IN THE UNITED STATES DISTRICT COURT
`FOR THE WESTERN DISTRICT OF NORTH CAROLINA
`CHARLOTTE DIVISION
`3:07CV186-C
`
`)
`
`))
`
`))
`
`U.S. SOUTH COMMUNICATIONS, INC.
`d/b/a INCOMM,
`
`
`Plaintiff,
`
`vs.
`
`NORTHERN TELECOM, INC. a/k/a
`NORTEL NETWORKS INC.,
`
`) MEMORANDUM AND ORDER
`)
`)
`
`))
`
`)
`Defendant.
`__________________________________________)
`
`THIS MATTER is before the Court on the Plaintiff’s “Motion to Remand” (document #8)
`
`and its “Memorandum in Support . . .” (document #8-2), both filed May 17, 2007. The Defendant
`
`filed its “Response . . .” (document #13) May 29, 2007. On June 5, 2007, the Plaintiff filed its
`
`“Reply . . .” (document #19). The Defendant then filed a “. . . Sur-Reply in Opposition . . .”
`
`(document #22) June 8, 2007.
`
`This matter has been referred to the undersigned Magistrate Judge pursuant to 28 U.S.C. §
`
`636(b)(1)(B), and the subject Motion is now ripe for determination.
`
`Upon examination of the Plaintiff’s Motion, the parties’ briefs, and the pleadings, it is
`
`apparent that there is no basis for federal subject matter jurisdiction and, accordingly, this matter will
`
`be remanded to state court, as discussed below.
`
`I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
`
`On April 23, 2007, the Plaintiff filed the subject action in the Superior Court of Mecklenburg
`
`County alleging claims under North Carolina law for unfair and deceptive trade practices, breach of
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 1 of 11
`
`

`
`contract, unfair competition, breach of the duty of good faith and fair dealing, and seeking a
`
`declaratory judgment that it does not owe additional fees under the parties’ contract.
`
`The Plaintiff is a wholesaler of long-distance communication services. The Defendant
`
`designs, develops, manufactures, and sells network and telecommunication products and services,
`
`and licenses software it develops for use in operating hardware manufactured by or for it. On July
`
`1, 1996, the parties entered into a “Network Product Purchase Agreement” (“1996 Agreement”), in
`
`which the Plaintiff purchased a DMS-500 telecommunications switching system (the “switch”) from1
`
`the Defendant. Attached to the 1996 Agreement were the following two provisions which the
`
`Defendant contends limit the Plaintiff’s right to use the software associated with the switch: (1) that
`
`the Plaintiff shall “not reproduce, copy, or modify the Software in whole or in part except as
`
`authorized” by the Defendant, and (2) that the Plaintiff shall only use the software in conjunction
`
`with its “use of the Equipment [Hardware] with respect to which such Software was furnished.”2
`
`On September 22, 1999, the parties entered into a “Master Purchase Agreement” (“1999
`
`Agreement”). The 1999 Agreement, which is still in effect, set forth the terms for the purchase of
`
`future products or services from the Defendant and licensed the Plaintiff to use the Defendant’s
`
`software in operating its switch. Relevant to this action, the MPA contains the following provisions
`
`for the use of “Non-Licensed Software”:
`
`10.8 Certain Software delivered by Nortel may include Non-Licensed
`Software. Non-Licensed Software includes (i) any Software for which the applicable
`
`1
`
`A switch is a networking device that processes long-distance calls.
`
`2
`The Defendant contends that these Attachments “survived the termination” of the 1996 Agreement. In
`addition, the Defendant urges the Court that these provisions should be considered in spite of the fact that the
`Plaintiff did not attach them to its Complaint. The undersigned has considered these provisions in the interest of a
`full review of jurisdiction – but, as discussed herein, they do not change the character of the underlying state law
`allegations of the Complaint.
`
`2
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 2 of 11
`
`

