Badhwa v. Veritec, Inc.

Decision Date13 December 2018
Docket NumberCivil No. 18-cv-2258
Citation367 F.Supp.3d 890
Parties David A. BADHWA, et al., Plaintiffs, v. VERITEC, INC., et al., Defendants.
CourtU.S. District Court — District of Minnesota
ORDER

Patrick J. Schiltz, United States District Court Judge

The above matter comes before the Court upon the Report and Recommendation of United States Magistrate Judge David T. Schultz dated November 21, 2018. No objections have been filed to that Report and Recommendation in the time period permitted.

The Court, being duly advised in the premises, upon the Report and Recommendation of the Magistrate Judge, and upon all of the files, records and proceedings herein, now makes and enters the following Order.

IT IS HEREBY ORDERED:

1. Defendant and Third-Party Plaintiff Veritec, Inc.'s Motion to Remand [Docket No. 11] be GRANTED IN PART AND DENIED IN PART.

2. The Court retain jurisdiction over those counterclaims to Veritec, Inc.'s Third-Party Complaint that seek declaratory relief, and that all other claims be remanded to state court.

LET JUDGMENT BE ENTERED ACCORDINGLY.

REPORT AND RECOMMENDATION

DAVID T. SCHULTZ, United States Magistrate Judge

INTRODUCTION

Defendant and Third-Party Plaintiff Veritec, Inc. seeks to remand this action to state court. The removing parties, eight of the nine Third-Party Defendants, oppose remand, arguing the action was properly removed under the doctrine of complete preemption (i.e., that Veritec's claims are completely preempted by the Patent and Copyright Acts). Alternatively, they contend their declaratory judgment counterclaims create a removable federal question, which makes removal of the entire action appropriate. These arguments present novel questions of law not previously answered by any court within the Eighth Circuit and implicate fundamental questions regarding the nature and scope of federal jurisdiction. Because the "complete preemption" doctrine expands federal court jurisdiction in derogation of the well-pleaded complaint rule, this court declines to apply it here. Moreover, although the declaratory judgment counterclaims must be litigated in federal court, their assertion does not support removal of the entire action. Accordingly, this Court recommends that the declaratory judgment be severed from this action and that the remainder of the action be remanded to state court.

FINDINGS OF FACT

This action began in state court as a two-count complaint by David and Denise Badhwa against Veritec, Inc., alleging breach of a promissory note and unjust enrichment. Notice of Removal Ex. A (Amended Complaint), Docket No. 1-1. Along with an answer and affirmative defenses, Veritec brought thirteen claims against the Badhwas and the nine parties it added through a third-party complaint. Id. at Ex. A (Veritec, Inc.'s Verified Answer, Countercl., and Third-Party Compl. 5-38).1

Veritec alleges that Badhwa, who is president of JAB Companies, entered into a licensing agreement with Veritec to develop and distribute new products in foreign markets. This arrangement included a confidentiality agreement. Id. (Countercl. and Third-Party Compl. 12-13). At roughly the same time, Veritec was negotiating with Steven Renner, Joseph Morris, and their associated entities regarding business opportunities related to the products Badhwa was helping develop. Id. (19-20). When these discussions broke down, Badhwa allegedly circumvented his agreement with Veritec and began using information he learned while working with Veritec to develop competing products for Renner. Id. (19-21).

Veritec brought counterclaims and third-party claims against the Badhwas and JAB Companies for breach of the confidentiality agreement, breach of fiduciary duties, usurpation of a business opportunity, misappropriation of trade secrets, conversion, and unjust enrichment. Veritec also brought third-party claims against Renner, Morris, and their business entities for tortious interference with contract, misappropriation of trade secrets, aiding and abetting the Badhwas' actions, and unjust enrichment. In pleading its counterclaims and third-party claims, Veritec referred to several of its patents and copyrights and alleged on "information and belief, discovery may reveal that one of more Counter-Defendants or Third-Party Defendants are infringing upon Veritec's patent rights [or its] copyright in its source code." Id. (11-12)

In response to the third-party complaint, the Renner- and Morris-affiliated Third-Party Defendants filed nine declaratory judgment counterclaims against Veritec, seeking a declaration of non-infringement of Veritec's patents and copyrights. Shortly after filing their answer and counterclaims, these Third-Party Defendants removed the case to federal court. This Court ordered briefing on the issue of its jurisdiction over the matter.

Meanwhile, Veritec filed an amended counterclaim and third-party complaint, removing any direct reference to its copyrights and patents, but maintaining the original thirteen claims alleged in the original pleading it filed in state court.

