When copyrights aren’t a federal case

Can copyright disputes ever be litigated in state court? It’s generally understood that the federal courts have exclusive jurisdiction over copyright claims, in contrast to trademark claims.

Before you answer, be forewarned:  This post is one of my periodic “borrowings” from Pamela Chestek of Property, Intangible, “a blog about ownership of intellectual property rights and its licensing.”

So now you know the answer:

It’s unusual to see what looks like a copyright case in state court, particularly one that reaches the highest court. It is Associated Management Services, Inc. v. Ruff, a license case in the Supreme Court of Montana. . . .
So we have what looks a lot like a copyright case in state court, but is instead a breach of contract case where the contract happens to be a copyright license. . . .
Even the ownership claim, that the TimeTracker program was a work made for hire, didn’t turn on copyright law. Rather, Ruff’s employment contract language closely tracked the definition of work made for hire in the Copyright Act and thus the ownership was decided as a matter of contract, with the software development easily outside the scope of Daniel’s employment.

Obviously I think you should read the whole thing.  As usual, Pamela — ace transactional IP lawyer — ends with an object lesson in how to do it right, noting that the outcome was a lesson on belt-and-suspenders drafting, because in this case (Associated Management Services, Inc. v. RuffDA 17-0102 (Mont. July 24, 2018)), “reiterating a legal standard as a term of a contract gave the employer flexibility in its choice of court.”

In other words, by tracking the work-for-hire standard of copyright law, the plainitiff-employer could stay local and rely on literal application of that standard as a contractual term itself. Alternatively, it could point to the parallel between the contractual language and that found in the Copyright Act and claim that the contract was really a work made for hire, and the breaching employee had — also (and under supplementary jurisdiction, in the alternative) — infringed the employer’s copyright. This would establish “federal question” jurisdiction in federal court.
Statue outside Essex County historic courthouse Newark NJ
For tactical reasons presently unknown, the employer chose to keep it local, and chose well.  What were the defendant’s options?  Could it remove to federal court on the ground that the claim was “really” one for copyright infringement?

That would be dicey if copyright wasn’t actually asserted in the complaint.  But it may not be impossible.  There are two possible approaches I can think of.  One is based on a principle I learned about preparing this blog post called the “Grable Doctrine,” and goes something like this:

[The] “Grable doctrine” . . . arose from a 2005 U.S. Supreme Court case, and supports removal when (1) a plaintiff’s state-law claim raises a disputed and substantial federal question, and (2) removal would not disturb the balance between state and federal judicial responsibilities.

The Grable case arose under federal tax law.  As explained in the link where I learned about it, it has since been applied to other contexts, namely judicial evaluation of the efficacy of federal regulatory agencies.  That definitely sounds like something most state court judges wouldn’t want to touch with a ten-foot pole. As the article notes, Grable-based removal seems pretty unusual.
Cadman Plaza Park and U.S. Courthouse
The other alternative is probably worse: Making a counterclaim for a declaratory judgment under the Copyright Act and then essentially “forcing” removal because of the general rule to which the Grable Doctrine is an exception.  Yeah?

No!  At least, not in Indiana:

It’s black letter law that federal courts have exclusive jurisdiction to hear infringement actions under the U.S. Copyright Act. But now the Indiana Supreme Court has found that state courts may indeed hear cases involving the Copyright Act if the claims are raised first in a counterclaim. . . .
The case of Green v. Hendrickson Publishers, Inc. started when Hendrickson sued Green for an accounting over books that had been published. Green counterclaimed alleging copyright infringement by Hendrickson. Green attempted to remove the case to federal court based upon the copyright infringement counterclaim but the federal court remanded the case back to the state court. . . .
In determining whether a case can be removed from state court to federal court, the federal court could only look at the allegations in the complaint. Because the complaint on its face did not allege any copyright infringement, the case could not be removed to federal court. . . .
On appeal, the Indiana Supreme Court first examined whether the counterclaim was a contract issue traditionally within the jurisdiction of a state court or whether it was a claim under the Copyright Act. It found that the claim by Green was a claim for copyright infringement because Green was seeking to stop the reproduction of the work:

 

Thus, if any breach of contract occurred, it was accomplished by the wrongful reproduction of the works, and violated no other provision of the contract. The agreement therefore provided the Greens with no rights they did not already enjoy under copyright law, and no element other than reproduction was needed to state a claim for a violation of those rights.

 

As a result, the only relief available to them was under the Copyright Act.

Well, before we get to the punchline, that right there goes to show you that you never know! What impressed us so much about the draftsmanship reported in Pamela’s Montana case blew right up in the plaintiff’s face in Indiana — but probably only because the defendant pushed the copyright point, which I will address specifically below.  Here’s the rest of the story:

Because the only relief was under the Copyright Act, then the logical solution was for Green to file a separate action in federal court for infringement with Green as the plaintiff. However, rather than affirming the trial court’s dismissal, the Indiana court reinstated the copyright infringement counterclaim for the state court to hear. The court found that even though the claim was preempted by the copyright law, the state court could hear the claim nonetheless.

In doing so, the Indiana high court relied on the U.S. Supreme Court’s opinion in Holmes Group, Inc. v. Vornado Air Circulation Sys., which “reaffirmed the established rule that a patent counterclaim did not confer original or removal jurisdiction on a federal district court.” Finding no reason to distinguish Holmes‘s rule about patent removal from a situation involving copyright removal based on a counterclaim, it kept the copyright counterclaim in Greene in Indiana state court.

Trademark lawyer Ron ColemanIn all these cases, besides the Ruff case in Montana blogged about by Pamela, the defendant tried to use a federal counterclaim to escape the clutches of state court litigation. There are lots of reasons why a lawyer might want to do that, and plenty why a lawyer might not.  That issue is worthy of its own post.

In the Ruff case, however — in contrast to whatever was going on in Indiana — it’s not hard to guess why the decision was made not to invoke copyright law and at least achieve the (presumed) tactical “win” of depriving the plaintiff of the forum of its choice. The clever drafting admired by Pamela probably had the effect of scaring the defendant into the realization that if he acknowledged that copyright issue, he could only gain what was likely a trivial advantage by discomfiting the plaintiff’s side — forcing it to adjust to a different venue. But for his efforts, he could place himself on the hook for statutory damages and attorneys’ fees under the  Copyright Act that could exceed the contract damages.

Or maybe he doesn’t like federal court. Some lawyers are more comfortable in state court.  As I said, that’s a whole topic unto itself.
Cold spring day, Foley Square
The lesson is to read blogs, or to just be so good at writing contracts that bloggers read your contracts admiringly when they’re litigated. If you represent the licensor, and typically licensors have the upper hand, it may be appropriate to draft accordingly and think through the state court versus federal court scenarios.

And if you represent the licensee?

Just try your best.  You have my deepest sympathies.

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