Preemption: Texas Misappropriations law Improperly Overlaps with US Patent Law

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.

[Orthoflex v. ThermoTek – 5th Circuit Opinion]

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 Gary Myers wrote back in 1996 that it was time for the “demise of this outdated cause of action .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.

16 thoughts on “Preemption: Texas Misappropriations law Improperly Overlaps with US Patent Law

  1. In a case where there are no copyright or patent rights at issue, wouldn’t that by definition exemplify the opposite of overlap?

    e.g. If you have valid copyright or valid patent rights you cannot seek a remedy BUT if you do not have copyright or valid patent rights, your rights fall outside federal protections and thus you can rely on the common law remedy?

    1. If you are suggesting that a state could validly give patent-like competition exclusions to anyone that does not obtain a a patent, that is not what federal “preemption” is about. Especially for legal issues like patents and copyrights that the Constitution expressly gives Federal jurisdiction for, e.g., Bonito Boats. Especially with the addition of clear federal statutory preemption provisions, as in the modern copyright legislation.
      Additionally, see, for example, Lear, 395 U.S. at 656, emphasizing “the strong federal policy favoring free competition in ideas which do not merit patent protection.”

      1. “the strong federal policy favoring free competition in ideas which do not merit patent protection.”

        Their muh policy shouldn’t Trump the state’s rights to make lawls as they see fit imo. The constitution granted congress the power to issue patents and copyright, it didn’t grant it exclusive authority to do so.

        Absurd rulings.

        I think we can all see what the civil war was really about: PATENTS!

        In all for realz though, I don’t think there should have to be another civil war to get the feds to butoutsky of the state’s doing such in this arena.

        1. “the strong federal policy favoring free competition in ideas which do not merit patent protection.

          let’s beat the drum once more: trade secrets are often comprised of things that do not merit patent protection.

          And yet, the “free competition in ideas” expressly does not hold back state laws vis a vis trade secrets.

          Not only that, but we now have an additional layer of trade secret law at the federal level that was purposefully crafted so as to NOT pre-empt State trade secret laws.

          So the, as to “give patent-like competition exclusions” it will very much depend on how “patent-like” the states go. Since I heavily doubt that the items under consideration qualify as “patent-like” (seeing as NO state has any semblance of an examination machine), I think that the position being advanced by Paul just does not hold water.

  2. Based on the offered theory, how in the world does any type of Trade Secret protection also not run afoul? Heck, the AIA even “elevated” trade secrets to be on par with patents (as part of the expanded Prior User Right defense.

    Have any of the other circuits taken the views of the Fifth?

    1. [T]he appellate panel here suggested that torts that require “deceit” or “improper means” will be acceptable…

      “Improper means” is an element of a cause of action for misappropriation of trade secrets (at least in Missouri). National Rejectors Inc. v. Trieman, 409 S.W.2d 1, 19 (Mo. 1966), quoting Restatement of Torts, § 757 (“[A] substantial element of secrecy must exist, so that, except by the use of improper means, there would be difficulty in acquiring the information,” emphasis added).

      I have no idea whether there are other circuits who have taken the same view as CA5, but if the concern is that the CA5 view would swallow up trade-secret law, it seems to me that the panel’s opinion is crafted explicitly not to swallow trade-secret law, by giving a pass to torts that require “deceit” or “improper means.”

    2. Most federal courts apply what is known as the “extra elements” test. There has to be some additional requirement beyond taking the plaintiff’s creative product.

      In the case of trade secrets, this is easily met, because (1) you have to show that the idea, etc. was kept secret, and it derives its value from the fact it is kept secret and (2) the defendant had to use wrongful means to get to the secret.

      So trade secret law has long easily lived with patent and copyright law, neither of which have such requirements. (Now that trade secret misappropriation is a federal cause of action, there is no pre-emption at all. One federal law does not pre-empt another.

      1. Whoops, loaded the picture in the wrong place.

      2. Also, of course, the Constitution gives express Federal authority for patents and copyrights, but not trade secrets.

        1. as well as “but not for unfair competition by misappropriation,” but clearly that did not stop the “logic” from being applied here.

          It is not like an actual patent or an actual copyright is at bottom of the action.

    3. Thanks Greg and BL.

      And while I see what you are saying, the items here (and the logic used to find pre-emption) are being used in a parsed manner as if the “extra elements” do not matter.

      The “free-ride” elements are not the same elements as may be present in (or perhaps better stated, as may be required) for patent and copyright protection.

  3. Idk man, if the states want to offer an additional lawl like that, I’m not sure that copyright lawl should preempt on all of those things that they brought an action for. Copyright doesn’t even cover some of those things. The “billing info” would still seem to be fair game, even if we presume patents would cover the physical designs of the products.

    Also I’m not sure that patents, which are a program to promote the useful arts, should be conflated with an anti-free rider provision simply because patents provide that as a side effect for a limited time.

    If Texas doesn’t want people straight up copying each other’s stuff and competing in this manner then that should be up to Texas.

  4. It seems the court should have at least mentioned International News Service v. Associated Press, 248 U.S. 215, where the Court recognized a federal cause of action for misappropriation despite the existence of copyright law.

    1. Good question – is that still good law?

      1. Answer: no. The Sup. Ct. in Erie v Tompkins subsequently eliminated “federal common law.” Federal courts are supposed to apply state law for legal issues that are not preempted by federal law. Unfortunately a few of the Fed. Cir. judges have had to learn that the hard way on things like state bar association proceedings, contract law, etc.. But as to “hot news” [as in International News Service v. Associated Press] some state courts will protect it.

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