Published On: November 2, 2014Categories: Contracts, Copyright

Texas Breach of Contract and Trade Secrets Law and Copyright Preemption

New NDTX Ruling Clarifies Scope of Copyright Preemption of State Law

On September 9, 2013, the Northern District of Texas released its opinion inVersata Software Inc. et al. v. Infosys Technologies, Ltd., Case No. 10-00792-SS.

Versata had contracted with American Express’s Ameriprise division for the latter to use Versata’s Distribution Management Software (DCM). Ameriprise then hired Infosys to customize the software for use on its own platform. As part of the relationship, Infosys entered into an agreement with Versata that provided, among other things, that Infosys would not decompile the source code (i.e., reverse engineer into the human-readable form) and would not utilize the code or the information it obtained about the functionality of the code.

Infosys breached all of these agreements, and Versata filed suit alleging a series of causes of action that Infosys says are all preempted by copyright.

The district court agreed with Infosys on all claims except for trade secret violation. The district court held that breaches of contract are preempted by copyright law when the promise that was breached was essentially one to not commit a breach of copyright. The same holds true for tortuous interference and unjust enrichment. The court found that claims for trade secret theft and damages under the Texas Theft Liability Act were not preempted. The court’s preemption analysis turned on whether the state causes of action imposed an obligation greater than what was there under the copyright act.

From a strategic standpoint, there is an open question as to why it mattered to Versata. The copyright act provides greater protection–not less protection–than a state contract action. Copyright law allows actual damages or statutory damages, injunctive relief, punitive damages, and attorneys fees. Texas contract law provides attorneys’ fees and actual damages only, but none of the rest. While Texas has a four year statute of limitations for contracts versus the three year statute of limitations under copyright law, that doesn’t appear to have been an issue here either. It’s a head scratcher to us.