In an order dated April 20, 2017, New York’s Court of Appeals agreed to hear Sergey Aleynikov’s appeal of his conviction under an arcane New York criminal statute.

Aleynikov is a former Goldman Sachs computer programmer, arrested in July 2009 and accused of stealing computer source code from the bank.  Originally, a federal jury found him guilty of violating both the National Stolen Property Act and the Economic Espionage Act, but that verdict was overturned by the Second Circuit in April 2012 (after Aleynikov had been incarcerated for over a year).

More recently, Aleynikov also has been prosecuted at the state level, as the Manhattan District Attorney secured a jury verdict convicting him of N.Y. Penal Law §165.07 (unlawful use of secret scientific material), which was overturned by the trial judge in 2015.  Earlier this year, New York’s Appellate Division, First Department, reinstated the jury’s conviction of Aleynikov.

Given the prevalence and dangers of trade secret theft, Aleynikov’s case has drawn extensive media scrutiny over the years, and his appeal to New York’s highest court will be watched closely.

Before the Defend Trade Secrets Act (“DTSA”) became federal law in the spring of 2016, Supreme Court watchers would likely care little about prospective justices’ approach to trade secrets matters.  Such matters were the province of state law, and the phrase “trade secret” might be avoided, even in passing, in the opinions of the Supreme Court for entire terms or more.  But with DTSA cases being reported with increasing regularity, differences in interpretation are beginning to emerge.  Supreme Court attention may follow.

Because DTSA says that “misappropriation of a trade secret” can involve unlawful acquisition of a trade secret, or improper disclosure of a trade secret, or unauthorized use of a trade secret, the impact of the statute’s May 11, 2016 “effective date” has been the subject of some debate.  For instance, should the act apply to a trade secret unlawfully acquired on May 10, 2016 but improperly used or disclosed on May 12, 2016 or thereafter?  Likewise, what if a trade secret unlawfully acquired and used before May 10, 2016 is used again after May 11, 2016?  These issues have come up in cases in March and January 2017 in the Northern District of California, in March 2017 in the Eastern District of Pennsylvania, and earlier in the Middle District of Florida.  The answers and analysis found in these opinions is not always entirely consistent, which suggests that this issue under DTSA  as well as others will continue to be litigated.

Should differences arise between circuits, the Supreme Court might be called upon to interpret the reach of DTSA. In that vein, one might wish to look at the Court’s newest member, Neil Gorsuch, and his opinions while a 10th Circuit judge in Storagecraft Technology Corp. v. Kirby, 744 F. 3d 1183 (10th Circuit 2014), and in Russo v. Ballard Medical Products, 550 F. 3d 1004 (10th Circuit 2008). Each reveal interesting elements of Judge — now Justice — Gorsuch’s approach to trade secrets matters.

Storagecraft proves interesting opinion on several levels.  That case involved the Utah trade secrets act in a case coming to the 10th Circuit after being brought in the federal district court as a matter of diversity jurisdiction.  In addressing one of the appealing defendant’s arguments, the Gorsuch opinion rejected the notion that one need show that a defendant facilitated another’s commercial gain to recover under the statute:

Continue Reading Court’s Newest Member Has Trade Secret Protecting Track Record

In 2016, several states enacted laws that were designed, in varying degrees, to limit non-competes, including Illinois, Utah, Connecticut and Rhode Island. Which states are most likely to do the same in 2017?

Idaho:  A bill proposed in January, House Bill 61, would amend an existing Idaho law that has made it easier for employers to enforce non-competes against the highest paid 5% of their employees and independent contractors.  The bill would alleviate the burden placed on such “key” personnel by the existing law by, among other things, eliminating the rebuttable presumption of irreparable harm to the employer that is automatically established if a court finds that the key employee or independent contractor is in breach of his or her non-compete.

