District Court Dismisses State Law Unfair Competition Claim as Preempted by Federal Copyright and Patent Law
The Northern District of Texas recently held that federal copyright and patent laws preempted a state law unfair competition claim involving rival medical device companies. The decision reflects that a preemption analysis does not consider whether the facts support actual protection by copyright or patent law. Rather, the copyright preemption analysis looks to, among other things, whether the works “fall within the subject matter of copyright.” The patent preemption analysis looks to whether the state law is used to protect “functional aspects” of a product. Referencing Supreme Court jurisprudence, the decision reminds that “state regulation of intellectual property must yield where it clashes with the balance struck by Congress.”
A copy of the court decision is available here. The decision is currently on appeal at the Fifth Circuit.
The plaintiff, ThermoTek, designed and developed the VascuTherm System, a device designed to deliver thermal compression therapy using specially-designed wraps. Beginning in 2008, ThermoTek entered into an agreement with defendants whereby defendants purchased and distributed the product. As distributors, defendants had access to information such as billing codes, product manuals, product design, and manufacturing processes for the product. ThermoTek terminated the agreement in 2010, after which defendants began selling their own competing system and wrap.
ThermoTek brought a state law unfair competition claim, alleging that defendants misappropriated information related to the VascuTherm System. After removal to federal court, the claim was tried before a jury which returned a verdict in favor of ThermoTek. The defendants then moved for post-trial judgment as a matter of law on grounds that the unfair competition claim was preempted by federal copyright and patent laws.
The ThermoTek v. Orthoflex Decision
The court first addressed whether the information allegedly appropriated by defendants—drawings, a user manual, wrap insert, safety reports, billing info and codes, Material Safety Data Sheet, FDA 510k documents, and pricing information (all apparently reduced to writing or embodied in writings)—fell within the scope of copyright protection. ThermoTek argued that the defendants failed to prove that such information constituted “original works of authorship,” a finding necessary to bring them within the scope of copyright law. ThermoTek also argued that the state law right was not equivalent to copyright because an unfair competition claim requires an “extra element” not required for copyright claims.
The court disagreed on both accounts. The court reasoned that under the copyright preemption analysis, it is to determine “whether the works at issue fall within the subject matter of copyright.” The court further noted that “even if works are not actually protected by copyright, if they are the types of works contemplated by copyright, state law cannot extend those works additional protection.” The court found that the information fell within the subject matter of copyright because they were “original works of authorship fixed in a tangible medium of expression.” The court rejected ThermoTek’s argument that the works were not proved to be original, as ThermoTek itself had argued that substantial time, skill, labor, and money had been invested in the works.
As to the second argument, the court found that ThermoTek failed to identify any extra element to distinguish its claim for unfair competition based on misappropriation from a copyright infringement claim. In doing so, the court relied on the Fifth Circuit’s decision in Alcatel USA, Inc. v. DGI Techs. In Alcatel, the appellate court reasoned that although an unfair competition claim requires proof that the product was created through “extensive time, labor, skill and money,” the “time, labor, skill and money expended by the author in creating the work are necessarily contemplated in that copyright.” In other words, as the ThermoTek court explained, the “sweat equity” elements of misappropriation are “subsumed within a claim for copyright infringement.” The court also rejected ThermoTek’s argument that an unfair competition claim requires proof that defendants “improperly obtained” the information. The court noted in dicta that ThermoTek’s arguments sounded more like a claim of trade secret misappropriation, which requires the extra element of a breach of a confidential relationship and is thus not preempted by copyright law.
The court then addressed whether the allegedly misappropriated technical information about the VascuTherm system and wraps was governed by patent law. ThermoTek had sought patent protection for its products but it was unclear whether defendants had established that the products were covered by any issued patents. According to ThermoTek, its unfair competition claim served a different purpose from a patent infringement claim and the state law claim did not impede the public use of an otherwise unprotected design.
The court rejected this argument, finding more generally that patent law preempts state law to the extent state law is used to protect “functional aspects” of a product. The court found support in the 1989 Supreme Court decision in Bonito Boats, Inc. v. Thunder Craft Boats, Inc., which explained that state law is preempted where it offers “patent-like protection” to ideas otherwise unprotected under patent law. Because ThermoTek did not argue any non-functional aspects of the products were misappropriated, the court found the claim preempted in regards to the allegedly misappropriated technical information.
After finding the entire unfair competition claim to be preempted, the court then decided to dismiss the claim. ThermoTek had argued that the claim could be converted into the corresponding federal claims and then adjudicated on those grounds. The court, however, found that ThermoTek had ample opportunity (two years) to seek leave to plead the federal claims but failed to do so. The Court also reviewed the jury’s damage awards in its decision.