On June 30, 2015, in Spear Marketing, Inc. v. BancorpSouth Bank, the US Court of Appeals for the Fifth Circuit joined the majority of US Courts of Appeal in holding that state law claims based on ideas fixed in tangible media are preempted by 17 U.S.C. § 301(a), and are the proper subject for removal (No. 14-10753, (5th Cir. June 30, 2015)).

Spear Marketing, Inc. (SMI) produces a computer program for the banking industry called VaultWorks. BancorpSouth Bank (BCS) was one of SMI's largest customers. ARGO Data Resource Corp., like SMI, develops software for the banking industry. In 2010, SMI contacted ARGO to see if ARGO would be interested in acquiring SMI. Though SMI demonstrated its VaultWorks software to ARGO in a presentation, and the parties communicated about it, ARGO declined to acquire SMI.

Meanwhile, ARGO had been trying to get BCS to switch from SMI's software to ARGO's since 2008. In 2011, BCS agreed to switch to ARGO's software, and they began a year-long implementation process that involved BCS sending ARGO screenshots of BCS's historical cash usage data as displayed in SMI's VaultWorks user interface. Once the ARGO system was in place, BCS declined to renew its contract with SMI.

Six months later, SMI sued BCS and ARGO in Texas state court, alleging violation of the Texas Theft Liability Act (TTLA), misappropriation of trade secrets and conversion, among other state law claims, based on its allegations that BCS and ARGO had stolen trade secrets related to VaultWorks. The defendants removed the case to federal court, arguing that SMI's claims were completely preempted by the Copyright Act. Denying SMI's motion to remand, the US District Court for the Northern District of Texas held that it had federal jurisdiction over the case because SMI's conversion and TTLA claims were completely preempted. The district court then granted summary judgment to the defendants on the merits. SMI appealed.

The Fifth Circuit explained that it uses a two-part test to determine whether a state law claim is preempted by the Copyright Act:

Though a claim must satisfy both elements of the test to be preempted, if any claim is preempted, the entire case may be removed to federal court.

Under the first prong, the Fifth Circuit noted that the statutory basis for preemption is 17 U.S.C. § 301(a), which preempts claims that fall within the subject matter of copyright as specified in § 102. Under § 102, copyright protection:

SMI argued that it structured its trade secret claims to include only ideas and other concepts described in § 102(b), which, it argued, excludes those claims from copyright protection. Since they were excluded from copyright protection, they were protected from preemption.

Noting that this was an issue of first impression and the subject of a circuit split, the Fifth Circuit explained that the majority of circuits:

The court explained that Congress intended the Copyright Act to protect some expressions but not others, and Congress made the scope of preemption broader than the scope of protection to ensure the states could not encroach on this delineation.

Endorsing the majority position, the Fifth Circuit held that state law claims based on ideas fixed in tangible media are preempted by § 301(a). Applying this rule, the court concluded that SMI's alleged VaultWorks trade secrets fell within the subject matter of copyright, because VaultWorks is computer software, a tangible medium covered by § 102(a)'s definition of copyright subject matter. Therefore, any specific trade secrets VaultWorks contains fall within the scope of copyright, even if they would not be protected by it under § 102(b).

Under the second prong, the Fifth Circuit examined SMI's causes of action to determine if they protect rights equivalent to any federal copyright exclusive rights. The Fifth Circuit agreed with the district court that SMI's conversion and TTLA claims were equivalent, and therefore preempted. Though the Fifth Circuit recognized that any claims for conversion of physical property would not be preempted by § 301(a), it explained that it has repeatedly held that conversion of intangible property is preempted. It also held that claims under the TTLA are equivalent, despite the additional requirement for mens rea.

Since two of SMI's claims satisfied both elements of the preemption test, the Fifth Circuit held that the district court properly exercised jurisdiction. The Fifth Circuit then affirmed the district court's grant of summary judgment on SMI's misappropriation of trade secrets claims, and dismissed SMI's remaining claims.