693, 717 (2d Cir. 1992), for support that the "breach of duty is the gravaman of such trade secret claims, and supplies the "extra element" distinguishing trade secrets from copyrights. Dun & Bradstreet, 982 F.2d at 218. Without proof of a breached duty, the court reasoned that merely copying or displaying the trade secret information is nothing more than copyright infringement. Id. at 217. Preemption, therefore, extinguishes the state-law trade secret claim and the trade secret owner is reduced to prosecuting only its copyright infringement claims. Id. at 217-18.

Overlooked in Dun & Bradstreet, Computer Associates, and most other published decisions, however, is the obvious extra element of secrecy, proof of which is required for trade secret claims but not for copyright claims. In other words, the trade secret proponent must demonstrate that the economic value of its asserted trade secret depends on guarding the information from disclosure. There is no similar requirement for proving a claim of copyright infringement. The qualitative difference resulting from the extra element of secrecy in trade secret claims has long been suggested in 1 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 1.01 [B] [ 1] [h] (2002) as the principal factor distinguishing trade secrets from copyrights. Nevertheless, only a few Courts have relied on the secrecy element when applying the extra elements test. See, e.g., Firoozye v. EarthlinkNetwork, 153 F. Supp.2d 1115, 1130-31 (N.D. Calif 2001); Idema v. Dreamworks, Inc., 162 F. Supp.2d 1129, 1194-95 (C.D. Calif. 2001); Unix Sys. Lab., Inc. v. Berkeley Software Design, Inc., No. 92-1667, 1993 WL 414724 at *16 (D.N.J. March 3, 1993).

Focusing on the secrecy element instead of breached duties, in many cases, would have resulted in a sounder basis for preemption, because the secrecy, and therefore validity, of the alleged trade secrets were in doubt. For example, in the recent decision in Stromback v. New Line Cinema, No. 01-73898, 2002 WL 31548620 (E.D. Mich. Oct. 23, 2002), the plaintiff's copyright and trade secret claims were based upon a poem and screenplay that the defendant allegedly used for one of its movies. The poem and screenplay could not have been trade secrets because the plaintiff had disclosed and registered them with the Writers Guild of America and the U.S. Copyright Office. Id. at *1. Instead of focusing on the obvious, the complete absence of secrecy, the court reasoned that a breached duty had not been shown and preemption was warranted. Id at *8 n.13. By comparison, the court in Idema, readily dismissed trade secret claims on similar facts because there was "no allegation that the information in the [screenplay] was a `trade secret' in the sense that its mere disclosure would undermine its value." Idema, 162 F. Supp.2d at 1194-95 (emphasis in original).

Moreover, preemption may be proper even when some duty was breached. For example, in Bieg v. Hovnian Enterprises, Inc., No. Civ. A. 98-5528, 1999 WL 1018578 (E.D. Penn. Nov. 9, 1999), the court reached the correct result, preempting the trade secret claims, but for the wrong reason. At issue in that case were architectural drawings that the plaintiff, an architect, had created for the defendant, a construction company. The plaintiff alleged that the defendant had breached a contractual duty not to disclosure and use the drawings until after the defendant had paid the plaintiff for the drawings. The payment allegedly was never made. Id. at *4. In ruling that the trade secret claims were preempted, the court side-stepped the extra element test and alleged breach of contractual duties by reasoning that the "copyright and trade secret misappropriation claims are functionally equivalent." Id. at *5. Preemption was, nevertheless, appropriate in that case because the plaintiff's theory of recovery could not have depended upon the secrecy of the drawings. The plaintiff had previously disclosed the drawings in a registration application to the U.S. Copyright Office. Id. at *1. Accordingly, the plaintiff had alleged nothing more than copyright infringement in the guise of state-law trade secret violations, despite the alleged breach of contractual duties.

Placing the focus on whether a duty has been breached causes difficulty when trade secret validity is clear but when the breach of a duty is not. For example, in Computer Associates, 982 F.2d at 718, the Court acknowledged that the defendant had not breached any duty of confidentiality owed to the plaintiff, a competitor, but strained nonetheless to avoid preemption. The court embarked on an extended analysis of the defendant's "constructive notice" that one of its employees, previously recruited from the plaintiff, might be using the plaintiff's trade secrets to develop the defendant's own software. Id at 718-19. Moreover, the court postulated that the defendant had actual notice. After the trade secret allegations came to light, the defendant rewrote its software to eliminate the plaintiff's copyrighted expressions. Id. at 719. The court reasoned that the plaintiff could establish that even the rewritten software still embodied some of the misappropriated trade secrets. Id. The court, therefore, held that the trade secret claims were not preempted due to constructive and actual notice of the prior trade secret theft. Id.

The court in Computer Associates could have substantially simplified its preemption analysis by acknowledging that the plaintiff's theory of recovery depended upon proof that the secrecy of the software code was reasonably guarded; the secrecy provided the extra element needed to escape preemption. The extended duty analysis could have been saved for summary judgment or trial. Indeed, emphasizing the secrecy element addresses whether there is a real conflict between federal and state law instead of whether a plaintiff can succeed on the merits of the trade secret claims. See Firoozye, 153 F. Supp.2d at 1131. Accordingly, the true "gravaman" of trade secret law is the overlooked extra element of secrecy, which in most cases will work to avoid preemption of valid state-law misappropriation claims by co-existing claims of copyright infringement.