Winning: Victory on Unfair Competition Allegation in 5th Circuit

Winning: Victory on Unfair Competition Allegation in 5th Circuit

On January 11, 2017, the Fifth Circuit Court of Appeals in New Orleans affirmed the winning trial court judgment obtained by Buche & Associates, P.C. on behalf of its client, defendant Pelican Worldwide, Inc. This was the culmination of nearly ten years of legal battle. The case had been pending since 2007 and was hard fought by all sides.

The appellate court upheld the trial court judgment and specifically held that Federal copyright law preempted the Texas state law claim of unfair competition by misappropriation as plead.

In the complaints, Ultraflo Corp. (“Ultraflo”) alleged that Pelican Worldwide, Inc. (“Pelican”) engaged in unfair competition by misappropriation when a former Ultraflo employee assisted Pelican in the manufacture of a competing valve that was allegedly documented in Ultraflo’s design drawings. The trial court judge threw out the unfair competition allegation as a matter of law, and then Pelican won the jury trial against all allegations of trade secret theft and copyright infringement.

Nevertheless, there was an appeal of the unfair competition claim and the ruling of the trial judge. The defendant argued on appeal that allowing the unfair competition claim to proceed at the trial might have changed the outcome. After trial, the issue on appeal was whether Ultraflo’s Texas state claim for unfair competition by misappropriation was preempted by federal copyright law. “Preemption” is the doctrine that says federal law exclusively controls certain subjects—like patents and copyrights. If a state law intrudes into federal terrain, it can be dismissed as “Preempted” by the federal law. In this case, the trial judge held that Ultraflo’s claims were trumped/preempted by the Copyright laws.

The Copyright act provides that state law claims that fall within the general scope of federal law are preempted. Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772, 785 (5th Cir. 1999). The Fifth Circuit applied a two-part test to determine whether the state claim was preempted: (1) whether the property at issue is within the subject matter of copyright; and, (2) if it is, whether it protects rights in the property that are equivalent to any of the exclusive rights within the general scope of copyright. Id. at 785-786.

There was no disagreement that design drawings were within the scope of copyright protection, but what about using drawings to make a tangible product? This was one of the issues—whether a copyrighted design was misappropriated to create a competing valve. The parties agreed that the tangible valve itself was not protected under copyright law because it was a useful article, but the Fifth Circuit explained that the preemption statute of the Copyright Act “sweeps more broadly.” That is, the statute preempts works that fall within the subject matter of copyright, which is broader than the protections of copyright. Accordingly, state claims based on ideas “fixed in a tangible medium of expression” fall within the subject matter of copyright even though copyright law does not protect the mere ideas. Spear Mktg., Inc., 791 F.3d at 597.

Next, the Fifth Circuit looked at whether the state law protected rights that were equivalent to any of the exclusive rights within the general scope of copyright. Again, the Fifth Circuit explained that the preemption statute “operates on a more general level” and that “[t]he question is not whether state law provides a right identical to federal copyright law, but whether state law provides a right akin to those “within the general scope of copyright[.]” With this broader view, Ultraflo’s state claim for unfair competition by misappropriation was found not to afford protection materially different from federal copyright law because copyright law recognizes that derivative use of copyrighted drawings is protected by copyright law.

Thus, this decision solidified that the Texas state cause of action for unfair competition by misappropriation will often be preempted by copyright, particularly when allegations attack production of objects/drawings derivative of copyrighted materials. Practically speaking, “sweat equity” unfair competition claims may be harder to make, and plaintiffs may wish to focus more energy on actual patents, trade secrets, or breaches of contract rights to protect alleged confidential information claims—rather than on amorphous unfair competition claims that potentially intrude on federal copyright law. If an unfair competition by misappropriation even survives as a viable cause of action, it would require exceptional care in pleading to avoid sounding like a copyright allegation. Moreover, perhaps the decision was right for another reason: namely, that unfair competition laws were not intended to create a quasi-patent right of indefinite duration on physical objects.

Defendant Pelican was represented by Buche & Associates, P.C. Lead counsel, John K. Buche, appeared before the trial court and the Fifth Circuit Court of Appeals to argue the case with the support of Scott Compton, Greg Ryn, and Byron Ma. John Buche is a civil litigator and handles cases that span the country. He can be reached at: jbuche@buchelaw.com

The published opinion can be found here: http://www.ca5.uscourts.gov/opinions/pub/15/15-20084-CV0.pdf.