Maryland:  On January 27, 2017, Maryland lawmakers proposed House Bill 506, which would render null and void any non-compete provision in an employment contract that restricts the ability of an employee who earns equal to or less than $15.00 per hour or $31,200 annually to enter into employment with a new employer or to become self-employed in the same or similar business. The bill was adopted by Maryland’s House and is now in its Senate.

Massachusetts:  On January 20, 2017, lawmakers proposed Bill SD.1578, which would impose significant limitations on the reach of non-competes in Massachusetts.  If enacted, the proposed law would, among other things:  limit the temporal scope of non-compete agreements to 12 months from the date of termination of employment (or 2 years if the employee has breached his or her fiduciary duty or has unlawfully taken property belonging to the employer); prohibit non-competes against certain categories of workers, including nonexempt employees, students, employees terminated without cause, and employees 18 years or younger; and require non-competes to be supported by consideration independent from the continuation of employment.

Nevada:  A bill proposed in February, A.B. 149, would make a non-compete “void and unenforceable” in Nevada if it prohibits an employee from seeking employment with or becoming employed by a competitor for a period of more than 3 months after the employee’s termination, which is an extremely short duration in the non-compete realm.  Willful violators of the law would be guilty of a gross misdemeanor punishable by a fine of not more than $5,000; in addition, the Nevada Labor Commissioner may impose an administrative penalty of up to $5,000 for each such violation.

New York:  On October 25, 2016, New York Attorney General Eric Schneiderman announced that he planned to introduce legislation in 2017 that would, among other things, prohibit the use of non-competes for low-wage workers and require employers to pay employees additional consideration if they sign non-compete agreements.  While he has not yet introduced this bill, Schneiderman has given no indication that he will backtrack from his 2016 announcement.

Washington:  After a bill that would have, among other things, limited non-competes to one year faced strident opposition from businesses, Washington legislators penned a more watered-down version of a bill designed to make non-compete agreements more transparent.  Specifically, Bill HB 1967, which passed the Washington House on March 8 and is now in the Senate, requires that all the terms of a non-compete contract be disclosed in writing before the employee signs the contract. While this revised bill is far less restrictive than other proposed bills, if enacted, it will nevertheless be beneficial to Washington employees.

Stay Tuned: The Maryland and Washington bills have the most traction, as they have already passed the states’ Houses.  Nevertheless, at this point it is simply too early to predict whether the law proposed in those states or elsewhere will garner enough support to clear the necessary legislative and executive hurdles to be enacted.  In the meantime, employers across all states should stay tuned and continue to draft narrowly tailored and enforceable non-competes.

In non-compete matters, it is often said that trial judges dislike enjoining individuals and will go out of their way to avoid doing so. A recent decision by the Florida Court of Appeals, Allied Universal Corporation v. Jeffrey B. Given, may be a good example of such a situation – as well as an example of an employer that took an immediate appeal and got the relief it wanted.

In Allied Universal, the trial court denied a motion for a preliminary injunction to enforce the terms of a non-compete with a former employee, even though the employee failed to rebut evidence that his non-compete was supported by legitimate business interests and that his former employer would suffer irreparable harm in the absence of an injunction.  Here, the legitimate business interests at issue were substantial relationships with specific prospective or existing customers and various types of proprietary information and pricing strategies.

Rather than presenting rebuttal evidence, the employee argued that because he had not yet begun to actively compete, he had not yet breached his non-compete.  Following an evidentiary hearing, the trial court denied the motion for a preliminary injunction, “finding only that Allied failed to show irreparable harm or absence of an adequate remedy at law.”

In contrast, based on the unrebutted evidentiary record, the appellate court held that the burden shifted to the employee to establish the absence of irreparable harm, and that because the employee failed to provide such evidence, the trial court’s denial of an injunction was an abuse of discretion.