`
`right to use fees have not been paid; and (ii) Software for which a periodic right to
`use fee has expired and the applicable additional periodic right to use fees have not
`been paid. Company shall submit to Nortel an Order for any Non-Licensed Software
`that Company desires to license or renew.
`
`10.9 When Non-Licensed Software is placed into service, the applicable right
`to use fees shall be payable. Company shall also have the option to pay the
`applicable right to use fees for any Non-Licensed Software upon installation of a
`Software load containing such Non-Licensed Software.
`
`10.10 To ensure Company’s proper activation and/or usage of only the
`appropriate Software, Company shall complete the appropriate form designated by
`Nortel prior to the activation and/or usage by Company of any Non-Licensed
`Software. Company shall identify all Software desired to be activated and/or used
`(including the number of lines or other units activated, if applicable) in each System
`and shall transmit such form to Nortel.
`
`10.11 Nortel shall promptly review any form submitted pursuant to Section
`10.10 and respond in writing, identifying whether (i) any applicable prerequisite
`Hardware or Software is required by Company prior to activation and/or usage of the
`applicable Software; or (ii) whether the use of such Software requires Nortel to
`determine whether the current System configuration will require additional elements,
`such as Hardware, other hardware and/or System memory, prior to activation and/or
`usage; or (iii) whether Company can use such Software without the addition of any
`additional Hardware or Software.
`
`10.12 Nortel reserves the right to access by remote polling any site in which
`Software has been installed to determine which Software has been activated. Such
`polling shall be done so as not to unreasonably interfere with Company’s use of the
`Products.
`
`10.13 Nortel shall issue invoices to Company, in addition to those amounts
`previously invoiced, for amounts found to be payable as a result of Company’s
`activation and/or usage of any Software which Nortel determines as a result of the
`remote polling of a site and for which Company has not previously paid the
`appropriate right to use fees.
`
`10.14 The warranty period for Software activated later than the original Ship
`Date of the Software load shall be for the same period as such original Software load
`and shall not be extended to provide for an additional period of warranty based upon
`the date individual features or units are activated and/or utilized by Company or the
`date Company pays any applicable right to use fees.
`
`3
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 3 of 11
`
`

`
`From the signing of the 1996 Agreement, the parties’ relationship continued for
`
`approximately ten years without major incident. During that time, the Plaintiff purchased some
`
`Nortel brand “peripheral hardware,” from the Defendant and also from third parties, which had the
`
`effect of expanding the switch’s capacity to support a larger number of telephone lines. Upon
`
`learning of the additional capacity, the Defendant, apparently “in the guise of an agreed-upon system
`
`upgrade,” installed a disabling patch which limited the switch’s capacity. In the ten years prior to
`
`the installation of the disabling patch there had been no capacity limitation. Shortly thereafter the
`
`Defendant issued an invoice to the Plaintiff for $2,074,464.00 relating to software right-to-use fees
`
`for the seven Nortel peripheral devices which the Plaintiff purchased from third parties.
`
`The use of the third-party-purchased peripheral Nortel hardware is at the center of the
`
`dispute. The Plaintiff alleges that the 1999 Agreement licensed it to use the switch software to
`
`support its use of the peripheral hardware. In sharp contrast, the Defendant claims this amounts to
`
`non-licensed use of their software and that the Plaintiff owes it $2,074,464.00 in right-to-use fees.
`
`Relevant to its decision to remove this action to this Court, the Defendant also asserts that use of this
`
`software constitutes an infringement on its intellectual property rights (the Defendant states that it
`
`holds a valid copyright for the subject software and the Plaintiff does not contest this fact). The
`
`Plaintiff disagrees, arguing this is nothing more than a breach of contract action.
`
`On May 3, 2007, the Defendant removed the state law action to the Western District of North
`
`Carolina, contending the following as a basis for federal jurisdiction:
`
`a.
`
`b.
`
`Plaintiff’s requests for declaratory judgments represent an assertion that
`Plaintiff is not infringing on Defendant’s copyright rights under federal law;
`
`Plaintiffs’ requests for declaratory judgments are preempted and/or
`completely preempted by federal copyright law;
`
`4
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 4 of 11
`
`

