Opinion ID: 597418
Heading Depth: 3
Heading Rank: 2

Heading: Preemption in this Case

Text: The district court stated that: 161 Were CA's [trade secret] allegations premised on a theory of illegal acquisition of a trade secret, a charge that might have been alleged against Arney, who is not a defendant in this case, the preemption analysis might be different, for there seems to be no corresponding right guaranteed to copyright owners by § 106 of the copyright act. 162 Computer Assocs., 775 F.Supp. at 565. However, the court concluded that CA's trade secret claims were not grounded in a theory that Altai violated a duty of confidentiality to CA. Rather, Judge Pratt stated that CA proceeded against Altai solely on a theory that the misappropriation took place by Altai's use of ADAPTER--the same theory as the copyright infringement count. Id. The district court reasoned that the right to be free from trade secret misappropriation through 'use', and the right to exclusive reproduction and distribution of a copyrighted work are not distinguishable. Id. Because he concluded that there was no qualitative difference between the elements of CA's state law trade secret claims and a claim for federal copyright infringement, Judge Pratt ruled that CA's trade secret claims were preempted by section 301. 163 We agree with CA that the district court failed to address fully the factual and theoretical bases of CA's trade secret claims. The district court relied upon the fact that Arney--not Altai--allegedly breached a duty to CA of confidentiality by stealing secrets from CA and incorporating those secrets into OSCAR 3.4. However, under a wrongful acquisition theory based on Restatement (First) of Torts § 757 (1939), Williams and Altai may be liable for violating CA's right of confidentiality. Section 757 states in relevant part: 164 One who discloses or uses another's trade secret, without a privilege to do so, is liable to another if.... (c) he learned the secret from a third person with notice of the fact that it was a secret and that the third person discovered it by improper means or that the third person's disclosure of it was otherwise a breach of his duty to the other.... 165 Actual notice is not required for such a third party acquisition claim; constructive notice is sufficient. A defendant is on constructive notice when, from the information which he has, a reasonable man would infer [a breach of confidence], or if, under the circumstances, a reasonable man would be put on inquiry and an inquiry pursued with reasonable intelligence and diligence would disclose the [breach]. Id., comment 1; Metallurgical Indus., Inc. v. Fourtek, Inc., 790 F.2d 1195, 1204 (5th Cir.1986); Vantage Point, Inc. v. Parker Bros., Inc., 529 F.Supp. 1204, 1210 n. 2 (E.D.N.Y.1981), aff'd, 697 F.2d 301 (2d Cir.1982); see also Rohm and Haas Co. v. Adco Chem. Co., 689 F.2d 424, 431 (3rd Cir.1982) (Defendants never asked where the 'Harvey process' had come from. Defendants therefore were charged 'with whatever knowledge such inquiry would have led to.' ) (citation omitted); Colgate-Palmolive Co. v. Carter Prods., Inc., 230 F.2d 855, 864 (4th Cir.) (per curiam) (defendant  'must have known by the exercise of fair business principles'  that its employee's work was covered by an agreement not to disclose) (citation omitted), cert. denied, 352 U.S. 843, 77 S.Ct. 43, 1 L.Ed.2d 59 (1956); 1 Milgrim § 5.04[c]. 166 We agree with the district court that New Jersey's governing governmental interest choice of law analysis directs the application of Texas law to CA's trade secret misappropriation claim. See Computer Assocs., 775 F.Supp. at 566. Texas law recognizes trade secret misappropriation claims grounded in the reasoning of Restatement section 757(c), see, e.g., Fourtek, 790 F.2d at 1204, and the facts alleged by CA may well support such a claim. 167 It is undisputed that, when Arney stole the ADAPTER code and incorporated it into his design of OSCAR 3.4, he breached his confidentiality agreement with CA. The district court noted that while such action might constitute a valid claim against Arney, CA is the named defendant in this lawsuit. Additionally, the district court found, as a matter of fact, that [n]o one at Altai, other than Arney, knew that Arney had the ADAPTER code.... Computer Assocs., 775 F.Supp. at 554. However, the district court did not consider fully Altai's potential liability for improper trade secret acquisition. It did not consider the question of Altai's trade secret liability in connection with OSCAR 3.4 under a constructive notice theory, or Altai's potential liability under an actual notice theory in connection with OSCAR 3.5. 168 The district court found that, prior to CA's bringing suit, Altai was not on actual notice of Arney's theft of trade secrets, and incorporation of those secrets into OSCAR 3.4. However, by virtue of Williams' close relationship with Arney, Williams' general familiarity with CA's programs (having once been employed by CA himself), and the fact that Arney used the ADAPTER program in an office at Altai adjacent to Williams during a period in which he had frequent contact with Williams regarding the OSCAR/VSE project, Williams (and through him Altai) may well have been on constructive notice of Arney's breach of his duty of confidentiality toward CA. The district court did not address whether Altai was on constructive notice, thereby placing it under a duty of inquiry; rather the court's finding that only Arney affirmatively knew of the theft of CA's trade secrets and incorporation of those secrets into OSCAR 3.4 simply disposed of the issue of actual notice in connection with the creation of OSCAR 3.4. CA's claim of liability based on constructive notice, never considered in the district court's opinion, must be determined on remand. 169 With respect to actual notice, it is undisputed that CA's first complaint, filed in August 1988, informed Altai of Arney's trade secret violations in connection with the creation of OSCAR 3.4. The first complaint alleged that Arney assisted in the development of ADAPTER, thereby obtaining knowledge of CA's related trade secrets. It also alleged that Altai misappropriated CA's trade secrets by incorporating them into ZEKE. 170 In response to CA's complaint, Altai rewrote OSCAR 3.4, creating OSCAR 3.5. While we agree with the district court that OSCAR 3.5 did not contain any expression protected by copyright, it may nevertheless still have embodied many of CA's trade secrets that Arney brought with him to Altai. Since Altai's rewrite was conducted with full knowledge of Arney's prior misappropriation, in breach of his duty of confidentiality, it follows that OSCAR 3.5 was created with actual knowledge of trade secret violations. Thus, with regard to OSCAR 3.5, CA has a viable trade secret claim against Altai that must be considered by the district court on remand. This claim is grounded in Altai's alleged use of CA's trade secrets in the creation of OSCAR 3.5, while on actual notice of Arney's theft of trade secrets and incorporation of those secrets into OSCAR 3.4. The district court correctly stated that a state law claim based solely upon Altai's use, by copying, of ADAPTER's non-literal elements could not satisfy the governing extra element test, and would be preempted by section 301. However, where the use of copyrighted expression is simultaneously the violation of a duty of confidentiality established by state law, that extra element renders the state right qualitatively distinct from the federal right, thereby foreclosing preemption under section 301. 171 We are also convinced that CA adequately pled a wrongful acquisition claim before Judge Mishler and Judge Pratt. In ruling that CA failed to properly plead a non-preempted claim, Judge Pratt relied heavily upon two allegations in CA's amended complaint. Id. at 563-64. They read as follows: 172 p 57. By reason of the facts stated in paragraph 39 and by copying from CA-SCHEDULER into ZEKE, ZACK and ZEBB the various elements stated in paragraphs 39-51, 54 and 55, defendant Altai has infringed [CA's] copyright in CA-SCHEDULER. 173