While it is impossible to say what degree human empathy played in the trial court’s denial of the preliminary injunction, prudent practitioners in non-compete cases should never lose sight of that reality. They should also not forget that denials of requests for injunctive relief are immediately appealable, and if a request is justified under the facts and the law, an immediate appeal may be in order.

shapiro

As the law’s first anniversary approaches, federal courts continue to adjudicate claims arising under the Defend Trade Secrets Act (“DTSA”).  Enacted on May 11, 2016, DTSA provides the first private federal cause of action for trade secret misappropriation, allowing parties to sue in federal court for trade secret misappropriation.  Although the law is in its infancy, employers and legal practitioners filing complaints that assert DTSA claims must nevertheless adhere to longstanding rules of pleading set forth by the Supreme Court and the Federal Rules of Civil Procedure (“FRCP”).  Two recent decisions address this fundamental concept and serve as reminders that all complaints must follow basic pleading precepts.

Rules of Pleading Under DTSA

Rule 8(a)(2) of the FRCP requires a pleading to contain a “short and plain statement of the claim showing facts that the pleader is entitled to relief.” A complaint must contain sufficient factual matter, accepted as true, “to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).  A claim becomes plausible if its “factual content . . . allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”  Should the well-pleaded facts support no “more than the mere possibility of misconduct,” then dismissal pursuant to FRCP 12(b)(6) is warranted.  Applying these standards to claims brought under the DTSA, a plaintiff must allege facts demonstrating that it is the owner of a trade secret that was misappropriated.  18 U.S.C. § 1836(b)(1).  Generally speaking, a “trade secret” is information that the owner “has taken reasonable measures to keep . . . secret” and that “derives independent economic value . . . from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” Id. § 1839(3).  Thus, a plaintiff asserting a DTSA claim bears the burden of alleging sufficient facts to demonstrate that it took reasonable steps to maintain the secrecy of the protected information.

Two Recent DTSA Decisions Reach Opposite Results

In Raben Tire Co. v. Dennis McFarland, Case No. 16-CV-00141, 2017 U.S. Dist. LEXIS 26051 (W.D. Ky. Feb. 24, 2017), a Kentucky federal court dismissed with prejudice a claim for misappropriation of trade secrets under DTSA for failure to state a claim. The plaintiff Raben Tire (a seller and installer of tires for commercial vehicles and construction equipment) sued two of its former employees and their new employer because, prior to resigning, the former employees allegedly transferred “confidential and proprietary information” to their new employer, including sales commission reports and the names of the individuals responsible for tire purchases.  Other than labeling that information as “confidential” in its complaint, Raben Tire did not allege any facts showing that it took any steps to protect the information from disclosure.  This omission was fatal to Raben Tire’s claim for misappropriation of trade secrets under the DTSA.

By contrast, a North Dakota federal court denied a motion to dismiss such a DTSA claim in Aggreko, LLC v. Guillermo Barreto & Elite Power, LLC, Case No. 16-cv-00353, 2017 U.S. Dist. LEXIS 35573 (D.N.D. Mar. 13, 2017), finding that the complaint satisfied the pleading standards. Just like in Raben Tire, the plaintiff Aggreko (a company that rents generators to customers) sued a former employee and his new employer because, prior to resigning, the employee allegedly downloaded Aggreko’s trade secrets and confidential information relating to Aggreko’s operations, customers, business proposals, and pricing strategies onto his personal hard drive for the benefit of his new employer. Aggreko’s complaint included one critical allegation missing from the complaint in Raben Tire:  the former employee was bound by confidentiality and employment agreements intended to protect Aggreko’s confidential information and to ensure that the information was not removed from the workplace or used by former employees and competitors.  In light of these allegations, the court denied the former employee’s motion seeking dismissal of Aggreko’s trade secret claim because it was “certainly plausible.”

