Software for Moving, Inc. v. La Rosa Del Monte Exp., Inc., 2009 WL 1788054 (S.D.N.Y. 2009)
There was a decision last week in the S.D.N.Y. that is candy for any of you who, like me, love the sometimes bizarre world of subject matter jurisdiction. In Software for Moving, Inc. v. La Rosa Del Monte Exp., Inc., the Defendant moving company refused to make payments to a vendor of a web-based moving software, allegedly because the vendor was behind schedule. The Defendant brought an arbitration proceeding under an arbitration clause in its licensing agreement. The Plaintiff vendor filed an action in the Northern District of Illinois alleging, among other things, copyright infringement. The moving company filed a motion to dismiss based on lack of subject matter jurisdiction or, in the alternative, a transfer to the Southern District of New York.
Eden Toys and subject matter jurisdiction in the Northern District of Illinois
There is a peculiar, but generally accepted, judicially created exception to 17 U.S.C. 204(a)’s requirement that an assignment of exclusive rights must be in writing. The exception, which was first enunciated in Eden Toys, Inc. v. Florelee Undergarment, Co., Inc., 697 F.2d 27 (2d Cir. 1983), bars a third-party from contesting the validity of a transfer when the copyright owner and the transferee don’t dispute the transfer. Under this exception, the Defendant moving company wasn’t allowed to challenge the Plaintiff’s copyright ownership:
Judge Gottschall relied upon established case law in the Seventh Circuit that “[w]here there is no dispute between the copyright owner and the transferee over the status of the copyright, ‘it would be unusual and unwarranted to allow a third party infringer to invoke [17 U.S.C. § ] 204(a) to avoid suit for copyright infringement.’ “ Software for Moving, Inc. v. La Rosa Del Monte Express, Inc., No. 07 Civ. 1839, 2007 WL 4365363, at *3 (N.D.Ill.Dec. 7, 2007) (quoting Billy-Bob Teeth, Inc. v. Novelty, Inc., 329 F.3d 586, 592-93 (7th Cir.2003)).
Judge Gottschall of the Northern District of Illinois found the court had subject matter jurisdiction over the suit and transferred the case to the Southern District of New York.
Proceedings in the Southern District of New York
In the Southern District of New York the Plaintiff claimed that the licensing agreement was a forgery and not binding on the dispute. The Court held a non-jury trial, heard five witnesses, and reached the conclusion of fact that the agreement was valid, including the arbitration clause which stated (emphasis mine):
Except as specifically provided in this Agreement, the parties agree that any dispute or controversy arising out of, relating to or in connection with the interpretation, validity, construction, performance, breach or termination of this Agreement shall be submitted to binding arbitration to be held in Westchester County, New York in accordance with the rules of the American Arbitration Association.
The Court also rejected the Defendant’s renewed claim that it lacked subject matter jurisdiction on grounds that it should generally provide deference to earlier decisions in a case, and that the Second Circuit recognizes the Eden Toys exception to Copyright Act’s requirement of a written assignment. The Court further found that the question was moot because it had decided in the Defendant’s favor that the licensing agreement was binding, and it ordered arbitration.
So where’s the Catch-22?
The problem with this case is that the question of subject matter jurisdiction is never moot. The issue of whether a court has subject matter jurisdiction “is inflexible and without exception, which requires this court, of its own motion, to deny its jurisdiction . . . in all cases where such jurisdiction does not affirmatively appear in the record.” Mansfield, C. & L. M. R. Co. v. Swan,111 U. S. 379, 382 (1884). The S.D.N.Y. issued a final judgment in Software for Moving, Inc. v. La Rosa Del Monte Exp., Inc. finding that the parties were bound by the arbitration clause. But when the Court issued the judgment, the question of whether the tribunal had subject matter jurisdiction was still up in the air.
Under the facts presented, the Court only had subject matter jurisdiction over the copyright claim and the suit in general if it were to find that there was a termination of the licensing agreement — that there was a claim for copyright infringement, not of contract. Thus we can’t be certain the Court had subject matter jurisdiction unless it delved further into the merits of the case, and decided whether there was a termination of the licensing agreement. According to the arbitration clause, the question of whether there was termination was supposed to be reserved for arbitration.
So does the Court have power to issue a final judgment on the grounds that it might have subject matter jurisdiction? Or is required to address the merits of the case because the merits are intertwined with the question of whether it has subject matter jurisdiction?
This Catch-22 doesn’t go away if you switched the parties in the case and made the plaintiff the defendant, and the defendant the plaintiff. The Federal Arbitration Act doesn’t create an independent basis for subject matter jurisdiction. Instead, tribunals “look through” an arbitration petition and order arbitration if, “‘[s]ave for the arbitration agreement,’ the Court would have jurisdiction the ‘substantive [controversy] between the parties.” Vaden v. Discovery Bank, 556 U.S. __ (2009). Regardless of whether the motion to compel arbitration is a complaint or a counter-claim the Court isn’t certain it has jurisdiction until it addresses many of the merits of the case. This issue also wouldn’t be resolved if plaintiff seeking to compel arbitration were to file in state court. Federal district courts have exclusive original jurisdiction over copyright claims.
So, can a tribunal issue a judgment when it may, but doesn’t necessarily, have subject matter jurisdiction? Is it possible to square the judgment in Software Movers, Inc. with the language in Mansfeld that a Court must “deny its jurisdiction . . . in all cases where such jurisdiction does not affirmatively appear in the record”? And if it isn’t possible, are all arbitration clauses that compel arbitration over whether there was a termination of an agreement all but worthless.
