Krueger v. Tradeguider Systems, LLC, et al., USDC N.D. Illinois

Plaintiff was employed as CEO of defendant company. Plaintiff filed suit in state court against defendants for breach of his employment agreement and sought a declaratory judgment stating, among other things, that the employment agreement was void and unenforceable, that plaintiff owned all rights in all of the intellectual property he created during his employment, and that the defendants must stop selling the CD-ROM products that plaintiff developed. Defendants removed the case to federal court based on plaintiff’s intellectual property claims. Plaintiff filed a motion to remand back to state court, and the court granted the motion.

The court explained that federal question jurisdiction exists if the actions arise under the Constitution, laws, or treaties of the United States, and that a court generally looks no further than the allegations contained in the plaintiff's well-pleaded complaint. However, “[i]t is well-established within the Seventh Circuit that not every complaint that references a copyright will be deemed to ‘arise under’ federal law.” The court wrote that because Count I of the complaint, which alleged a breach of contract and requested a declaratory judgment related to the defendants’ use of intellectual property, did not state a federal cause of action on its face, removal is only appropriate if the 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. The court then considered whether Count I fell into the preemption exception to the well-pleaded complaint rule.

Preemption under the Copyright Act is governed by 17 U.S.C. § 301(a) which creates the following two-prong test for preemption of a right under state law: (1) the work must be fixed in a tangible medium of expression and be copyrightable subject matter under 17 U.S.C. § 102; and (2) the right asserted must be equivalent to any of the rights specified in 17 U.S.C. § 106. Thus, the issue before the court was whether plaintiff's breach of contract claim involved rights that are not equivalent to the exclusive rights under § 106.

The court noted that the law regarding preemption is unsettled among the circuits. The court applied the narrow view of preemption for contract claims adopted in ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), which held with regard to software licenses that whether a particular license is generous or restrictive, a simple two-party contract is not equivalent to any of the exclusive rights within the general scope of copyright and therefore may be enforced. Applying ProCD, Inc. to the facts in the current case, the plaintiff argued that Count I did not arise under federal law because the complaint seeks relief based on the defendants’ forfeiture of their contractual rights under the intellectual property provision of the employment agreement as a result of defendants’ breach of contract, rather than rights as specified in § 106.

The court agreed with this characterization of Count I and concluded that Count I did not arise under federal copyright law. The court explained that the employment agreement “created numerous rights and obligations that are distinct from those protected under the Copyright Act. For instance, the agreement governed Krueger's employment generally, required compensation for the services performed, required confidentiality of nonpublic information, and prohibited Krueger's ability to compete with the LLC or solicit employees from the LLC. In addition, Krueger alleges that TradeGuider LLC breached various duties owed to Krueger under the Employment Agreement by, among other things, frustrating the purpose of the Employment Agreement and failing to work with Krueger in good faith. The obligations on which Krueger bases his declaratory judgment claim are more expansive than the rights specified under § 106.”

The court rejected the defendants’ argument that Count I was a copyright claim, rather than a contract claim, because resolution of the claim necessitated interpretation of the Copyright Act (specifically, the work for hire doctrine) and the relief requested was governed by the Copyright Act. The court said that this argument was unpersuasive because the complaint did not explicitly raise an issue related to the work for hire doctrine and, even if the defendants raised this doctrine as a defense, federal jurisdiction cannot be based on issues that may come in by way of a defense or counterclaim. The court also rejected the defendants’ argument that the relief the plaintiff was seeking – barring the defendants from selling certain intellectual property – arose under the Copyright Act; instead the court explained that the plaintiff’s requests for relief stemmed from a violation of his contractual rights, not from his "exclusive rights" as against the world.