The Fifth Circuit Rules that Federal Law Preempts Unfair Competition Claim Under Texas Law

Originally published by Leiza Dolghih.

The Fifth Circuit Court of Appeals recently considered whether the federal copyright and patent laws (rock!) preempt  Texas common law claim of unfair competition by misappropriation (scissors!). The question reared its head amidst a web of lawsuits involving a medical device company, ThermoTek, and its former distributor, in which the company accused the distributor of obtaining its trade secrets involving a medical device he sold for them and proceeding to use the information to manufacture his own line of competing devices.   

The Fifth Circuit explained that the federal Copyright Act preempts a state law claim where (1) the intellectual property rights at issue are within the subject matter of copyright and (2) the state law protects rights in that property that are equivalent to any of the exclusive rights within the general scope of copyright. Meanwhile, the federal patent statutes preempt a state claim where its aim is to protect “the functional aspects of a product” because such claim would likely obstruct Congress’s goals by offering patent-like protection to intellectual property that its owner chose not to protect with a patent.  

In applying the above tests, the Fifth Circuit Court of Appeals held that the various aspects of the unfair competition by misappropriation claim in ThermoTek’s case against its former distributor were preempted either by the federal copyright or patent laws. 

The Copyright Act preempted the claim to the extent that ThermoTek alleged that the distributor misappropriated its written materials related to the medical device – here, manuals, reports, billing information, and other written documents – because such materials fell within the subject matter of copyright and the unfair competition by misappropriation claim did not qualitatively differ from a copyright claim.  Meanwhile, the federal patent law preempted the unfair competition claim to the extent it sought to protect the medical devices themselves or their functional aspects because the claim substantially interfered with the public’s enjoyment of unpatented aspects of the devices that ThermoTek publicly disclosed. 

BOTTOM LINE:  On a very basic level, the doctrine of preemption allows federal claims to preempt state law claims if they concern the same subject matter. If not analyzed strategically and addressed in the pleadings, this doctrine can wreak havoc on a party’s litigation strategy in a trade secrets lawsuit.  For example, in the ThermoTek lawsuit, the jury found in the company’s favor awarding it $6,000,000.00 in damages on the unfair competition claim. However, after the trial, the court found that the unfair competition claim was preempted by federal law and dismissed it leaving ThermoTek with $0.  In conclusion, trade secrets claims do not exist in a vacuum, but should be analyzed in the context of the existing intellectual property framework along with other types of IP.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

 

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