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Chris-Leef General Agency, Inc. v. Rising Star Ins. Inc.

United States District Court, Tenth Circuit

October 21, 2013

CHRIS-LEEF GENERAL AGENCY, INC., et al., Plaintiffs,
RISING STAR INSURANCE INC., et al., Defendants.



Plaintiffs Chris-Leef General Agency, Inc. and QuoteTracker GA, LLC bring this action against Defendants Rising Star Insurance Inc., Glenda Dowell, and Richard Black, seeking damages and injunctive and declaratory relief for several claims, alleging conversion, civil conspiracy, and misappropriation under the Kansas Uniform Trade Secrets Act (“KUTSA”). The case is now before the Court on Plaintiffs’ Motion to Remand (Doc. 8). The motion is fully briefed, and the Court is prepared to rule. As explained more fully below, the Court denies Plaintiffs’ Motion to Remand.

I. Background

On May 27, 2011, Plaintiffs filed their original Complaint against Defendants in the District Court of Johnson County, Kansas. Defendants timely removed the action to the United States District Court in Kansas on July 22, 2011, arguing that this Court had subject matter jurisdiction, pursuant to 28 U.S.C. § 1331, because Plaintiffs’ KUTSA claims were preempted by the Copyright Act.[1] Plaintiffs filed the Motion to Remand on August 18, 2011. In their motion, Plaintiffs claimed that Defendants improperly removed the case. Plaintiffs asserted that their state law claims did not fall within the province of the Copyright Act and were therefore not preempted by the Copyright Act. This Court found that preemption did not apply and remanded the case back to the District Court of Johnson County, Kansas.[2]

On remand, both parties engaged in limited discovery.[3] During discovery, Defendants produced a Certificate of Registration issued by the United States Copyright Office for QMS Software, the software program at issue in this case.[4] The software was registered in Defendant Black’s name only.[5] After Defendant Black asserted ownership over QMS Software, Plaintiffs amended their complaint to add a declaratory judgment count (hereinafter referred to as “Count V”), seeking a declaration that Plaintiffs are the only owners of the QMS Software and QMS Source Code and Defendants “do not have any ownership, interest, copyright or otherwise, in the QMS Software or QMS Source code.”[6] Additionally, the First Amended Complaint (FAC) added a request for injunctive relief to prevent Defendants from continued use of QMS Software and any of its derivatives.[7] Defendants then filed a Notice of Removal with this Court on the ground that Count V arises under the federal Copyright Act.[8]

II. Discussion

The Court must remand “[i]f at any time before final judgment it appears that the district court lacks subject matter jurisdiction.”[9] Federal courts must have a statutory basis for exercising subject matter jurisdiction.[10] Because federal courts “are courts of limited jurisdiction, there is a presumption against federal jurisdiction.”[11] And so, courts must resolve doubtful cases in favor of remand.[12]

But remand is improper if the defendant properly removed a case to federal court that the plaintiff could have originally filed in federal court.[13] The defendant, however, bears the burden of showing that jurisdiction is proper.[14] When, as here, the action does not involve complete diversity of citizenship, the defendant must show federal question jurisdiction. A court may exercise federal question jurisdiction over “all civil actions arising under the Constitution, laws, or treaties of the United States.”[15] “‘A case arises under federal law if its well-pleaded complaint establishes either that federal law creates the cause of action or that the plaintiff’s right to relief necessarily depends on the resolution of a substantial question of federal law.’”[16] Thus, the federal question must appear on the face of the well-pleaded complaint.[17] While a complaint may disclose that the matter involves a copyright dispute, it does not in itself follow that the case “arises under” the Copyright Act.[18]

“[A]n action ‘arises under’ the Copyright Act if and only if the complaint is for a remedy expressly granted by the Act, e.g., a suit for infringement or for the statutory royalties for record reproduction . . ., or asserts a claim requiring construction of the Act . . ., or, at the very least and perhaps more doubtfully, presents a case where a distinctive policy of the Act requires that federal principles control the disposition of the claim.”[19]