Raben Tire and Aggreko confirm that claims brought under DTSA must be pleaded with the longstanding federal pleading principles in mind.  Employers and practitioners must take care to allege facts asserting plausible claims that not only describe the trade secrets at issue but also detail what measures the employer took to protect them.  Otherwise, like the plaintiff in Raben Tire, the complaint may be subject to dismissal on a motion to dismiss pursuant to Rule 12(b)(6).

shapiroAs we have written about and discussed extensively on this blog over the past year, the Defend Trade Secrets Act (“DTSA”) – enacted on May 11, 2016 – provides the first private federal cause of action for trade secret misappropriation, allowing parties to sue in federal court for trade secret misappropriation regardless of the dollar value of the trade secrets at issue.  Given that the law is less than a year old, federal courts seeing DTSA cases for the first time are still parsing through its language and clarifying its scope.  Although it is still a developing issue, two recent decisions reveal a limitation and viable defense to DTSA claims:  a plaintiff asserting a DTSA claim must allege facts showing that acts of misappropriation occurred after DTSA came into effect.

The first case is a September 27, 2016 decision from the Middle District of Florida, Tampa Division: Adams Arms, LLC v. Unified Weapons Sys., No. 16-cv-01503, 2016 U.S. Dist. LEXIS 132201 (M.D. Fla. Sep. 27, 2016).  Plaintiff Adams Arms, LLC, a manufacturer of military rifles, sued defendant Unified Weapons (and other affiliates and individuals) in federal court – asserting a misappropriation claim under DTSA – for allegedly using Adams Arms’ own trade secrets to enter into an agreement to supply rifles to a foreign country’s military after the companies had agreed to work together to supply the rifles.  The defendants moved to dismiss the DTSA claim relying solely on DTSA’s statute-of-limitations provision, which provides that:

A civil action under [18 U.S.C. § 1836(b)] may not be commenced later than 3 years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered. For purposes of this subsection, a continuing misappropriation constitutes a single claim of misappropriation.

18 U.S.C. § 1836(d) (emphasis added). The defendants argued that because some of the alleged conduct at issue occurred before the effective date of DTSA, there was a single continuing misappropriation and therefore, none of the conduct was actionable.  The Florida court was not persuaded, noting that the sub-section addresses only when a claim accrues for statute of limitations purposes, but does not address the critical question:  whether an owner may recover under DTSA when the misappropriation occurs both before and after the effective date, assuming the entire misappropriation is within the 3-year limitations period.  The court looked to Section 2(e) of DTSA, which applies to “any misappropriation . . . for which any act occurs” after the effective date.  Pub. L. No. 114-153, § 2(e).  According to the court, this language suggests that when an “act” occurs after the effective date, a partial recovery is available on a misappropriation claim.  Based on that reading of Section 2(e) of the DTSA, the court found that a plaintiff may state a plausible claim for relief so long as it sufficiently alleges a prohibited “act” that occurred after May 11, 2016.  Because Adams Arms’ complaint alleged that Unified Weapons disclosed Adams Arms’ trade secrets to the Peruvian military in or about late May or early June of 2016, the court held that Adams Arms articulated a viable misappropriation claim premised on a disclosure theory.  However, the court held that the complaint failed to state a viable claim based on an acquisition theory after the effective date of DTSA because the alleged facts indicated that Unified Weapons acquired all of Adams Arms’ trade secret information well prior to May 2016.  Accordingly, the court denied Unified Weapons’ motion to dismiss the DTSA claim, but limited the DTSA claim to a disclosure theory and held that Adams Arms could not proceed under an acquisition theory.

The second case comes from the Northern District of California and was decided on January 31, 2017: Avago Techs. United States Inc. v. NanoPrecision Products, No. 16-cv-03737, 2017 U.S. Dist. LEXIS 13484 (N.D. Cal. Jan. 31, 2017). In this decision, the California court considered Avago’s motion to dismiss a DTSA counterclaim asserted by nanoPrecision Products, Inc. (“nPP”) contending that Avago  had misappropriated its trade secrets by acquiring its confidential business information and disclosing it in three U.S. patent applications and subsequent prosecution of those applications.  Avago argued that the counterclaim should be dismissed because all of the actionable conduct occurred before the DTSA came into effect.  The court agreed.

nPP did not dispute that the original wrongful acquisition of its confidential information (i.e., Avago’s receipt of nPP’s confidential information in the course of the parties’ business discussions that ended in 2012) occurred before the DTSA came into effect. But nPP nevertheless argued that Avago’s continued use of its confidential information in the prosecution of the three patent applications allowed it to seek a partial recovery for misappropriation from the date the DTSA came into effect.  nPP specifically did not suggest that any new information was disclosed in the course of the patent prosecutions that had not been disclosed prior to DTSA’s effective date.

