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CognetX, Inc. v. Haughton

Court grants plaintiff’s motion to remand to state court, rejecting defendants’ argument that the federal district court was required to exert subject matter jurisdiction over plaintiff’s state law claims because such claims are preempted by the Copyright Act.

Plaintiff CognetX is a business that provides healthcare research, analysis and consulting, and developed an interactive software program allowing clients to access its database of information. Plaintiff brought suit in state court against a former officer for, among other things, breach of contract, misappropriation of trade secrets, conversion, unjust enrichment, and unfair competition relating to the software program.

The defendants removed the action to federal court, arguing that four of plaintiff’s claims were preempted by the Copyright Act. Defendants alleged that the crux of CognetX’s complaint “is the claim that Houghton and [defendant] BOT improperly transferred, distributed and used [plaintiff’s] computer program” and therefore the federal court must exert subject matter jurisdiction over the matter.

The plaintiff, who never registered a copyright in the software and had no intention of registering a copyright, filed a motion to remand back to state court, asserting that the federal court lacks subject matter jurisdiction because plaintiff does not own a registered copyright. Defendants argued that the U.S. Supreme Court’s recent decision Reed Elsevier v. Muchnick, 130 S.Ct. 1237 (2010), held that lack of registration under § 411(a) of the Copyright Act does not defeat federal jurisdiction. The court in this case stated that “this is a novel, complex question.” According to the court, the Supreme Court left open the question “whether a district court could decline to hear a case on non-jurisdictional grounds, such as construing the lack of copyright registration as a type of procedural defect.” On the other hand, the court continued, Reed Elsevier informs district courts that the subject matter of copyright may be addressed in a federal forum despite lack of registration.

The court determined that Reed Elsevier “neither mandates nor prohibits remand in this matter” and therefore the court examined whether the plaintiff’s claims fall within the subject matter of copyright. The court held that the four claims at issue – misappropriation of trade secrets, conversion, unjust enrichment and unfair competition – all contain an “extra element” that makes the claims not equivalent to copyright infringement, and thus the claims were not preempted by the Copyright Act. The court further held that, because plaintiff had alleged separate and distinct causes of action, it need not decide whether plaintiff could recover under copyright law for defendants’ alleged actions.

In rejecting the defendants’ argument, the court said the “effect of holding that registration is now irrelevant to a federal forum’s consideration of copyright issues would virtually eliminate state trade secret law and any and all state claims relating to potentially copyrightable material. A plaintiff would be forced to choose a federal forum whenever he or she brought state claims that touched on any of the potential enumerated Copyright Act protections, whether or not the plaintiff had sought or failed to seek a registered copyright.” Accordingly, the action was remanded to state court.

The court also rejected the plaintiff’s alternative argument for removal to state court – that the defendants had waived their right to federal jurisdiction by litigating the merits of a temporary restraining order in state court – stating that such a waiver must be “clear and unequivocal.” The court held that the parties “were unquestionably in the preliminary stages of litigation” and defendants did not display any intent to waive the right to remove to federal court.