by Dennis Crouch
A new decision from the 5th Circuit includes an interesting analysis of federal preemption. Namely, the appellate panel found that Texas law of unfair competition by misappropriation improperly extends to offer patent and copyright protections.
The Texas common law tort of “unfair competition by misappropriation” is essentially an anti-free-riding law with three elements:
(i) the creation of plaintiff’s product through extensive time, labor, skill and money,
(ii) the defendant’s use of that product in competition with the plaintiff, thereby gaining a special advantage in that competition (i.e., a “free ride”) because defendant is burdened with little or none of the expense incurred by the plaintiff, and
(iii) commercial damage to the plaintiff.
My colleague Prof. Gary Myers wrote back in 1996 that it was time for the “demise of this outdated cause of action . . . [that arose] before comprehensive copyright, patent, and trademark laws were fully developed.” Despite Myers suggestion, the law has continued in some states, including Texas.
Here, the plaintiff’s claim is that Orthoflex improperly made use of ThermoTek’s manuals and billing information as well as the design of its physical products. However, rather than suing on copyright and patent respectively, ThermoTek sued on state-law misappropriation. The jury awarded more than a million dollars to the plaintiff. However, the district court judge nullified the jury verdict and instead held that the entire claim was preempted by federal IP laws. On appeal, the 5th Circuit has affirmed.
Both Copyright and Patent laws have been interpreted to preempting substantially overlapping state protection regimes. Here, copyright is more straightforward because the Copyright Act of 1978 expressly preempts state copyright-like laws, including common law, and including state provisions that protect works that are otherwise excluded under Section 102(b). Note here, that this is the third time that the court has held that Texas’s unfair-competition-by-misappropriation is improperly equivalent to copyright law. See Ultraflo and Alcatel.
The court notes that inclusion of an “improper means” requirement into the misappropriation law would likely rescue it from preclusion on the copyright side.
On the patent side, the court cited to Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989) statements that state laws that offer “substantially similar” protections are preempted by federal patent law and thus not enforceable.
As with copyright law, the appellate panel here suggested that torts that require “deceit” or “improper means” will be acceptable, but laws that focus simply on protecting the investment in product development and marketing will be preempted.
The latter laws, however, would likely obstruct Congress’s goals by “offer[ing] patent-like protection to intellectual creations which would otherwise remain unprotected as a matter of federal law.” Quoting Bonito Boats.
Here, the court noted that the Texas law is particularly problematic because it offers protection in perpetuity without the safeguards of the patent system. The court also particularly rejected the notion that instructing the jury that “reverse engineering is not actionable” does not save the law. Rather, to avoid preemption a proper jury instruction must expressly include an additional element such as fraud or dishonesty.
I believe that this is the correct decision. My one major caveat begins with the difference between copyright law’s express statutory preemption of state law and the mere implicit preemption offered by the patent laws. Couple that with the major historical difference from Bonito Boats — that this type of misappropriation claim likely predates patent law doctrine whereas Bonito Boats involved a newly developed Florida statute. Seems to me that we need to add an additional analysis to consider the extent that patent law is designed to snuff-out these preexisting common law claims 150 years after the fact.