FALL 2003

Trade Secrets

Course No. 9200-704-080
W 6:30 - 9:30 p.m.
Room W-214
Professor Jay Dratler, Jr.
Room 231D (IP Alcove)
(330) 972-7972
dratler@uakron.edu, dratler@neo.rr.com
Copyright © 2000, 2002, 2003  Jay Dratler, Jr.   For permission, see CMI.

Questions and Notes on Copyright Pre-emption

1.  All modes of pre-empting state law ultimately derive from the Supremacy Clause of the United States Constitution. It reads as follows:

    "This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding."

The specific form of pre-emption, however, depends upon whether the federal law: (1) explicitly excludes state law; (2) impliedly excludes state law because of an irreconcilable conflict, or (3) impliedly excludes state law because the federal law is so comprehensive as to "occupy the field" and leave no room for state action.

The patent pre-emption cases we have studied, such as Kewanee and Aronson, addressed the question whether there is an irreconcilable conflict between patent law and state law—trade-secret law in Kewanee and trade-secret-related contract law in Aronson.  The two current cases address a similar but different question: whether copyright law, by virtue of its explicit pre-emption provision in Section 301, explicitly precludes trade-secret protection either in general or under specific circumstances.

2.  In theory, so-called explicit pre-emption, under a provision like Section 301, is "easier" and more certain than "implied" pre-emption of the "conflict" or "occupy the field" variety.  But is that so in practice?  Is it so in these cases?  Do the general requirements set forth in Section 301 clearly and unambiguously reveal whether, for example, copyright law pre-empts such state-law claims as breach of contract, fraud, conversion, unfair competition, common-law misappropriation, violation of rights of publicity, or breach of fiduciary duty?  See generally, Jay Dratler, Jr., Intellectual Property Law: Commercial, Creative, and Industrial Property § 1.08[3] (Law Journal Press, 1991).

The Supreme Court's decision in Goldstein v. California dealt with pre-emption under the Copyright Act of 1909, which had no explicit pre-emption provision like Section 301 of the Copyright Act of 1976.  Accordingly, that case involved implied or so-called "constitutional" pre-emption.  Now that Section 301 has expressed Congress' views on pre-emption with respect to copyright, is such "constitutional" pre-emption precluded?  That is, if a claim under state law is not pre-empted under Section 301, is it immune from pre-emption entirely?  Or will it still fail if it creates an irreconcilable conflict with copyright law, even though the language of Section 301 do not cover it?

3.  Section 301(a) prescribes three elements for pre-emption of a claim under state law.  First, the state-law claim must assert rights within "the general scope of copyright as specified by section 106" in matter that "come[s] within the subject matter of copyright as specified by sections 102 and 103[.]"  This is the "subject matter" requirement.  Second, the subject matter must be "fixed in a tangible medium of expression[.]"  This is the "fixation" requirement.  Finally, the rights asserted under state law must be "equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106[.]"  This is the "equivalent rights" requirement.  Only if all three requirements—subject matter, fixation, and equivalent rights—are satisfied is there pre-emption.  See Baltimore Orioles, Inc. v. Major League Baseball Players Ass'n, 805 F.2d 663, 674, 231 U.S.P.Q. (BNA) 673 (7th Cir. 1986), cert. denied 480 U.S. 941 (1987) (stating same conditions, but treating first and second together).

4.  Section 102(b) of the Copyright Act of 1976 codifies an important principle of copyright law, namely, that copyright does not protect ideas or facts in the abstract, but only the particular way in which they are expressed.  This feature of copyright law is known as the "idea-expression" dichotomy.  See Baker v. Selden, 101 U.S. 99, 103, 25 L.Ed. 841 (1880) (seminal case); Dratler, supra, at § 5.01[2].

The Warrington court suggested that this principle precludes pre-empting trade-secret misappropriation claims generality because most trade secrets are abstract ideas that copyright does not protect.  Is this reasoning satisfying?  Or is it possible that Congress, in codifying the idea-expression dichotomy, meant to preclude protection for abstract ideas, at least under any theory of law that resembles copyright?

The House Report on the bill that eventually became the Copyright Act of 1976 contains the following language:

    "As long as a work fits within one of the general subject matter categories of sections 102 and 103, the bill prevents the States from protecting it even if it fails to achieve Federal statutory copyright because it is too minimal or lacking in originality to qualify, or because it has fallen into the public domain."

H.R. Rep. No. 1476, 94th Bong., 2d Hess. 131 (Sept. 3, 1976), reprinted in 1976 U.S. Code Bong.& Admin. News 5659, 5747.  This except does not address the idea/expression dichotomy directly, but which view of the subject-matter requirement does it support?  Does it suggest that uncopyrightable facts and ideas are or are not within the "general scope of copyright" for purposes of pre-emption analysis?

