Ultraflo Corporation v. Pelican Tank Parts, Inc.

Citations: 845 F.3d 652; 121 U.S.P.Q. 2d (BNA) 1307; 2017 U.S. App. LEXIS 509; 2017 WL 113897Docket: 15-20084

Court: Court of Appeals for the Fifth Circuit; January 10, 2017; Federal Appellate Court

Original Court Document: View Document

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Ultraflo Corporation appeals a decision regarding its claim of unfair competition by misappropriation against Pelican Tank Parts, Inc. and Thomas Joseph Mueller, asserting that the defendants unlawfully used its valve design drawings to create similar products. The case centers on the preemptive effect of the Copyright Act over Ultraflo's Texas state law claims. Previous rulings established that state claims are preempted when the underlying intellectual property falls within copyright subject matter. Ultraflo argues that its valve design, when separated from the drawings, is not protected by copyright, suggesting that its claim should not be preempted. However, the district court ruled that copyright preemption applies equally to state claims regarding unprotected elements. 

Ultraflo's valve design was created with the assistance of Mueller, who later joined Pelican. Following his departure, Pelican produced a valve similar to Ultraflo's design. Ultraflo initially filed suit in state court for conversion, civil conspiracy, and other claims, but Pelican's attempt to remove the case to federal court was unsuccessful due to timing issues. In state court, Pelican succeeded in dismissing the case based on jurisdictional arguments related to copyright law. Meanwhile, Mueller registered the valve drawings with the U.S. Copyright Office and sought federal declaratory relief regarding ownership and copyrightability, later dismissing his case to pursue settlement with Ultraflo.

After settlement efforts failed, Ultraflo filed a federal lawsuit reasserting its state claims and seeking a declaration against Mueller's copyright ownership. The district court, questioning the preemption of Ultraflo's claims, instructed the company to amend its complaint to avoid clearly preempted allegations. The amended complaint reiterated the claims, emphasizing that the misappropriation stemmed from Pelican's use of Ultraflo’s design drawings to manufacture competitive valves, highlighting unauthorized retention of confidential materials as a basis for alleged trade secret misappropriation and unfair competition.

Pelican filed a motion to dismiss Ultraflo's claims on preemption grounds, leading the district court to rule that all but Ultraflo's trade secret claim were preempted by copyright laws. In response, Ultraflo submitted a third amended complaint, eliminating the preempted claims and adding a copyright infringement claim. Pelican then sought to dismiss this new copyright claim, but the district court denied the motion, as Ultraflo alleged that the defendants infringed its intellectual property by creating their own drawings and butterfly valve based on Ultraflo's copyrighted materials.

The court's decision regarding the trade secret claim aligned with a precedent established in GlobeRanger Corp. v. Software AG United States of Am. Inc., which determined that Texas trade secret claims are not preempted. The case proceeded to trial, where the jury rejected both the copyright and trade secret claims. Following the trial, Ultraflo moved under Rule 50(b) for judgment as a matter of law or a new trial, arguing that its unfair competition claim was not preempted. The court, however, found this motion inappropriate for reconsidering the pretrial dismissal of the unfair competition claim, treating it instead as a Rule 59 motion and declined to alter its previous ruling on preemption.

Ultraflo's appeal focuses solely on reversing the pretrial dismissal of its unfair competition claim based on misappropriation and does not contest the jury's rejection of its other claims. Pelican contends that Ultraflo waived its right to challenge the pretrial ruling by failing to raise the issue during the trial. Pelican argues that Ultraflo should have requested a jury charge on the dismissed claims, introduced supporting evidence, and sought judgment on those claims before the jury's deliberation. However, the appellate review of a pretrial dismissal is not contingent upon these actions, as the final judgment rule allows Ultraflo to appeal the dismissal only after the trial concluded.

Ultraflo properly omitted the dismissed claims from its third amended complaint, aligning with judicial efficiency principles. As those claims were no longer part of the active pleadings, Ultraflo could not have taken the actions Pelican suggests during the trial. Nevertheless, Ultraflo retains the right to appeal the pretrial dismissal of claims from earlier pleadings, particularly when such dismissal is with prejudice or on the merits.

Ultraflo's appeal regarding its unfair competition by misappropriation claim is evaluated for preemption under the Copyright Act. The court reviews this matter de novo, referencing Section 301 of the Copyright Act, which preempts state law claims that fall within federal copyright law's scope. The statute asserts that all rights equivalent to exclusive rights under copyright are governed exclusively by federal law, negating any state claims to those rights. 

To determine if a state law claim is preempted, courts assess whether the intellectual property involved is within copyright's subject matter. Ultraflo claims its valve design was misappropriated by Pelican, arguing that this claim does not seek protection for a work under copyright laws, as it is not based on copying the design drawings themselves. Although the valve design is not protected by the Copyright Act—being categorized as a useful article or idea—preemption extends more broadly than mere copyright protection.

The court emphasizes that the scope of preemption includes works within copyright's subject matter, irrespective of their actual protection status. This principle is supported by precedent, indicating that even non-copyrightable ideas fixed in a tangible medium fall under copyright's subject matter and are thus subject to preemption. The argument that state claims could protect fixed ideas contradicts Congress's intent to exclude ideas from federal copyright protection, which also applies to the valve design. The exclusion of useful articles from copyright protection aligns with the established idea-expression dichotomy that informs preemption determinations.

Copyright protection applies solely to the expression of ideas and the artistic elements of a work, excluding mechanical or utilitarian features. Congress's decision to omit protection for the embodiment of ideas in useful articles is given preemptive authority, meaning state law cannot protect such works without undermining federal copyright provisions. While a valve design may fall under copyright, this does not automatically preempt state claims. The key factor is whether the state law protects rights equivalent to those under federal copyright, as assessed by the "extra elements" test, which determines if additional qualitatively different elements are present in the state claim. 

Prior rulings established that Texas's unfair competition by misappropriation claim does not provide materially different protection from federal copyright law, rejecting attempts to satisfy the extra elements test based on factors like sweat equity. The court found that the labor and skill involved in creating a work are inherently recognized under copyright law, and that any reproduction or derivative use by competitors constitutes copyright infringement.

Ultraflo's claim centers on the exclusive right to use copyrightable design drawings for making useful articles. Although the Copyright Act grants exclusive reproduction rights for such drawings, it does not extend this exclusivity to the production of the depicted articles. Nonetheless, the inquiry into preemption is broader; it examines whether state law grants rights similar to those outlined in federal copyright law, particularly the right to make derivative uses. Claims protecting against such derivative uses by others are preempted under Section 301 of the Copyright Act, as established in previous cases where state claims were deemed preempted when they involved unauthorized use of copyrighted material for competitive purposes.

Section 113(b) of the Copyright Act excludes the use of technical drawings for making useful articles from copyright protection, acknowledging that such derivative use may otherwise fall under copyright laws. The inquiry regarding 'equivalent rights' focuses on the types of rights Congress is empowered to confer, emphasizing the balance between copyright incentives and public access to ideas. This is supported by the House Report from 1976, which reiterates the idea-expression dichotomy, stating that ideas in copyrighted works are available to the public unless protected by patent law. Section 113(b) serves to clarify the line between copyright and patent law, as established in Baker v. Selden. Allowing state law protection in areas excluded from copyright would undermine federal policy, leading to the conclusion that the Copyright Act preempted Ultraflo’s unfair competition claim. The district court's judgment is affirmed.