United States: Copyright Preemption Notwithstanding No Copyright Protection And No Copyright Claims

Spear Marketing, Inc. v. BancorpSouth Bank

In a suit alleging trade secret theft of ideas related to a software program, the U.S. Court of Appeals for the Fifth Circuit affirmed both a lower court's denial of remand to state court based on complete copyright preemption and its subsequent summary judgment ruling, holding that the claim of trade secret theft was in fact a doomed copyright infringement claim. Spear Marketing, Inc. v. BancorpSouth Bank, Case No. 14-10753 (5th Cir., June 30, 2015) (Wiener, J.).

Spear Marketing, Inc. (SMI) is a small business with a single software product called VaultWorks for use by the banking industry to manage cash inventories. VaultWorks employs an online interface for user operability, and accordingly none of the users actually access the software itself. ARGO is a competitor of SMI, which also develops software for the banking industry. A customer of both SMI and ARGO, BancorpSouth Bank (BCS) used VaultWorks from SMI to manage its cash inventories and BANKPRO Teller from ARGO to automate customer transaction processing.

To expand its product line, ARGO began developing its own cash management program called Cash Inventory Optimization (CIO), which it intended to bundle with BANKPRO Teller. CIO uses different predictive algorithms than VaultWorks and is installed directly onto a bank's operating system. ARGO pitched CIO to BCS as an upgrade to its BANKPRO Teller system.

Concurrently with ARGO's attempt to transition BCS away from VaultWorks and to CIO, SMI and ARGO entered into discussions for ARGO to acquire SMI. In connection with those discussions, ARGO represented that it neither had, nor was developing, a cash management product similar to VaultWorks. Relying on this representation, SMI demonstrated VaultWorks to ARGO, simultaneously disclosing confidential business and technical information. ARGO chose not to acquire SMI. Subsequently, BCS decided to replace VaultWorks with CIO. During the transition to CIO, and to validate the software's functionality, BCS provided historical cash usage data to ARGO in the form of various screen shots of the VaultWorks user interface.

SMI filed suit against BCS and ARGO in a Texas state court, alleging 10 Texas state law causes of action and claiming theft of its technical and business trade secrets related to VaultWorks. The case was removed to federal court on Argo's argument that SMI's claims were completely preempted by the Copyright Act. Thereafter, SMI amended its complaint to remove certain causes of action and various references to copying and distribution; it also moved for remand back to state court. The federal district court denied remand and, after discovery, dismissed all of SMI's remaining claims on summary judgment. SMI appealed, arguing that its trade secret claims fell outside of the purview of the Copyright Act because ideas, processes and methods are themselves excluded from protection.

As an issue of first impression, the 5th Circuit addressed the intersection of trade secret law and the breadth of federal copyright preemption. Specifically, the 5th Circuit explained that ideas, processes and methods fixed in a tangible medium of expression may be copyrightable subject matter for preemption purposes, even though such subject matter is not actually copyrightable. The 5th Circuit first reiterated that grounds for removal are based on the complaint as originally filed, not subsequent amendments. Next, the court explained to determine whether there is preemption by the Copyright Act, a two-prong test is applied:  does the cause of action fall within the subject matter of copyright and does the cause of action protects rights that are equivalent to the exclusive rights of a federal copyright. Both prongs must be satisfied for preemption.

While actual copying of VaultWorks would fall within the subject matter of copyright, SMI had not alleged mere copying, but wrongful access, disclosure and theft of its trade secrets. Indeed, SMI's complaint was directed to theft of know-how, ideas, procedures, processes, systems, methods of operation and concepts, all of which are excluded from copyright protection. Nevertheless, according to the court, while these processes and methods are excluded from copyright protection, they are not outside of the scope of copyright. Undeniably, SMI's claims were based on ideas fixed in a tangible software medium, and thus were within the scope of copyright subject matter for the purposes of preemption under the Copyright Act.

Further, the court concluded that SMI's claims were equivalent to the exclusive rights of a federal copyright because its various claims relating to copying, communicating and transmitting of its trade secrets were qualitatively the same as a copyright infringement claim. Moreover, summary judgement as to SMI's claims was proper. SMI failed to establish substantial similarity between VaultWorks and CIO and waived its right to appeal with respect to the remaining claims for failure to proffer authority or argument thereabout.

Copyright Preemption Notwithstanding No Copyright Protection And No Copyright Claims

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