Veritec moved to remand the matter. The Court referred the motion to the undersigned for a report and recommendation.

CONCLUSIONS OF LAW

The removing parties offer two theories justifying this Court's exercise of jurisdiction over the removed action, neither of which has been addressed in this Circuit. First, they argue that at least one of the claims in Veritec's third-party complaint is "completely preempted" by the Copyright or Patent Act, so as to render the entire action removable. Second, the removing parties contend that, because their declaratory judgment counterclaim to Veritec's third-party complaint arises under federal law, the entire case may properly be removed to federal court. Neither argument is ultimately persuasive.

I. Legal Standard

Generally, defendants to a civil action in state court may remove it to federal court if the action could have originally been brought there. 28 U.S.C. § 1441(a). The party seeking removal bears the burden of establishing subject matter jurisdiction. Cent. Iowa Power Coop. v. Midwest Indep. Transmission Sys. Operator, Inc. , 561 F.3d 904, 912 (8th Cir. 2009). When invoking the district court's federal-question jurisdiction, removal generally requires that a defendant remove the matter based upon a federal question that appears in the plaintiff's complaint. Id. ; see also Caterpillar, Inc. v. Williams , 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987) (discussing the "well-pleaded complaint" rule). However, any party may remove an action to federal court when "any party asserts a claim for relief arising under any Act of Congress relating to patents ... or copyrights." 28 U.S.C. 1454(a) - (b). Thus, under 28 U.S.C. § 1454, a third-party defendant may remove an action to federal court based upon its own declaratory judgment action, if that action arises under the patent or copyright laws.2

A federal court considering a motion to remand must remember that it is a "court[ ] of limited jurisdiction, possessing only that power authorized by Constitution and statute." Gunn v. Minton , 568 U.S. 251, 256, 133 S.Ct. 1059, 185 L.Ed.2d 72 (2013) (internal quotations omitted). Thus, courts must read removal statutes narrowly and should "resolve all doubts about federal jurisdiction in favor of remand." Dahl v. R.J. Reynolds Tobacco Co. , 478 F.3d 965, 968 (8th Cir. 2007) (quoting Transit Cas. Co. v. Certain Underwriters at Lloyd's of London , 119 F.3d 619, 625 (8th Cir. 1997) ).

II. Removal Based Upon Veritec's Third-Party Complaint

Because the Badhwas did not join the Third-Party Defendants' removal of this action, removal is based entirely upon Veritec's third-party complaint and the removing parties' counterclaim for declaratory judgment. In its August 6, 2018 Order, this Court expressed skepticism about its ability to exercise jurisdiction over a case removed through a third-party complaint, even if a federal question was clearly pleaded. Based upon this Circuit's interpretation of the federal-question removal statute, 28 U.S.C. § 1441, such removal would not be allowed because it is "too much akin to the tail wagging the dog." Lewis v. Windsor Door Co. , 926 F.2d 729, 733 (8th Cir. 1991). Further analysis has not changed the Court's view regarding § 1441.

But recent statutory changes allow for removal even when based upon a third-party complaint (or a counterclaim thereto) if that pleading arises under federal patent and copyright law. In 2011, Congress expanded the scope of removal in actions "in which any party asserts a claim for relief arising under any Act of Congress relating to patents, plant variety protection, or copyrights." 28 U.S.C. § 1454(a). Such actions "may be removed by any party." Id. at § 1454(b). Congress intended this new rule to "fix" the Supreme Court's decision in Holmes Group., Inc. v. Vornado Air Circulation Systems., Inc. , 535 U.S. 826, 122 S.Ct. 1889, 153 L.Ed.2d 13 (2002), which held that a defendant's Copyright Act counterclaims, even though compulsory, did not create federal-question jurisdiction. Joe Matal, A Guide to the Legislative History of the America Invents Act: Part II of II , 21 Fed. Cir. B.J. 539, 539 (2012).

The plain language of § 1454 allows any party to remove an action in which any party seeks relief under the Copyright Act or Patent Act. This would logically include third-party claims and counterclaims to those claims. Similarly, the provision allows a party to remove an action based upon its own patent or copyright claims. Although no court in this Circuit has yet interpreted this unique removal provision, at least one other district has held that a third-party claim may be removed under § 1454. See TransCardiac Therapeutics, Inc. v. Yoganathan , 85 F.Supp.3d 1351 (N.D. Ga. 2014) (retaining jurisdiction over third-party declaratory judgment claim to settle inventorship, but remanding all other claims and counterclaims). Thus, in this case the mechanism for removal (a third-part...

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