Fifth Circuit Joins Majority on Scope of Copyright Preemption

In Spear Marketing, Inc. v. BancorpSouth Bank et al., __ F.3d __, 2015 WL 3972246 (5th Cir. June 30, 2015), the United States Court of Appeals for the Fifth Circuit joined the majority of its sister circuits in finding that copying or theft of an idea or non-copyrightable work fixed in a tangible medium is preempted by federal copyright law. The issue was one of first impression for the Fifth Circuit.

Spear Marketing, Inc. (“SMI”) licensed its cash management software VaultWorks to BancorpSouth Bank (“BancorpSouth”) from 2002-2012. When BancorpSouth did not renew its agreement with SMI and instead licensed a new cash management software developed by ARGO Data Resource Corporation (“ARGO”) (its teller software provider of 20 years), SMI claimed the ARGO product was created by taking SMI’s trade secrets. SMI originally filed its case in Texas state court, alleging misappropriation of trade secrets, fraud and breach of contract, among other derivative causes of action. The case was successfully removed to federal court on the basis of copyright preemption because SMI’s claims centered on an alleged copying of software. The district court granted full summary judgment in Defendants’ favor in June 2014, holding that SMI had no proof of any alleged use of its purported trade secrets. SMI appealed challenging federal jurisdiction. The Fifth Circuit affirmed. 

The Court first held that SMI’s original petition was the appropriate pleading to evaluate for jurisdictional purposes under the time of filing rule, rejecting SMI’s argument that the rule only applied in diversity cases and not those involving federal question.

Then, in a case of first impression for the Court, the Fifth Circuit determined that copying or theft of an idea fixed in a tangible medium falls within the subject matter preempted by federal copyright law. A two-part test is used to determine if a state law claim is preempted by the Copyright Act: (1) whether the claim falls within the subject matter of copyright law, and (2) whether the rights protected by the asserted claim are equivalent to the exclusive rights of federal copyright. As to the first prong, the Court had previously held in GlobeRanger Corp. v. Software AG, 691 F.3d 702 (5th Cir. 2012) that the exclusivity of federal copyright law, 17 U.S.C. § 301(a), completely preempts the substantive field but had not answered the question of whether § 301(a) preemption extends to all works fixed in tangible mediums, including those excluded from copyright protection such as ideas. BancorpSouth and ARGO argued that the preemption analysis should focus not on the copyrightability of the expression itself but on the type of work – here, software. The Fifth Circuit agreed and affirmatively held “state law claims based on ideas fixed in tangible media are preempted by § 301(a).” In reaching its conclusion, the Court joined five sister circuit courts (the Second, Fourth, Sixth, Seventh and Ninth) on the issue. The Eleventh Circuit Court of Appeals remains in disagreement, finding ideas categorically excluded from copyright protection even if expressed in a tangible medium. 

The Court next evaluated the equivalency part of the preemption test for SMI’s conversion and theft of trade secret claims. Agreeing with the lower court, the Fifth Circuit found that the copying, communicating, and transmitting allegations in SMI’s petition were equivalent to the reproduction and distribution rights of copyright law.

Having resolved the scope of copyright preemption, the Fifth Circuit then analyzed two of SMI’s state law claims and found them completely preempted by the Copyright Act. With federal jurisdiction established, the Court agreed with the lower court that SMI “failed to point to any evidence suggesting that ARGO or BCS used its purported trade secrets” and affirmed judgment in favor of BancorpSouth and ARGO.

BancorpSouth Bank is represented in the matter by Tonya Gray of Andrews Kurth LLP.