Significantly, nPP relied on the Adams Arms decision in support of its position, but to no avail.  Noting that the Adam Arms court had found that DTSA’s statute of limitations provision applies only to determinations of the timeliness of a DTSA claim and does not preclude a DTSA claim based on acts that occurred after the effective date of the statute, the California court distinguished Adams Arms, stating that the situation in Avago was “entirely different.”  Whereas in Adams Arms there were allegations that specific information had been disclosed after DTSA’s effective date,  the confidential information at issue in Avago was disclosed when the three patent applications were published before the DTSA came into effect.  The court therefore held that nPP’s DTSA counterclaim failed on the pleadings because nPP had failed to allege any facts showing acts of misappropriation that occurred after DTSA came into effect.

From these two decisions emerges a temporal limitation on the reach of the DTSA. While this issue is still open for further judicial interpretation, Adams Arms and Avago Techs. indicate that a plaintiff may be precluded from bringing a claim under DTSA if it only alleges facts that show acts of misappropriation occurring prior to May 11, 2016.  Defendants facing such DTSA claims should carefully analyze the alleged facts and consider raising this as a defense.

Matthew Savage Aibel

In Acclaim Systems, Inc. v. Infosys, the U.S. Court of Appeals for the Third Circuit recently rejected a claim for tortious interference with a non-compete, because the plaintiff introduced no evidence of actual knowledge that the individuals in question were covered by non-competes.

Infosys, an IT services company, bid on a job from Time Warner Cable (“TWC”) that had been serviced by a competitor, Acclaim. TWC decided to transfer the project over to Infosys, but wanted Infosys to hire four contractors who previously worked with Acclaim on the project.

Infosys acceded to TWC’s request, but first reached out to the contractors to inquire about any possible non-competes in their contracts with Acclaim. One contractor affirmatively stated in an email, “I do not have a non-compete clause with Acclaim.”  That same contractor also represented on an employment application that he did not have any contractual restrictions, including non-compete covenants.  The other three contractors verbally represented that they were not subject to any non-compete agreements, and their subcontractor employer, when asked, also did not inform Infosys of any non-compete.  In fact, all four contractors had non-competes in their contracts with Acclaim.

Acclaim filed suit against Infosys for tortious interference with these non-competes (i.e., intentional interference with contract).  The District Court granted summary judgment to Infosys.

The Court of Appeals found that to have “intent” to harm a contractual relationship, a party must have knowledge of that relationship. Here, the Court found that Infosys did not have knowledge of the non-competes, so it could not have had the intent necessary to commit tortious interference.  Acclaim argued, based on circumstantial evidence and the industry custom of non-competes in IT services, that the existence of the non-competes could be inferred.  Acclaim also argued that by asking the contractors themselves, Infosys did not ask the correct parties and instead should have asked the subcontracting employers.  Acclaim alleged that Infosys conducted a “sham” due diligence process such that it was willfully blind to the existence of the non-competes.

The Court of Appeals found that by asking multiple times about the non-competes, Infosys could not be held to be “willfully blind,” and further found that Acclaim’s arguments regarding asking questions to the wrong party were an improper attempt to imposed a negligence standard of care on an intentional tort.

This case shows that when onboarding employees, companies should exercise due diligence in ascertaining the existence of a possible non-compete. Steps that can be taken as part of such due diligence include having counsel review any existing contracts to which a potential new hire is subject and having potential hires and contractors sign certifications regarding the existence of non-competes or other contractual restrictions on their ability to perform the duties of their proposed new position.