`
`c.
`
`d.
`
`Plaintiff seeks, in essence, to assert defenses or counterclaims to an
`impending or threatened copyright infringement action under federal law; or
`
`Plaintiff claims and requests a declaratory judgment that Defendant has
`granted Plaintiff an implied license over copyrighted software under federal
`copyright law.
`
`The Plaintiff filed its timely “Motion to Remand,” and as set forth above, the Motion has been fully
`
`briefed and is ripe for disposition.
`
`II. DISCUSSION
`
`28 U.S.C. § 1441(a) provides:
`
`Except as otherwise expressly provided by Act of Congress, any civil action brought
`in a State court of which the district courts of the United States have original
`jurisdiction, may be removed by the defendant or the defendants, to the district court
`of the United States for the district and division embracing the place where such
`action is pending.
`
`The existence of subject matter jurisdiction is a threshold issue, and absent a proper basis for
`
`subject matter jurisdiction, a removed case must be remanded to state court. Steel Co. v. Citizens
`
`for a Better Env't, 523 U.S. 83, 96 (1998). Accord Jones v. American Postal Workers Union, 192
`
`F.3d 417, 422 (4th Cir. 1999); and Evans v. B.F. Perkins Co., 166 F.3d 642, 647 (4th Cir. 1999).
`
`The party seeking federal jurisdiction, in this case, the Defendant, has the burden of proving that
`
`subject matter jurisdiction exists. See Lovern v. Edwards, 190 F.3d 648, 654 (4th Cir. 1999);
`
`Richmond, Fredericksburg & Potomac R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991);
`
`and Norfolk Southern Ry. Co. v. Energy Development Corp., 312 F.Supp.2d 833, 835 (S.D.W.Va.
`
`2004).
`
`It is well-established that “[t]he subject matter jurisdiction of federal courts is limited and
`
`the federal courts may exercise only that jurisdiction which Congress has prescribed.” Chris v.
`
`5
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 5 of 11
`
`

`
`Tenet, 221 F.3d 648, 655 (4th Cir. 2000), citing Kokkonen v. Guardian Life Ins. Co. of Am., 511
`
`U.S. 375, 377 (1994). Accord Darcangelo v. Verizon Communications, Inc., 292 F.3d 181, 186 (4th
`
`Cir. 2002) (“In general, an action filed in state court may be removed to federal court only if it might
`
`have been brought in federal court originally”).
`
`Accordingly, at the time it filed its Notice of Removal, the Defendant had the burden of
`
`establishing the existence of subject matter jurisdiction, that is, the existence of either of what are
`
`commonly called “federal question” or “diversity” jurisdiction. Accord Lovern, 190 F.3d at 654;
`
` Richmond, Fredericksburg & Potomac R. Co., 945 F.2d at 768; and Energy Development Corp.,
`
`312 F.Supp.2d at 835. The Defendant has not asserted diversity jurisdiction as a basis for removal.3
`
`Thus, the issue is whether the Defendant can satisfy its burden of establishing federal question
`
`jurisdiction.
`
`Concerning federal question jurisdiction, as the Fourth Circuit has stated:
`
`Title 28 U.S.C. § 1331 provides that district courts have subject matter jurisdiction
`of every civil action that “arises under the Constitution, laws, or treaties of the United
`States.” This means that Congress has given the lower federal courts jurisdiction to
`hear only those cases in which a well-pleaded complaint establishes either that
`federal law creates the cause of action or that the plaintiff's right to relief necessarily
`depends on resolution of a substantial question of federal law.
`
`Battle v. Seibels Bruce Ins. Co., 288 F.3d 596, 606-07 (4th Cir. 2002) (emphasis added).
`
`Moreover, “the vast majority of cases brought under the general federal question jurisdiction
`
`3
`The Plaintiff asserts that the Defendant could not remove this action on the basis of diversity because its
`principal place of business is in North Carolina. See 28 U.S.C. § 1441(b) (an action based on diversity shall only be
`removable “if none of the parties in interest properly joined and served as defendants is a citizen of the State in
`which such action is brought”); and 28 U.S.C. § 1332(c)(1) (“a corporation shall be deemed to be a citizen of any
`State . . . where it has its principal place of business”).
`
`However, in the Defendant’s “Response . . .” it states that it is organized under Delaware law and its
`principal place of business is in Richardson, Texas. It appears that the location of the Defendant’s principal place of
`business is immaterial to a diversity jurisdiction determination, because both parties are incorporated under the laws
`of Delaware. See 28 U.S.C. § 1332(a)(1) (“district courts shall have original jurisdiction of all civil actions where
`the matter in controversy exceeds the sum or value of $75,000 . . . and is between . . . citizens of different states”),
`and (c)(1) (“a corporation shall be deemed to be a citizen of any State by which it has been incorporated”).
`
`6
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 6 of 11
`
`