5.  Some other courts have found the Warrington court's approach too glib.  They do not separate subject matter into copyrighted and uncopyrightable elements, but ask whether the subject matter as a whole, copyrighted or not, falls within the "general scope of copyright," i.e., within the class of matter for which copyright law provides or withholds protection.  See NBA v. Motorola, Inc., 105 F.3d 841, 849, 41 U.S.P.Q.2d (BNA) 1585 (2d Cir. 1997) (addressing pre-emption of misappropriation claim based on unauthorized real-time transmission of basketball scores):

    "Adoption of a partial preemption doctrine—preemption of claims based on misappropriation of broadcasts but no preemption of claims based on misappropriation of underlying facts—would expand significantly the reach of state law claims and render the preemption intended by Congress unworkable.  It is often difficult or impossible to separate the fixed copyrightable work from the underlying uncopyrightable events or facts. Moreover, Congress, in extending copyright protection only to the broadcasts and not to the underlying events, intended that the latter be in
    the public domain.  Partial preemption turns that intent on its head by allowing state law to vest exclusive rights in material that Congress intended to be in the public domain and to make unlawful conduct that Congress intended to allow."

Which approach—the Warrington court's or the Second Circuit's—is more faithful to the probable intent of Congress in providing explicitly for copyright pre-emption?  Which approach is easier to apply?

6.  The Warrington court also cited the House Report's mentioning "trade secrets" as conclusive on the issue of legislative intent.  But is it?  The actual process by which the remarks on Section 301 came to be in the House Report was confusing and self-contradictory.  In a leading pre-emption decision, the Fifth Circuit described that process as follows:

    "From the time it was first proposed in 1963 as part of a general revision of copyright law until it reached the floor of the House of Representatives in 1976, the language that became § 301 contained a list of causes of action that were not 'equivalent' a copyright.  That list originally consisted of breaches of trust, invasion of privacy, and deceptive trade practices including passing off and false representations, but later came to include such actions as misappropriation, breaches of contract, trespass, conversion, and defamation.  Nevertheless, in response to objections by the Department of Justice, see Copyright L. Rep. (CCH) ¶ 7305 (setting forth complete text of letters), this provision was deleted in a last-minute amendment on the House floor.  Because the House's debate concerning the effect of the amendment is ambiguous, if not contradictory, and because the Senate concurred without discussion in the House's version of § 301, almost any interpretation of the concept of equivalent rights can be inferred from the legislative history.  Therefore, in determining whether a particular right is equivalent to a copyright, we place little weight on the deletion of the list of nonequivalent rights.  For an excellent discussion of the legislative history of § 301, see Abrams, Copyright, Misappropriation, and Preemption: Constitutional and Statutory Limits of State Law Protection, 1983 Sup. Ct. Rev. 509, 537-48.

Baltimore Orioles, Inc. v. Major League Baseball Players Ass'n, 805 F.2d 663, 677 n.25, 231 U.S.P.Q. (BNA) 673 (7th Cir. 1986), cert. denied 480 U.S. 941 (1987) (additional citation to treatise omitted).  Because the legislative history is so full of twists and turns, most courts, like the Baltimore Orioles court, prefer applying the statute' three explicit requirements to trying to discern congressional intent from an ambiguous history.

7.  If the subject matter and fixation tests are not decisive, then the "equivalent rights" test must bear the weight of decision.  Most court's today follow Professor Nimmer's "extra element" test for equivalent rights, described by the Second Circuit as follows:

    "When a right defined by state law may be abridged by an act which, in and of itself, would infringe one of the exclusive rights [of a copyright owner under Section 106], the state law in question must be deemed preempted. . . .  Conversely, when a state law violation is predicated upon an act incorporating elements beyond mere reproduction or the like, the rights involved are not equivalent and preemption will not occur."

Harper & Row, Publishers v. Nation Enterprises, 723 F.2d 195, 200, 220 U.S.P.Q. (BNA) 321 (2d Cir. 1983), rev'd on other grounds 471 U.S. 539, 105 S.Ct. 2218, , 85 L.Ed.2d 588 (1985).  As the Altai court notes the "extra element" must be more than just an intent or state-of-mind requirement: it must be an extra substantive element that has independent analytical content, beyond mere violation of one of more of the rights of a copyright holder specified in Section 106.

8.  In each case—Warrington and Altai—was there an "extra element" in the trade secret claim not present in any violation of the exclusive rights listed in Section 106?  If so, can you identify the extra element precisely?  (Be sure to work through your checklists for both trade secrecy and misappropriation.)  Is such an "extra element" likely to exist in virtually every trade-secret action, or will some types of trade-secret actions look more like copyright actions in disguise and therefore be pre-empted?