Insurance coverage is not something which comes to mind when thinking about trade secret misappropriation. In fact, since this blog was started in 2009, I cannot recall a single post about an insurance coverage issue.

That being said, one of the first things prudent defense counsel will do when a client is sued for alleged trade secret misappropriation is to instruct their client to notify their insurance carrier and inquire as to whether there is coverage for some or all of the claims. Sometimes there is; sometimes there isn’t.  However, the prudent course of action is always to play it safe and ask.

In a recent decision issued by Judge Dow in the U.S. District Court for the Northern District of Illinois, Sentinel Insurance Company, LTD v. Yorktown Industries, Inc., the defendant in what seems to have been a garden variety trade secrets misappropriation case  – Yorktown — demanded that its insurance carrier defend and indemnify it under its insurance policies.  The carrier denied coverage and denied having any duty to defend, and then brought a declaratory  judgment action seeking vindication for its position.

In the underlying lawsuit for which coverage and a defense was requested, Yorktown was sued for violation of the Uniform Trade Secrets Act, intentional interference with contractual relations, intentional interference with prospective business advantage, unfair competition, and civil conspiracy (i.e., claims commonly seen in these types of cases).

Yorktown requested indemnification under an insurance policy which provided coverage for claims for, among other things, “personal and advertising injury.” Yorktown’s argument was premised on the fact that it had been accused of stealing another’s “advertising idea.”

Judge Dow made short work of this claim, holding that Yorktown had merely been accused of stealing a customer list and sales information and wrongly using that information, and that this alleged misconduct did not amount to an allegation that Yorktown copied an “advertising idea” or copied trade secrets in an advertisement. Additionally, among other things, Judge Dow noted that the policy contained an express exclusion for claims predicated on the alleged misappropriation of a trade secret.

In these types of disputes, a common instance in which there may be coverage is where a breach of fiduciary duty is alleged, or where there is a claim against a director or officer and a “D & O” policy is implicated. Here, there was no mention of such claims.

While Yorktown came up short before Judge Dow, the prudent course of action in every trade secrets case is to notify the carrier and inquire about coverage.   Because insurance policies (and lawsuits) come in all sizes and shapes, sometimes there is coverage; sometimes there isn’t.

Two recent decisions by the Fifth Circuit Court of Appeals clarify the intersection between federal copyright law and state trade secret shapiro law. In GlobeRanger Corp. v. Software AG United States of America, Inc., 836 F.3d 477 (5th Cir. Sep. 7, 2016), the Fifth Circuit rejected an appeal in which the defendant argued that a plaintiff’s trade secret misappropriation claim was preempted by federal copyright law. Just four months later, in Ultraflo Corp. v. Pelican Tank Parts, Inc., No. 15-20084, 2017 U.S. App. LEXIS 509 (5th Cir. Jan. 11, 2017), the Fifth Circuit upheld a district court’s dismissal of a plaintiff’s state law claim of unfair competition by misappropriation, holding that the state law claim was preempted by federal copyright law.   What accounts for these seemingly inconsistent conclusions over two strikingly similar state law claims? The difference lies in the elements needed to establish each state law claim.

In its September 2016 GlobeRanger decision, the Fifth Circuit heard an appeal after a jury awarded plaintiff GlobeRanger a $15 million jury verdict following a trial in the United States District Court for the Northern District of Texas on its state trade secret misappropriation claim. The central allegation in that case was that competitor Software AG misappropriated GlobeRanger’s radio frequency identification (RFID) technology – most commonly used in electronic readers in tollbooths, like EZ-Pass – after it had taken over Software AG’s subcontract with the U.S. Navy to implement the technology.  Following the verdict, Software AG appealed, contending that federal copyright law preempted GlobeRanger’s state trade secret claim.