`
`of the federal courts are those in which federal law creates the cause of action [and t]he well-pleaded
`
`complaint rule requires that federal question jurisdiction not exist unless a federal question appears
`
`on the face of a plaintiff's properly pleaded complaint.” Columbia Gas Transmission Corp. v. Drain,
`
`237 F.3d 366, 369-70 (4th Cir. 2001), citing Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804,
`
`808 (1986). See also Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826,
`
`830-32 (2002) (well-pleaded complaint rule does not allow a defendant’s defenses or counterclaims
`
`to serve as the basis for a district court’s “arising under” jurisdiction). A review of the Plaintiff’s
`
`Complaint shows only state law claims, revolving primarily around the underlying alleged breach
`
`of contract. There is no federal question presented in the Plaintiff’s Complaint.
`
`However, the Defendant argues that even if the Court finds that the Complaint presents no
`
`federal question, the Copyright Act still preempts the Plaintiff’s claims. Generally, federal
`
`preemption is a defense to a plaintiff’s claims which “does not appear on the face of a well-pleaded
`
`complaint, and, therefore, does not authorize removal to federal court.” Metropolitan Life Ins. Co.
`
`v. Taylor, 481 U.S. 58, 63 (1987). However, “Congress may so completely pre-empt a particular
`
`area that any civil complaint raising this select group of claims is necessarily federal in character.”
`
`Id. at 63-64. Copyright claims are one such select group. See Rosciszewski v. Arete Assoc., Inc.,
`
`1 F.3d 225, 232 (4th Cir. 1993). “[A]ll legal or equitable rights that are equivalent to any of the
`
`exclusive rights within the general scope of copyright . . . are governed exclusively by this title.” 17
`
`U.S.C. § 301(a).
`
`Thus, the Copyright Act would preempt these claims, even though the Plaintiff has pled no
`
`federal claims, if the subject software is within the scope of the Copyright Act and the rights granted
`
`under state law are equivalent to the rights granted by federal copyright law. See Rosciszewski, 1
`
`F.3d at 229. To determine whether the state and federal rights are equivalent, courts apply the “extra
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 7 of 11
`
`7
`
`

`
`element” test. Id. at 229-30. This test has been described as follows:
`
`if an extra element is required instead of or in addition to the acts of reproduction,
`performance, distribution or display, in order to constitute a state-created cause of
`action, . . . there is no preemption, . . . provided that the extra element changes the
`nature of the action so that it is qualitatively different from a copyright infringement
`claim.
`
`Id. (quotations and citations omitted). In addition:
`
`[A] right which is equivalent to copyright is one which is infringed by the mere act
`of reproduction, performance, distribution or display . . . If under state law the act of
`reproduction, performance, distribution or display, . . . will in itself infringe the state
`created right, then such right is preempted. But if other elements are required, in
`addition to or instead of, the acts of reproduction, performance, distribution or
`display, in order to constitute a state created cause of action, then the right does not
`lie within the general scope of copyright, and there is no preemption.
`
`Collezione Europa U.S.A., Inc. v. Hillsdale House, Ltd., 243 F. Supp. 2d 444, 449 (M.D.N.C. 2003)
`
`(internal quotations and citations omitted) (emphasis in original).
`
`The parties do not dispute that the software at issue is within the subject matter of copyright
`
`– making the central issue whether there is an “extra element” to the Plaintiff’s claims which
`
`prevents preemption. The Fourth Circuit has found this “extra element” in a breach of contract claim
`
`which was originally held preempted by the district court. See Acorn Structures, Inc. v. Swantz, 846
`
`F.2d 923, 925-26 (4th Cir. 1988). In Acorn Structures, the plaintiff created house design plans for
`
`the defendant on the contractual provision that if the defendant chose to build the designed home he
`
`either had to purchase the plans or purchase all of his building materials from the plaintiff. Id. at
`
`926. However, the defendant built the home without fulfilling either of the contractual requirements.
`
`Id. The Fourth Circuit held that the plaintiff’s “cause of action is based upon this implicit provision
`
`of the contract which does not arise out of the subject matter of copyright and is therefore a separate
`
`and distinct cause of action.” Id.
`
`As in Acorn Structures, the underlying dispute here is contractual in nature – the question
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 8 of 11
`
`8
`
`