The Court must not consider whether the claim implicates a federal defense—such as preemption—because the defense is not part of the plaintiff’s well-pleaded complaint.[20]

It is clear from the face of Plaintiffs’ FAC that the matter involves a copyright dispute because Plaintiffs allege that Defendants do not own a “copyright” in the QMS Software or QMS Source Code. However, Plaintiffs’ allegation regarding copyright status does not unequivocally establish their claim as arising under the Copyright Act. Defendants argue that this Court has subject-matter jurisdiction because Count V in the FAC arises under federal copyright law.

Although Plaintiffs’ FAC does not explicitly invoke the Copyright Act on its face, resolution of Count V requires construction of §§ 101 and 201(b) of the Copyright Act. Under the Copyright Act, “ownership ‘vests initially in the author or authors of the work.’”[21] Plaintiffs’ argument that the Court can declare that they are the owners of QMS and Defendants obtained it through violation of state law without construction under the Copyright Act is unpersuasive. The only document governing ownership of QMS Software is Defendant Black’s certificate of registration. A certificate of registration of a copyright constitutes prima facie evidence that the copyright is valid.[22] Albeit, the validity of that registration is brought into question by Count V. But, “[u]pon presentation of the certificate, the [party without the registration] bears the burden to overcome the presumption of validity.”[23] Defendants have presented a certificate of registration for QMS Software so Plaintiffs now hold the burden of overcoming the presumption of validity. However, “[i]f the work is for hire, the employer or other person for whom the work was prepared is considered the author and owns the copyright, unless there is a written agreement to the contrary.”[24] Plaintiffs admitted that Defendant Black assisted in developing the QMS Software and QMS Source Code.[25] Plaintiffs also alleged that Defendant Black was “hired ... to assist in maintaining, supporting, and updating the QMS Software at the direction of Plaintiff CLGA.”[26] Plaintiffs do not indicate whether they considered Defendant Black an employee or independent contractor. Defendants maintained that he was an independent contractor. The applicability of definitions under the Copyright Act are at issue.[27] Defendant Black’s employment status is central to the question of authorship under the Copyright Act. To prove that QMS was a work made for hire, § 101 provides that Plaintiffs show: 1) Defendant Black worked as Plaintiffs’ employee and prepared QMS “within the scope of his employment”; or 2) Defendant Black, working as an independent contractor, expressly agreed in writing that QMS would be a work made for hire.[28] Since Plaintiffs have not alleged that Black, the holder of the federal copyright registration, assigned his interest in QMS by way of written agreement, Plaintiffs must show that Black worked as Plaintiffs’ employee and prepared QMS within the scope of his employment to prevail on their claim.[29]

Application of the Copyright Act requires federal principles control disposition of Count V. The Supreme Court held that the terms “employee” and “scope of employment” must be construed using “federal rule[s] of agency”— and not “the law of any particular State”— in the face of the Copyright Act’s express objectives to create a national, unified copyright law by preempting any state common law and statutory schemes regulating copyrights.[30] Therefore, the Court finds that federal question jurisdiction is further supported by the need to apply federal rules of agency to Count V.

Plaintiffs heavily rely on cases in which federal courts did not exercise jurisdiction because contracts governed the ownership of the copyrighted materials at issue.[31] While the Court need not go further in its jurisdiction analysis since the FAC confers jurisdiction, the Court would be remiss if it did not take the opportunity to distinguish between disputes over ownership of copyrighted materials in which jurisdiction is exercised and jurisdiction is refused. Ownership of copyrighted material can be governed by written agreement or solely by the Copyright Act. Cases involving a written agreement are inapposite here because determination of ownership rests on construction of a contract; there is no contract between the parties in this action.[32] “Although a complaint may not state a Copyright Act ...

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