Opinion
CV 24-28-M-DLC-KLD
06-21-2024
CHRIS SCHRICHTE, Plaintiff/Counterclaim Defendant, v. CHRIS TILLEMAN; TERADACT ACQUISITIONS, LLC; DOES I-X, Defendant/Counterclaim Plaintiffs.
FINDINGS & RECOMMENDATION
KATHLEEN L. DESOTO, UNITED STATES MAGISTRATE JUDG.
This removal action comes before the Court on several motions, including Plaintiff/Counterclaim Defendant Chris Schrichte's threshold motion to remand the case to state district court pursuant to 28 U.S.C. § 1447(c). For the reasons set for the below, Schrichte's motion to remand (Doc. 24) should be denied.
I. Background
As alleged in Schrichte's original state court Complaint, he is the former chief executive officer of TeraDact Solutions, Inc., a Missoula-based software company that developed a software system for redaction of personal information from government records. (Doc. 25-1 at ¶ 6). To facilitate the generation of short- term capital, TeraDact Solutions' board of directors and shareholders authorized Schrichte to pursue a strategy known as an “assignment for the benefit of creditors” (“ABC process”). (Doc. 25-1 at ¶¶ 8-9). Under the ABC process, TeraDact Solutions' assets would be assigned to a new entity, which would market the assets to third parties, sell the assets, and use the proceeds to pay off debt owed by TeraDact Solutions. (Doc. 25-1 at ¶ 10). As a result of the ABC process, TeraDact Solutions' assets were ultimately acquired by Defendant TeraDact Acquisitions, LLC. (Doc. 25-1 at ¶ 11). Schrichte asserts that Defendants Chris Tilleman and TeraDact Acquisitions (collectively “TeraDact”) made-and later reneged on-promises regarding the terms of Schrichte's ongoing employment with TeraDact and the percentage of ownership interest in TeraDact Acquisitions that he would acquire. (Doc. 25-1 at ¶ 12).
On March 11, 2022, Schrichte filed suit against TeraDact in the Montana Fourth Judicial District Court, Missoula County. (Doc. 18 at 7-14; Doc. 25-1). Schrichte's Complaint alleged five claims for relief: (1) wrongful discharge from employment; (2) breach of contract; (3) unjust enrichment; (4) fraudulent inducement; and (5) punitive damages. (Doc. 25-1 at 5-8). Schrichte served TeraDact with a copy of the Complaint approximately six months later, on September 7, 2022. (Doc. 25-3).
While this case was pending in state court, Schrichte amended his complaint to add several new claims (Doc. 15), and TeraDact answered and counterclaimed to both the original and amended complaint. (Docs. 16; 25-3). The parties also engaged in discovery and discovery-related motion practice. (Doc. 18).
On February 21, 2024, TeraDact removed the case to this Court pursuant to 28 U.S.C. § 1441(a) based on federal question jurisdiction. TeraDact asserts that the Court has federal question jurisdiction because Schricte's unjust enrichment claim is completely preempted under the Copyright Act of 1976, 17 U.S.C. § 101 et seq. (Doc. 1 at ¶¶ 6, 27). Schrichte has filed a motion to remand the case back to state court pursuant to 28 U.S.C. § 1447(c) on the ground that the TeraDact's notice of removal was untimely. (Doc. 24).
II. Legal Standards
Under 28 U.S.C. § 1441(a), any “state-court action[ ] that originally could have been filed in federal court may be removed to federal court by the defendant.” Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). “Absent diversity of citizenship, federal-question jurisdiction is required.” Caterpillar Inc., 482 U.S. at 392.