The Fifth Circuit explained in GlobeRanger that the different spheres of intellectual property can sometimes overlap and, as the software code at issue illustrates, the same intellectual property can be protectable under copyright laws or subject to trade secret protection.  If the creator of the IP seeks copyright protection, it obtains the exclusive right to make copies of the work for decades but must publicly register the work before enforcing that right through a lawsuit.  The supremacy of federal copyright law means, however, that state protection of copyrightable subject matter must sometimes defer to its federal counterpart.  As the Fifth Circuit explained, two conditions must be met in order for the Copyright Act to preempt a state law claim. First, “the work in which the right is asserted must come within the subject matter of copyright.” Second, “the right that the author seeks to protect . . . [is] equivalent to any of the exclusive rights within the general scope of copyright.”  This inquiry asks whether the state law is protecting the same rights that the Copyright Act seeks to vindicate or against other types of interference. “If state law offers the same protection, then the state law claim is preempted and must be dismissed.”

Applying this articulated two-part test to the facts in GlobeRanger, the Fifth Circuit found that the first condition was satisfied (because Software AG conceded its software code was copyrightable) but the second condition was not.  This is because while federal copyright law and Texas trade secret misappropriation both involve copying, trade secret misappropriation involves an extra element:  the state law prevents any improper acquisition through a breach of a confidential relationship or improper means.  Accordingly, the Fifth Circuit ruled that GlobeRanger’s trade secret claim was not preempted because it was required to establish an “extra element” in order to establish a copyright violation:  that its “protected information was taken via improper means or breach of a confidential relationship.”  Significantly, the Fifth Circuit noted, ten other circuit courts that have considered this issue agreed that trade secret misappropriation claims are not preempted by the Copyright Act for this same reason.

Revisiting the issue of preemption just four months later in Ultraflo, the Fifth Circuit reached the opposite result when faced with a different state law cause of action.  In this case, Ultraflo asserted an unfair competition by misappropriation claim under Texas law alleging that competitor Pelican stole its drawings showing how to design butterfly valves used in the transportation industry and then used them to make duplicate valves.  The United States District Court for the Southern District of Texas dismissed Ultraflo’s Texas state law claim, finding that the general scope of federal copyright law preempts the claim.  Ultraflo appealed, challenging the ruling.  As it did in GlobeRanger, the Fifth Circuit utilized the two-part test to determine whether the Copyright Act preempted the state law cause of action. First, it found that Ultraflo’s design drawings were “undoubtedly” within the scope of federal copyright, as were the valve designs themselves even though they were not actually protectable under the Copyright Act. Second, unlike in GlobeRanger, the Fifth Circuit found that the second condition was met because Texas’s unfair competition by misappropriation cause of action does not afford protection materially different from federal copyright law.  The elements of Texas’s unfair competition by misappropriation claim are: (1) the creation by a plaintiff of a product through extensive time, labor, skill, and money; (2) the use of that product by defendant in competition with plaintiff; and (3) commercial damage to the plaintiff. In other words, unlike the traditional trade secret misappropriation claim asserted in GlobeRanger, the unfair competition by misappropriation claim asserted in Ultraflo lacks the “extra element” necessary to bring it out of the general scope of copyright.  Therefore, the claim was preempted.

These two Fifth Circuit decisions demonstrate that parties should pay attention to the possible application of copyright preemption to claims involving alleged theft of information or unfair competition. While most such claims will not be preempted, Ultraflo illustrates that some will be.

The year-end episode of Employment Law This Week  looks back at the biggest employment, workforce, and management issues in 2016.

Our colleague Jonathan Shapiro discusses the impact of the Defend Trade Secrets Act (DTSA)—which opened federal courts to trade secrets claims, regardless of the dollar value—and the White House’s call to action encouraging states to ban non-compete agreements in some circumstances.

Watch the segment below and read Epstein Becker Green’s recent Take 5 newsletter, “Top Five Employment, Labor & Workforce Management Issues of 2016.”