United States: Two Federal Preemption Cases, One Consistent Outcome

Two Federal Preemption Cases, One Consistent Outcome

Two recent decisions from the Fourth and Fifth Circuits—with similar outcomes—have contributed further guidance and consistency on the issue of federal preemption with respect to state law claims pertaining to conversion and computer fraud, as well as unfair competition. 

Both circuits explained that federal preemption, as it applies to federal intellectual property laws, is intended to maintain balance by preventing states from offering intellectual property protections that the federal Copyright or Patent Acts do not provide. Citing § 301 of the Copyright Act, both courts examined the facts of their respective cases under the Act's two-pronged inquiry to determine when a state law claim is preempted. First, the work at issue must be within the scope of the subject matter of copyright. If it is, then a state-law claim is preempted if the rights granted thereunder are equivalent to those protected by federal copyright. 

OpenRisk v. MicroStrategy Services

The US Court of Appeals for the Fourth Circuit addressed the issue of whether the federal Copyright Act preempted a plaintiff's state law claims arising from the copying and transfer of certain computer data. In finding such claims preempted, the Court affirmed the district court's grant of summary judgment in favor of the defendant. OpenRisk, LLC v. MicroStrategy Services Corporation, Case Nos. 16-1852; -4906 (4th Cir., Nov. 13, 2017) (Harris, J).

OpenRisk, a startup company, contracted with MicroStrategy for cloud computing and hosting services in relation to OpenRisk's data and programming. Shortly thereafter, OpenRisk faced insolvency, and three of OpenRisk's principal officers resigned and started their own company, Spectant Group LLC. The next year, OpenRisk sued MicroStrategy in district court in Virginia, claiming conversion and computer fraud under state law based on allegations that MicroStrategy had copied and transferred OpenRisk's data from the MicroStrategy cloud to a new cloud environment created for Spectant. After close of discovery, the district court granted MicroStrategy's motion for summary judgment arguing that the federal Copyright Act preempted OpenRisk's state law claims. OpenRisk appealed.

Starting with the two-prong preemption inquiry of § 301 of the Copyright Act, the court noted that there was no dispute as to the first prong since the materials in question (a computer program and associated data) fall within the subject matter of copyright. Thus, the case hinged on the second prong of the inquiry, i.e., whether the rights that OpenRisk wanted to protect under state law are "equivalent to the exclusive rights reserved to the owner of a copyright." Finding that the unauthorized copying of a computer program falls squarely within the Copyright Act's grant of exclusive rights to "reproduce" and "distribute" copies of a copyrighted work, the Court held that OpenRisk's conversion and computer fraud claims were preempted.

The Court rejected OpenRisk's arguments that the Virginia Computer Crimes Act upon which it based certain state law claims contains "extra elements" that save its case from preemption. The court explained that preemption may be avoided only when an extra element of a state law claim "changes the nature of the action so that it is qualitatively different from a copyright infringement claim." Here, the Court found that the core of OpenRisk's claim remains the unauthorized copying and transfer of its data, which is "equivalent to" a copyright infringement action and thus preempted.     

Motion Medical v. ThermoTek

Just one day after the Fourth Circuit's OpenRisk decision, the US Court of Appeals for the Fifth Circuit granted judgment as a matter of law in favor of a defendant, finding the plaintiff's unfair competition claim under Texas state law to be preempted by the federal Copyright and Patent Acts. Motion Medical Technologies, L.L.C., et al. v. ThermoTek, Incorporated, et al., Case No. 16-11381 (5th Cir., Nov. 14, 2017) (Higginson, J).  

ThermoTek, a medical device company, filed suit against its distributor, Mike Wilford, and his related companies in Texas state court for unfair competition after Wilford developed and sold a competing product for thermal and compression therapies that ThermoTek alleged was created with its proprietary information obtained by Wilford. Wilford removed the case to the Northern District of Texas, where a jury decided in favor of ThermoTek. Wilford then renewed a motion for judgment as a matter of law, arguing that federal copyright and patent law preempted ThermoTek's state unfair-competition-by-misappropriation claim. The district court agreed and dismissed all claims in the matter.

On appeal, the Fifth Circuit examined whether Wilford waived the preemption argument by failing to plead the affirmative defense. The panel agreed with the district court findings (1) that Wilford raised the affirmative defense at a "pragmatically sufficient time" since the issue first arose at the summary judgment stage before discovery closed, which was nearly two years before trial, and (2) that ThermoTek was not prejudiced in its ability to respond.

Turning to the issue of whether federal copyright law preempted ThermoTek's unfair-competition-by-misappropriation claim under Texas state law, the Fifth Circuit referred to the § 301 two-prong test. Regarding prong one, the Court quickly concluded that the misappropriated information, which included manuals, reports, billing information and other written documents, was "within the subject matter of copyright." Moving on to prong two, the Court noted that it has "twice held that Texas's unfair-competition-by-misappropriation tort does not afford protection qualitatively different from federal copyright law," and thus affirmed the district court's finding of copyright preemption.

On the question of patent preemption, the Fifth Circuit relied on the Supreme Court of the United States' decision in Bonito Boats, since the issue of patent preemption with respect to the Texas unfair competition law was a novel question in the Fifth Circuit. Under Bonito Boats, the panel also affirmed the district court's patent preemption ruling, explaining that to the extent a state law unfair competition claim seeks to protect functional aspects of ThermoTek's products, that state law thereby offers patent-like protection that might otherwise be unavailable under federal law, and would likely "obstruct Congress's goals." 

Practice Note: As the circuits provide further detailed

guidance on the issue of preemption, it is critical for parties on both sides of a matter to carefully examine state law claims to see if preemption can or should be addressed from an offensive or defensive position. 

Two Federal Preemption Cases, One Consistent Outcome

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions