ATTORNEY FOR APPELLANTS
Thomas J. Herr
Lafayette, Indiana
ATTORNEYS FOR APPELLEE
Robert B. Carpenter
Boston, Massachusetts
Karen C. Horseman
Jonathan D. Mattingly
Indianapolis, Indiana
__________________________________________________________________
IN THE
SUPREME COURT OF INDIANA
__________________________________________________________________
JAY GREEN, SR. and )
MARY GREEN, )
) Indiana Supreme Court
Appellants (Defendants Below), ) Cause No. 79S02-0206-CV-352
)
v. ) Indiana Court of Appeals
) Cause No. 79A02-0009-CV-603
HENDRICKSON PUBLISHERS, INC., )
)
Appellee (Plaintiff Below). )
__________________________________________________________________
APPEAL FROM THE TIPPECANOE SUPERIOR COURT
The Honorable Gregory J. Donat, Special Judge
Cause No. 79D02-9906-CP-144
__________________________________________________________________
ON PETITION TO TRANSFER
__________________________________________________________________
June 27, 2002
BOEHM, Justice.
We conclude that a claim of breach of a covenant not to reproduce a
copyrighted writing appears to be preempted by federal copyright law.
Although such a claim asserts rights under the Copyright Act, it may be
asserted as a counterclaim in a state court and is not within the exclusive
jurisdiction of the federal courts.
We would be happy to be corrected on the first of these points of
federal law, as we can see no persuasive policy reasons why the Greens
should not be permitted to assert their contract claim under state law. As
the Seventh Circuit noted in ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1454
(7th Cir. 1996), contract rights exist only against the parties to the
agreement, not against the world at large. The desire for nationwide
uniformity in the law of copyright would not seem to be seriously disturbed
by an occasional holding from a state court turning on the peculiarities of
a given contract or a given state’s law of contract interpretation.
Nevertheless, we conclude that prevailing federal law treats such a state
law claim as preempted by the Copyright Act.
As to the jurisdiction of a state court to entertain such a claim, at
the time this case arrived at our Court we regarded the federal authorities
cited in this opinion as requiring us to force bifurcated litigation by
finding exclusive federal jurisdiction over the Greens’ counterclaim.
However, we think the recent decision of the Supreme Court of the United
States in Holmes Group, Inc. v. Vornado Air Circulation Sys., Inc., __ U.S.
__, 122 S. Ct. 1889 (2002), implies that there is no exclusive federal
jurisdiction over this claim. Accordingly, we reverse the trial court’s
grant of partial summary judgment to Hendrickson.
Factual and Procedural Background
In 1985, Hendrickson Publishers, Inc. contracted for a ten-year term
to publish and distribute books to which Mary and Jay Green claimed the
copyright. These books were compilations of cross-references among works
in the public domain, e.g., cross-references from Hebrew words appearing in
the Bible to a Bible-study guide defining those words. As the end of the
contract term approached, Hendrickson notified the Greens that the
publishing agreement would not be renewed. In 1995, the parties entered a
termination agreement that outlined procedures for wrapping up the parties’
relationship.
In 1999, Hendrickson initiated this action in Tippecanoe Superior
Court seeking monies due from the Greens for books sold on account. The
Greens counterclaimed, alleging, inter alia, that Hendrickson infringed the
Greens’ copyrights by continuing to print and sell the Greens’ books after
the original agreement expired. The Greens then removed the action to
federal court, based on the exclusive federal jurisdiction over copyright
claims. The federal court remanded the action because a defendant’s
counterclaim based on federal law does not confer federal court
jurisdiction. Rather, the basis for removal must appear on the face of the
plaintiff’s complaint.
Back in state court, the Greens amended their counterclaim, and in a
single count alleged the following:
3. Hendrickson Publishers, Inc. violated the terms of the parties’
agreement:
A. By failing to give notice to Green when a book was out of
print.
B. By failing to timely provide updated reports on the status
of books in stock.
C. By failing to timely pay royalties due pursuant to the
parties’ agreement. In particular, a royalty payment due
November 30, 1995 was not paid until January of 1996.
D. By continuing to print additional copies of the books
covered by the 1985 agreement.
Hendrickson filed a motion for partial summary judgment, asserting that
paragraphs 3(C)—to the extent it concerned books published after the
original agreement expired—and 3(D) were based on the federally preempted
copyright claim and were now merely couched as claims for breach of
contract. At a hearing on the motion, the Greens contended that their
agreement prohibited Hendrickson from publishing the compilations under its
own name and required Hendrickson to pay royalties to the Greens.
Therefore, the Greens argued, their claims arose under state law because
they were based on the parties’ agreement, independent of the Greens’
rights under federal copyright law. Hendrickson countered that the books
it published in alleged violation of the agreement were not the same as
those produced by the Greens, an issue Hendrickson claimed could only be
resolved by a federal court applying federal copyright law. The trial
court agreed the claims were preempted, and entered summary judgment for
Hendrickson on the offending portions of the counterclaim. The trial court
then stayed the proceedings to permit the Greens to pursue an interlocutory
appeal. The Court of Appeals reversed, holding that the copyright issues
were merely tangential to the contract claims, and the trial court had
jurisdiction over the offending portions of the counterclaim. Green v.
Hendrickson Publishers, Inc., 751 N.E.2d 815, 824-25 (Ind. Ct. App. 2001).
This Court granted transfer.
Hendrickson describes its motion to dismiss these claims as based on
the contention that the Copyright Act has preempted the claims and
therefore the state courts have no jurisdiction over it. We think this
formulation conflates the issues of jurisdiction and preemption. Otherwise
stated, one issue is whether the Greens have a valid state law claim. A
second question is what court may entertain the Greens’ claim. If federal
law preempts the rights asserted, the Supremacy Clause prevents a state
from creating such a claim, and an attempt to assert it in any court, state
or federal, fails for failure to state a claim, not lack of jurisdiction.
If, however, we are to treat an attempt to assert a state law claim that is
preempted as presenting a federal claim, albeit a disguised one, then we
are presented with the issue of the state court’s jurisdiction over that
federal claim.
I. Copyright Infringement or Breach of Contract?
The first issue is whether the offending portions of the counterclaim
may be heard as state law breach of contract claims as the Court of Appeals
held, or if they are in fact federally preempted copyright infringement
claims. Although there was for a long time a body of state copyright law,
in 1976 Congress federalized the field of copyright. One aspect of that
action was the provision of section 301(a) of the Copyright Act that
preempted state law “legal or equitable rights” if they “are equivalent to
any of the exclusive rights within the general scope of copyright.” 17
U.S.C. § 301(a) (1994). There is no doubt about the desire of Congress to
preempt the field as fully as possible. As the House Report put it:
The intention of section 301 is to preempt and abolish any
rights under the common law or statutes of a State that are equivalent
to copyright and that extend to works coming within the scope of the
Federal copyright law. The declaration of this principle in section
301 is intended to be stated in the clearest and most unequivocal
language possible, so as to foreclose any conceivable
misinterpretation of its unqualified intention that Congress shall act
preemptively, and to avoid the development of any vague borderline
areas between State and Federal protection.
H.R. Rep. No. 94-1476, at 130 (1976), reprinted in 1976 U.S.C.C.A.N. 5659,
5746.
Federal courts track section 301 in applying a two-pronged preemption
analysis. A state civil action is preempted if (1) the work at issue is
within the subject matter of copyright as defined in sections 102 and 103
of the Copyright Act, and (2) the state law created right is “equivalent”
to any of the exclusive rights within the general scope of copyright as
specified in section 106. Nat’l Car Rental Sys., Inc. v. Computer Assocs.
Int’l, Inc., 991 F.2d 426, 428 (8th Cir. 1993). Here, the parties agree
the first prong of the test is satisfied, but debate the “equivalency”
issue.
Whether a state right is “equivalent” to rights under federal
copyright law is itself a question of federal law: it turns on the meaning
of that term as used in 17 U.S.C. § 301(a). A right sought under state law
is “equivalent” to the exclusive rights under copyright if the right in
question is infringed by the mere act of reproduction, performance,
distribution or display. Id. at 431 (citing 1 Nimmer on Copyright §
1.01[B][1], at 1-13). However, if an “extra element” is required by the
state created right, either instead of or in addition to the acts of
reproduction, performance, distribution or display, then the state right is
not preempted. Id.
The Greens, relying principally on ProCD, Inc. v. Zeidenberg, 86 F.3d
1447 (7th Cir. 1996), contend the parties’ agreement provides the extra
element necessary to avoid preemption of their claims, effectively
converting what would be an infringement claim against a stranger to the
contract into a breach of contract claim against Hendrickson in its
capacity as a promisor. Prevailing federal authority is against the Greens
on this point of federal law. First, although the court in ProCD did state
that “a simple two-party contract is not ‘equivalent to any of the
exclusive rights within the general scope of copyright,’” the court was
addressing the enforcement of shrinkwrap licenses purporting to govern the
use of computer software. Id. at 1455. These licenses included a variety
of terms beyond a simple covenant not to reproduce the work. In
particular, there was no claim that the alleged infringer had purchased and
“reproduced” the software without authorization. The claim was that the
shrinkwrap license authorized only the noncommercial use of the “consumer”
version of the program, and the user had applied it for commercial
purposes. Id. at 1450. In ProCD itself, the court found it “prudent to
refrain from adopting a rule that anything with the label ‘contract’ is
necessarily outside the preemption clause: the variations and possibilities
are too numerous to foresee.” Id. at 1455. Accordingly, although this
case has been taken by some to hold that any contract supplies the
necessary “extra element,” we agree with the courts that have rejected the
view that ProCD stands for the universal proposition “that no breach of
contract action would ever be barred by § 301 [of the Copyright Act].”
See, e.g., Ballas v. Tedesco, 41 F. Supp. 2d 531, 536-37 n.14 (D.N.J.
1999). Further, to the extent ProCD suggests that no state contract claim
is preempted, that decision has met with harsh criticism. As one leading
commentator on copyright has noted, ProCD relied on three other cases, each
involving contract rights significantly broader than the simple promise not
to reproduce.[1] Accordingly, “none supports the broad conclusion that the
Seventh Circuit ascribes to them.” 1 Nimmer on Copyright § 1.01[B][1][a],
at 1-20. Thus, “pre-emption should continue to strike down claims that,
though denominated ‘contract,’ nonetheless complain directly about the
reproduction of expressive materials.” Id. at 1-22.
We conclude that federal law does not regard the rights the Greens
seek to vindicate under their agreement with Hendrickson as qualitatively
different from their federal copyright law rights. A naked promise not to
infringe a copyright does not provide the extra element necessary to avoid
preemption because that promise “is so inextricably entwined with the
copyright that to permit the promisee to sue upon it would undermine the
preemption feature of the Copyright Act.” Selby v. New Line Cinema Corp.,
96 F. Supp. 2d 1053, 1060 (C.D. Cal. 2000). In this case, the Greens
allege Hendrickson violated the parties’ agreement by “continuing to print
additional copies of the books covered by the 1985 agreement.” Thus, if
any breach of contract occurred, it was accomplished by the wrongful
reproduction of the works, and violated no other provision of the contract.
The agreement therefore provided the Greens with no rights they did not
already enjoy under copyright law, and no element other than reproduction
was needed to state a claim for a violation of those rights. Accordingly,
federal law appears to preempt this claim, and the only relief available to
the Greens is the relief they originally sought: vindication of their
rights under the Copyright Act.
II. Does a Counterclaim Give Rise to a “Civil Action” Subject to Exclusive
Federal Jurisdiction under 28 U.S.C. § 1338?
Because federal law appears to preempt the Greens’ claims, taking
their counterclaim at face value as grounded in state contract law, it
fails to state a claim. The issue then becomes whether, if the
counterclaim is to be treated as a claim under the Copyright Act, it is
cognizable in a state court. If it is not, the resulting forced
bifurcation of litigation was a reason the Court of Appeals noted in
supporting state court jurisdiction by regarding the claim as one under
state law. Green, 751 N.E.2d at 824.
The federal district courts have original jurisdiction over “all civil
actions arising under the Constitution, laws, or treaties of the United
States.” 28 U.S.C. § 1331 (1994). This federal question jurisdiction is
not exclusive, however, and state courts may entertain claims based on
federal law in the absence of a provision reserving exclusive jurisdiction
to the federal system. Grubb v. Pub. Util. Comm’n, 281 U.S. 470, 476
(1930). For purposes of removal of an action from state court to federal
court, the United States Supreme Court has long held that the presence or
absence of federal question jurisdiction is governed by the “well-pleaded
complaint” rule, which provides that federal jurisdiction exists only when
a federal question is presented on the face of the plaintiff’s properly
pleaded complaint. Rivet v. Regions Bank of La. et al., 522 U.S. 470, 475
(1998); see also Louisville & Nashville R. Co. v. Mottley, 211 U.S. 149,
152 (1908). A defendant’s defense is not part of a properly pleaded
statement of the plaintiff’s claim, so a case may not be removed on the
basis of a federal defense. Id. Similarly, a defendant cannot render a
case removable to federal court by pleading a counterclaim asserting a
federal claim. Takeda v. Northwestern Nat’l Life Ins. Co., 765 F.2d 815,
822 (9th Cir. 1985). Thus, the Greens could not remove this action to
federal court based upon the allegations raised in their counterclaim, and
for that reason the federal district court remanded the case when removal
was attempted.
Because of the “well-pleaded complaint” rule, the Greens’
counterclaim did not confer federal jurisdiction over this case, and their
effort to remove it to federal court failed. The Court of Appeals
nevertheless correctly observed that there is no jurisdictional bar to the
Greens’ assertion of their federal copyright claim as a separate lawsuit in
federal court under the copyright jurisdiction. Green, 751 N.E.2d at 824.
Indeed, Hendrickson concedes this point and relies on it in urging that
preclusion of state court jurisdiction does not deprive the Greens of a
forum altogether.[2] If Hendrickson is correct, separate lawsuits in state
and federal court would be required where a defendant in a state court
action seeks to assert rights under federal copyright law. This is true
even if, as in this case, the copyright claim arises out of the same
“transaction or occurrence” as the plaintiff’s complaint and would be a
compulsory counterclaim under Federal Rule of Civil Procedure 13 or its
Indiana counterpart, Trial Rule 13.
Whether the Greens may assert a federal claim in state court is
governed by federal law. The federal Judicial Code confers original
jurisdiction on the federal district courts in “any civil action arising
under any Act of Congress relating to patents, plant variety protection,
copyrights and trademarks.” 28 U.S.C. § 1338(a) (1994). That jurisdiction
is “exclusive of the courts of the states in patent, plant variety
protection and copyright cases.” Id. Thus, for the Greens’ counterclaim
to be cognizable by a state court, it must not be asserted in a “civil
action arising under any Act of Congress relating to . . . copyrights” as
that phrase appears in section 1338(a).
We are aware of no federal authority explicitly addressing whether a
counterclaim in a state court gives rise to a “civil action” as that term
is used in section 1338(a). The conclusion that a state counterclaim
converts a lawsuit into a “civil action arising under” the Copyright Act
seems highly anomalous in view of the fact that 28 U.S.C. § 1331,
conferring general federal question jurisdiction, uses the very same term
“civil action arising under” other laws of the United States to include
only those meeting the “well-pleaded complaint” test. Nevertheless, until
very recently the logic and language of a consistent body of federal
decisions appeared to preclude a state court from entertaining a
counterclaim under copyright law.
The leading case on this point was Aerojet-Gen. Corp. v. Mach. Tool
Works, Oerlikon-Buehrle, Ltd., 895 F.2d 736 (Fed. Cir. 1990). Pursuant to
28 U.S.C. § 1295(a), the Federal Circuit has exclusive appellate
jurisdiction over patent appeals from the district courts “if the
jurisdiction of [the district court] was based, in whole or in part, on
section 1338.” In Aerojet, the Federal Circuit held that for purposes of
determining appellate jurisdiction over patent cases, a compulsory
counterclaim in a federal court should be treated as a complaint—that is,
as a separate “civil action” that may be appealed only to the Federal
Circuit. Aerojet did not directly address the status of a state court
counterclaim. However, the Federal Circuit quoted Schwarzkopf Dev. Corp.
v. Ti-Coating, Inc., 800 F.2d 240, 244 (Fed. Cir. 1986), to the effect that
the patent counts of a counterclaim “could not have been filed in the state
court” and “[a]djudication of a patent counterclaim is in the exclusive
province of the federal courts.” 895 F.2d at 740. The court concluded
that the counterclaim was “a separate, well-pleaded claim with its own
jurisdictional basis” in section 1338. Id. at 742. Although reaffirming
the “well-pleaded complaint” requirement for federal district court
jurisdiction, Aerojet nevertheless held that the jurisdiction of the
district court over the patent counterclaim was “in part” grounded on
section 1338. Id. at 745. Aerojet was cited with approval by the Seventh
Circuit. U.S. Valves, Inc. v. Dray, 190 F.3d 811, 813 n.6 (7th Cir. 1999).
In DSC Communications Corp. v. Pulse Communications, Inc., 170 F.3d 1354,
1359 (Fed. Cir. 1999), the Federal Circuit extended the Aerojet holding to
include permissive counterclaims as well. The crux of the Aerojet holding
was that if a counterclaim has “its own jurisdictional basis” for purposes
of section 1338(a), then it is also governed by the provision of section
1338(a) that confers exclusive jurisdiction on the federal courts.
Accordingly, under Aerojet a counterclaim asserting patent rights that, if
placed in a complaint, would be required to be filed in federal court, may
not be entertained by a state court.
Although the statement in Aerojet that a patent counterclaim “could
not have been filed in the state court” was dicta, it seems to reflect the
common understanding of the federal courts on this point of federal law. A
leading commentator took the same position. Chisum on Patents §
21.02[1][e], at 21-91 n.129. A number of state courts have also reached
the conclusion that they may not entertain a counterclaim asserting a claim
that would be within section 1338 if filed as a complaint, although it is
not clear whether they did so on the basis of federal law or under state
doctrines.[3]
All of the foregoing is, we think, trumped by the Supreme Court’s
ruling in Holmes Group, Inc. v. Vornado Air Circulation Sys., Inc., __ U.S.
__, 122 S. Ct. 1889 (2002). In Holmes, the Supreme Court rejected the
Federal Circuit’s reasoning that it would be incongruous to confer
exclusive appellate jurisdiction on the Federal Circuit when a well-pleaded
patent infringement claim was undertaken in a complaint but not when the
identical claim was asserted in a counterclaim. Id. at 1893. Rather, the
Supreme Court rested on the language of section 1338 and found its use of
the familiar “arising under” phrase to incorporate the “well-pleaded
complaint” test that governs federal jurisdiction under section 1331.
Holmes reaffirmed the established rule that a patent counterclaim did not
confer original or removal jurisdiction on a federal district court, and
squarely held that the Federal Circuit’s appellate jurisdiction under
section 1295(a) is congruent with the original exclusive jurisdiction of
the district court under section 1338. Holmes seems clearly to reject the
contention that “civil action arising under” has a different meaning under
section 1338(a) from the “well-pleaded complaint” requirement of section
1331. The only basis for concluding that a state court may not entertain
patent or copyright counterclaims is the exclusive jurisdiction conferred
by section 1338 over “any civil action arising under” the patent or
copyright laws. A counterclaim under those laws does not fall within that
language. Holmes teaches that what Congress said—not what it intended—is
controlling here: “Our task here is not to determine what would further
Congress’s goal of ensuring patent-law uniformity, but to determine what
the words of the statute must fairly be understood to mean.” Id. at 1895.
Accordingly, we think Holmes requires us to reject the federal authorities
stating or implying that a state court may not entertain a counterclaim
under patent or copyright law.
We think it makes no difference that Holmes was a patent case, not one
dealing with copyright. Apparently copyright was not regarded as raising
the same forum shopping issues that gave rise to the reservation of
exclusive jurisdiction over patent appeals to the Federal Circuit. As a
result, the appellate jurisdiction statutes are different for patent and
copyright cases. Holmes dealt with the appellate jurisdiction of the
Federal Circuit but tied that jurisdiction to the original exclusive
jurisdiction of the federal district court. Copyright and patent
jurisdictions are identical at the district court level. Both are set
forth in the same federal statute in the same terms. Accordingly, we think
Holmes controls this case under copyright law.
We conclude that a copyright counterclaim is not subject to the
exclusive jurisdiction provision of section 1338, and the authorities
stating that such a claim “could not have been filed in the state court”
are no longer prevailing federal law.
Conclusion
The grant of partial summary judgment in favor of the plaintiffs is
reversed. This case is remanded to the trial court.
SHEPARD, C.J., and DICKSON, SULLIVAN, and RUCKER, JJ., concur.
-----------------------
[1] In Nat’l Car Rental, the court explicitly relied on the “extra element
rule” to find that a contractual provision prohibiting the use of computer
software to process data for third parties was qualitatively different from
a contract that could be “breached ‘by the mere act of reproduction,
performance, distribution or display.’” 991 F.2d at 433. In Taquino v.
Teledyne Monarch Rubber, 893 F.2d 1488, 1501 (5th Cir. 1990), the contract
at issue prohibited Taquino, an independent contractor who sold and managed
services for Teledyne, from representing a competing company prior to
termination of his relationship with Teledyne, a restriction that again
meets the “extra element rule” and clearly is not the equivalent of a
copyright claim. Likewise, in Acorn Structures, Inc. v. Swantz, 846 F.2d
923, 926 (4th Cir. 1988), the contract at issue contained an “implicit
provision” that if a prospective homeowner used Acorn’s home design plans,
he was obligated either to purchase the plans from Acorn or to purchase his
building materials from Acorn, a provision that “does not arise out of the
subject matter of copyright and is therefore a separate and distinct cause
of action.”
[2] Although the Court of Appeals was correct in observing that there is no
jurisdictional bar to the Greens’ asserting a federal copyright claim as a
separate lawsuit in federal court under the copyright jurisdiction, the
court expressed concern that if the Greens did so, the state and federal
compulsory counterclaim rules “could act as a bar to the separate action
‘if it arises out of the transaction or occurrence that is the subject
matter of the opposing party’s claim.’” Green, 751 N.E.2d at 824 (quoting
Fed. R.Civ.P. 13(a) & Ind. Trial Rule 13(A)). Because we find state court
jurisdiction over the Greens’ counterclaim to be proper for the reasons
given below, we agree that claim preclusion could prevent the Greens from
presenting their claim in a separate suit. We do not agree that that would
be the case if the state court had no jurisdiction over the Greens’
counterclaim. Although it is true that the subject matter of the Greens’
counterclaim and the as yet unfiled federal copyright claim are logically
related and presumably arise out of the same “transaction or occurrence,”
if the state court had no jurisdiction over the subject matter of the
counterclaim, it cannot be “compulsory” within the meaning of Rule 13. See
Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 382 (1985)
(“[C]laim preclusion generally does not apply where ‘[t]he plaintiff was
unable to rely on a certain theory of the case or to seek a certain remedy
because of the limitations on the subject matter jurisdiction of the
courts.’” (quoting Restatement (Second) of Judgments § 26(1)(c) (1982))).
[3] See Pleatmaster, Inc. v. Consol. Trimming Corp., 156 N.Y.S.2d 662, 666
(N.Y. Sup. Ct. 1956) (holding counterclaim is equivalent to affirmative
action brought by litigant and relief requested is of the same nature as
judgment demanded in complaint, so state court does not have jurisdiction
over counterclaim raising federally preempted patent issues); Tewarson v.
Simon, 750 N.E.2d 176, 183 (Ohio Ct. App. 2001) (holding, without
discussion of nature of counterclaim, court does not have jurisdiction over
counterclaim for declaratory judgment of exclusive right to publish, as
counterclaim arises under Copyright Act); Superior Clay Corp. v. Clay Sewer
Pipe Ass’n, 215 N.E.2d 437, 440 (Ohio Ct. Common Pleas 1963) (holding,
without discussion of nature of counterclaim, court does not have
jurisdiction over counterclaim for patent infringement, because the “main
issue” of the counterclaim is a matter not of state law but of federally
preempted patent law). Compare Am. Home Prods. Corp. v. Norden Labs.,
Inc., No. 11615, 1992 Del. Ch. LEXIS 262, at *8-10 (Del. Ch. Dec. 9, 1992),
which principally relies on Pleatmaster, but buttresses its argument with a
state law analysis of a counterclaim as an independent action.