`
`being whether the Plaintiff owes the Defendant additional right-to-use fees for its use of the subject
`
`software. The issue to be decided by the state court is essentially whether the Plaintiff’s use of the
`
`peripheral devices implicated the terms of the 1999 Agreement which require it to pay additional
`
`right-to-use fees, and if so, in what amount. Or, as the Plaintiff frames it, the issue for the state court
`
`is whether the use of the software associated with the peripheral devices purchased from third parties
`
`was permitted by contractual provisions authorizing the use of software in conjunction with the use
`
`of the switch. The fact that the software is subject to the protection of the Copyright Act does not
`
`change the underlying nature of these contractual claims, the extra element here being use of the
`
`software without paying the right-to-use fees as required by the contract.
`
`Further, where, there are contractual provisions which control the rights of the parties for
`
`unauthorized use of the software, “essentially granting permission for the excess use and then
`
`requiring payment for it,” then the “licensee’s alleged conduct constitutes a breach of a covenant and
`
`the covenant is an enforceable contractual obligation” making “the licensor’s sole remedy [an action]
`
`for breach of contract.” Madison River Mgmt. Co. v. Business Mgmt. Software Corp., 387 F. Supp.
`
`2d 521, 533-34 (M.D.N.C. 2005). The 1999 Agreement, which remains in effect, provided the terms
`
`should non-licensed use of the software occur. The Defendant argues that this section of the contract
`
`“is simply a safety provision that makes clear that if Nortel discovers violations of the agreement on
`
`its own despite U.S. South’s obligations to seek and pay for authorization to use software before it
`
`does so, Nortel has the right to invoice U.S. South for using software without a license.” Truly, it
`
`is a safety provision – a contractual term – of which the Defendant seeks to take advantage, having
`
`already invoiced the Plaintiff for over $2 million.
`
`Finally, the Defendant argues that in a declaratory judgment action, it is not the character of
`
`the Plaintiff’s claim, but the character of the Defendant’s threatened action that this Court should
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 9 of 11
`
`9
`
`

`
`consider. The Defendant asserts in support of this argument that had the Plaintiff not filed its action
`
`first, it would have filed an action for Copyright infringement in federal court.
`
`It is true that “[w]hether a state action for a declaratory judgment is removable to federal
`
`court is determined by reference to the character of the threatened action.” Hunter Douglas Inc. v.
`
`Sheet Metal Workers Int’l Ass’n, Local 159, 714 F.2d 342, 345 (4th Cir. 1983). However, the “well-
`
`pleaded complaint rule operates no differently when the jurisdictional issue is whether a district court
`
`possesses subject matter jurisdiction of a declaratory judgment action purporting to raise a federal
`
`question.” Columbia Gas, 237 F.3d at 370. Thus, “the proper jurisdictional question is whether the
`
`complaint alleges a claim arising under federal law that the declaratory judgment defendant could
`
`affirmatively bring against the declaratory judgment plaintiff.” Id. As discussed above, the answer
`
`to this question is no. Even if the Defendant had filed this action first in federal court, this Court
`
`would not have subject matter jurisdiction. The dispute is whether right-to-use fees are owed under
`
`the 1999 Agreement – not whether the Defendant’s copyright was infringed. There is an extra
`
`element to this claim, contractual in nature, which is not equivalent to the rights granted by federal
`
`copyright law.
`
`Accordingly, the Plaintiff’s “Motion to Remand” must be granted, and this matter shall be
`
`remanded to state court.4
`
`III. ORDER
`
`NOW, THEREFORE, IT IS ORDERED:
`
`1. The Plaintiff’s “Motion to Remand” (document #8) is GRANTED; that is, this action
`
`4
`In its “Reply . . .” memorandum, the Plaintiff seeks an award of costs, expenses, and attorneys’ fees
`because of the “insubstantiality and meritless position advanced by Defendant.” Although the Court has not adopted
`the Defendant’s position, because its complex arguments could not be characterized as frivolous, an award of costs,
`expenses, and fees would not be proper in this case.
`
`10
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 10 of 11
`
`

`
`(including the issue whether the Superior Court’s Temporary Restraining Order should remain in
`
`effect and the Defendant’s pending “Motion . . . to Dismiss Counts 1, 3, 5, and 6 of the Complaint”),
`
`is REMANDED to the Superior Court for the County of Mecklenburg.
`
`2. The Clerk is directed to send copies of this Memorandum and Order to counsel for the
`
`parties, and to the Honorable Robert J. Conrad, Jr.
`
`SO ORDERED.
`
` Signed: July 9, 2007
`
`Case 3:07-cv-00186-RJC-CH Document 34 Filed 07/09/07 Page 11 of 11
`
`11