9.  Why does the Second-Circuit remand the Altai case for further fact finding?  What issues is the trial judge supposed to consider on remand?  If you were the judge and had to rule based upon the facts as you know them, and reasonable inferences from those facts, how would you rule?  Would Computer Associates have a valid claim for misappropriation of trade secrets.

10. The Altai decision illustrates how important trade secrets are in computer-software practice, and why the pre-emption battle was worth fighting.  By the time of this appeal, Altai had, in effect, conceded copyright infringement with respect to its first product, OSCAR 3.4, by declining to appeal the damage award.  But OSCAR 3.4 by then was a dead product.  What Altai needed was another product with which to compete in the job-scheduling software market.

Altai attempted to "sanitize" its second product, OSCAR 3.5, by using a so-called "clean room" technique to design it.  In that technique, programmers untainted by contact with the plaintiff's software worked only from uncopyrightable ideas and functions, i.e., from the "functional specifications" for the software.  In the end, the Second Circuit agreed that the "clean room" technique saved OSCAR 3.5 from copyright infringement.  See Altai, 982 F.2d at 715.  Thus, insofar as copyright law was concerned, Altai was free to compete like crazy, using any and all lore that Arney had taken from Computer Associates and incorporated into OSCAR 3.5.

Unlike copyright claims, however, trade-secret claims don't distinguish between idea and expression.  Suppose Computer Associates can prove, on remand, that Arney took its trade secrets and used them in OSCAR 3.5, in breach of a confidential relationship with Computer Associates.  Under the UTSA, what remedies can Computer Associates have against Altai, and how would they affect Altai's competitive position?

11.  The Altai action was brought in federal court because it involved both copyright and trade-secret claims.  Under the "intellectual property" jurisdiction statute, the federal courts have exclusive jurisdiction over copyright and patent matters.  See 28 U.S.C. § 1338(a).  Therefore state-law claims such as trade secret claims have to "tag along" in federal cases under the rubric of supplemental jurisdiction.  See 28 U.S.C. § 1367.

Suppose Computer Associates believed it would have a better chance to win its trade-secret action in state court, perhaps because it thought a state-court judge might be more sympathetic to its plight.  Could it bring its trade-secret claim alone in state court?  If it did, wouldn't pre-emption analysis still operate just as before?  Is a state-law claim any less pre-empted just because the federal claim that pre-empts it is not brought in the same action?

Now suppose the state-court judge dismissed the trade-secret case, finding it pre-empted by Section 301 of the copyright statute.  Wouldn't that decision then constitute res judicata, because the copyright claim based on the same facts could have (maybe should have) been brought in the same action?  If so, wouldn't Computer Associates, by bringing the trade-secret claim by itself in state court, risk losing the whole ball game?  Can you see now why so many trade-secret actions end up in federal court?

12. Besides pre-emption, the Warrington case raises questions about technical manuals and computer programs.  Copyright is generally the primary means of protecting these materials, but copyright protection creates risks for trade secrets in them.  The risks arise out of the requirement for registering the copyright in order to enjoy full legal protection.  See: 17 U.S.C. § 411(a) (registration is prerequisite to suing for infringement of copyright in United States works); 17 U.S.C. § 412 (registration is prerequisite to remedies of statutory damages and awards of attorneys' fees for any work).

The first risk is legal.  A copyright registrant must indicate, on the application for registration, whether the copyrighted material is "published."  See Copyright Office, Copyright Registration Form TX, Items 1 and 3 and accompanying instructions. That designation affects a number of copyright issues, such as the duration of copyright protection for certain works.  See 17 U.S.C. § 302(c).  Might it also affect protection of trade secrets in the manual?  Would designating material as "published" in an application for copyright registration help or hurt one's chances of proving trade secrecy?  Remember the Data General case, in which 6000 copies of the maintenance manual for the plaintiff's Nova computer had been distributed to customers?  Could Data General have registered the copyright in that manual as an "unpublished" work?  See 17 U.S.C. § 101 (definition of "publication").

The second risk is both legal and practical.  Although copyright registration is a much simpler and cheaper process than patent prosecution, it requires the deposit, with the Library of Congress, of one or two copies of the copyrighted work.  See 17 U.S.C. § 408.  The Copyright Office has ruled that it will register object code (binary executable code) for software only under the "rule of doubt," with a letter stating that it cannot determine the nature of copyrightable authorship in the code.  See 37 C.F.R. §§ 202.20(c)(2)(vii)(B).  Yet doesn't depositing copies of source code risk disclosing all secrets in the code to trained programmers, who can "read" source code?  To solve this problem, the Copyright Office has promulgated special regulations for preserving trade secrets in deposited copies of source code for computer programs.  These regulations allow computer-program registrants to deposit copies of redacted versions of source code, with certain portions containing trade secrets omitted or blocked out.  See 37 C.F.R. §§ 202.20(c)(2)(vii)(A).

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