Trade Secrets and Removal Based on Copyright Preemption

Jurisdiction and removal may not sound like hot topics, but these considerations are critical and sometimes dispositive. Real talk: Certain state court systems are terrible places to litigate. It’s one thing to litigate a complex commercial case in Delaware state court, which is the highest ranked state court system by numerous metrics (here).   Litigate that same case in Miami-Dade Circuit Court and see how it turns out. Let me be clear: Every state court system has its share of good judges. But there are certain state court systems throughout the country where you do not want to litigate complex commercial cases.

Take a complex trade secret case. Trade secret claims arise under state law. If you are the plaintiff and your claim is frivolous, then yes, you probably want to stay in state court. But if (1) you have a legitimate claim or defense (2) you want to fight it out on the merits and (3) you want a reasonable, predictable process, then in many jurisdictions, you would prefer to be in federal court. Unfortunately, there are only a handful of ways to get a trade secret case into federal court.

If there’s diversity, then you file in federal court or remove to federal court. But if there’s not diversity, it gets tough: Sometimes, a plaintiff can come up with a federal claim to secure federal jurisdiction, then bring the trade secret claim as a pendant state law claim. This is a viable strategy if the facts actually support a federal cause of action. But often, plaintiffs attempt this approach where there is no viable federal claim.   Enter the Computer Fraud and Abuse Act (“CFAA”). Many trade secret plaintiffs (or more accurately, their lawyers) linger under the impression that there is a viable CFAA claim in any case where somebody used a computer to steal information. Let me save you some trouble: This is false. The CFAA provides a cause of action in a very limited range of circumstances. If an employee had authorized access to computer systems and used that authorized access to steal files, then you have a UTSA claim, not a CFAA claim. Bottom line: If you use a bogus CFAA claim as your way of getting a trade secret case into federal court, you’re in for a rude awakening. Over the past few years, I have seen dozens of courts dismiss the CFAA claim then decline to exercise supplemental jurisdiction over the remaining trade secret claim and remand the case to state court.

So you have diversity or using another federal cause of action to get pendant jurisdiction. But there is one final path into federal court, albeit an very limited one: Removal based on complete preemption. Complete preemption exists where a federal statute wholly displaces the state law cause of action. This happens where a claim – even if plead under state law – is actually subject to federal law. In such instances, the case can be removed to federal court. But this is a principle of limited utility. The Supreme Court has only recognized complete preemption in three areas: certain provisions of the National Bank Act (“NBA”), the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Labor Management Relations Act (“LMRA”).

Although not yet addressed by the Supreme Court, at least four appellate courts have found that the Copyright Act completely preempts various state law causes of action—- including certain misappropriation of trade secret claims. The latest appellate decision on this point comes out of the Fifth Circuit. Let’s take a closer look:

Spear Marketing created a software product for the banking industry called VaultWorks. VaultWorks essentially helps banks manage their cash inventories across all of their branches. None of Spear’s customers actually have access to the software itself. Instead, customers log into an online portal where they can view user interface screens, enter data and review reports. Bancorpsouth Bank (“BCS”) began using VaultWorks in 2002 and grew to become one of Spear’s largest customers. In addition to using software by Spear, BCS also used certain banking software created by another company named ARGO. ARGO is much larger than BCS and sells a variety of banking software products.

Around 2004, ARGO began to develop its own cash management system. This system would be installed on bank computers, integrated with bank operating systems and eliminate the need for bank personnel to manually enter data. In that respect, ARGO envisioned this product as being superior to VaultWorks. In 2008, ARGO began pitching its cash management system to BCS, which initially expressed no interest. But in March 2010, BCS informed ARGO that it would be interested in the new cash management system if certain integrations were possible.

At around this same time, Spear contacted ARGO to see if ARGO was interested in acquiring Spear. ARGO expressed interest and indicated that it did not have a cash management product like VaultWorks and was not then developing such a product. Spear arranged a demonstration of VaultWorks for ARGO, which it conducted online and over the phone. The demonstration lasted roughly one hour. During the demonstration, Spear apparently shared various confidential and technical information about VaultWorks with ARGO. After the demonstration, the parties exchanged a few more communications about a potential deal, but eventually ARGO lost interest.

In early January 2011, BCS agreed to license ARGO’s cash management system.   Switching over to ARGO’s system required a lengthy implementation process. During this process, BCS sent ARGO various screenshots of the VaultWorks user interface because ARGO needed historical cash usage data that was readily available from those screenshots. The new ARGO system was fully implemented at BCS in late 2011. On January 12, 2012, BCS notified Spear that it would not renew its VaultWorks agreement, which would expire in February 2012.

In September 2012, Spear sued BCS and ARGO in Texas state court alleging numerous claims including theft of trade secrets, conversion, fraud and unfair competition. The crux of Spear’s complaint was that the Defendants had conspired to steal trade secrets related to VaultWorks. The Defendants then removed the case to federal court on the basis that Spear’s claims were completely preempted by the Copyright Act. Spear – of course – moved to remand. The Southern District of Texas denied remand and, eventually, granted summary judgment in favor of the Defendants on all counts. The Fifth Circuit affirmed the District Court’s decisions on appeal. Here is the removal analysis:

Spear claimed that the Defendants stole VaultWorks. First, to the extent Spear’s claim implicated copying of the actual software, that falls under copyright.   Second, Spear claimed ARGO had copied “the selection of categories of input data used by VaultWorks … [and] selection of categories of output data to be generated by VaultWorks.” Although categories of input and output data may be ideas, they are fixed in the VaultWorks user interface. Recall that one of Spear’s key allegations was that ARGO stole its trade secrets during the online demonstration in which it received various screenshots. The contention that ARGO stole trade secrets by copying an interface contained in those screenshots brings at least some of the claims squarely within copyright. As such, at least some of the claims were preempted, creating a sufficient basis for federal jurisdiction.

The Takeaways:

• Jurisdiction Matters: Spear filed in state court and fought like mad to get back down to state court. Its efforts failed. And ultimately, after litigating the case in federal court, the Defendants won at summary judgment. Had the case been litigated in state court, the outcome might have been different (at least at the trial court level).

• Consider Preemption: If you defending a trade secret case and all other paths into federal court are blocked, at least consider preemption. I have seen plenty of trade secret cases where the plaintiff alleged that the defendant stole a product design (among other things). Theft of a design or layout implicates copyright.

• Good Lawyers:  Good commercial lawyers counsel clients out of bringing bad cases that have virtually no likelihood of success and will result in wasted time and money.  Look, I understand that some clients are hellbent on suing no matter what.  I’ve had potential clients who were hellbent on suing and turned them away because I felt their claim was frivolous and didn’t want to be a part of it.  But I think these sorts of clients are the exception, rather than the rule. Most commercial clients do not want to file a theft of trade secrets lawsuit and get involved in protracted litigation unless they believe they have a reasonable chance of success.  And that’s where good lawyers come in.  Good lawyers convince clients not to file cases that are dogs.

The case is Spear Marketing v. Bancorpsouth Bank, 2015 WL 3972246 (5th Cir. 2015).

Jonathan Pollard is a trial lawyer and business litigation attorney based on Fort Lauderdale, Florida. He focuses his practice on competition law and has extensive experience litigating non-compete, trade secret and antitrust claims. He is licensed in all Florida federal and state courts and routinely represents clients in Miami, Fort Lauderdale, West Palm Beach, Fort Myers, Tampa, Orlando and Jacksonville. His office can be reached at 954-332-2380.