“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.” Caterpillar Inc., 482 U.S. at 392 (citation omitted). The doctrine of complete preemption provides a narrow exception to the well-pleaded complaint rule. See Balcorta v. Twentieth Century-Fox Film Corp. 208 F.3d 1102, 1107 (9th Cir 2000). Complete preemption applies where the preemptive force of a statute is so strong that it “‘completely preempt[s]' an area of state law.” Balcorta, 208 F.3d at 1107. Where federal law completely preempts an area of state law, “any claim purportedly based on that pre-empted state law is considered, from its inception, a federal claim, and therefore arises under federal law.” County of San Mateo v. Chevron Corp., 32 F.4th 733, 748 (9th Cir. 2022). Unlike a defense of preemption, complete preemption can provide a basis for federal question removal jurisdiction under 28 U.S.C. § 1441(a). See Caterpillar, 482 U.S. at 393.
“The removal statute is strictly construed, and any doubt about the right of removal requires resolution in favor of remand.” Moore-Thomas v. Alaska Airlines, Inc., 553 F.3d 1241, 1244 (2009) (citing Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992)). There is a strong presumption against removal jurisdiction, which means that the defendant always bears of the burden of establishing that removal is proper. Gaus, 980 F.2d at 566. The removing party must show both that there are grounds for federal jurisdiction and that it complied with the procedural requirements for removal. Emrich v. Touche Ross & Co., 846 F.2d 1190, 1195 (9th Cir. 1988). Remand may be ordered based on defects in the removal procedure. 28 U.S.C. § 1447(c).
The procedure for removal is set forth in 28 U.S.C. § 1446. This statute provides two pathways to remove a case to federal court, each of which is subject to a thirty-day deadline. 28 U.S.C. § 1446(b); Dietrich v. Boeing Co., 14 F.4th 1089, 1090 (9th Cir. 2021). The first pathway applies when the basis for removal is clear from the complaint or other initial pleading, in which case the thirty-day removal period begins “to run from the date a defendant receives the initial pleading.” Dietrich, 14 F.4th at 1090 (citing 28 U.S.C. § 1446(b)(1)). “But ‘if the case stated by the initial pleading is not removable, a notice of removal may be filed within 30 days after receipt by the defendant ... of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable.'” Dietrich, 14 F.4th at 1090 (quoting 28 U.S.C. § 1446(b)(3)). Under this second pathway to removal, “an amended pleading, motion, order, or other paper must make a ground for removal unequivocally clear and certain” before the 30-day removal clock begins. Dietrich, 14 F.4th at 1095.
Removability “under § 1446(b) is determined through examination of the four corners of the applicable pleadings, not through subjective knowledge or a duty to make further inquiry.” Harris v. Bankers Life & Cas. Co., 425 F.3d 689, 694 (9th Cir. 2005). “[E]ven if a defendant could have discovered grounds for removability through investigation, it does not lose the right to remove because it did not conduct such an investigation and then file a notice of removal within thirty days of receiving the indeterminate document.” Kenny v. Wal-Mart Stores, Inc., 881 F.3d 786, 791 (9th Cir. 2018) (quoting Roth v. CHA Hollywood Med. Ctr. L.P., 720 F.3d 1121, 1125 (9th Cir. 2013)). Although § 1446(b)'s time limits are not jurisdictional, they are “mandatory and a timely objection to a late petition will defeat removal.” Fristoe v. Reynolds Metals Co., 615 F.2d 1209, 1212-13 (9th Cir. 1980).
III. Discussion
A. The Copyright Act
TeraDact's notice of removal identifies the Copyright Act of 1976, 17 U.S.C. § 101 et seq. as the basis for federal question jurisdiction. (Doc. 1 at ¶ 6). The Copyright Act gives “copyright owners the ‘exclusive rights' to display, perform, reproduce, or distribute copies of a copyrighted work, to authorize others to do those things, and to prepare derivative works based upon the copyrighted work.” Maloney v. T3Media, Inc., 853 F.3d 1004, 1010 (9th Cir. 2017) (citing 17 U.S.C. § 106).
The Ninth Circuit applies a two-part test to determine whether a state law claim is preempted by the Copyright Act. Laws v. Sony Music Entm't, Inc., 448 F.3d 1134, 1137 (9th Cir. 2006). The court must first determine whether the subject matter of the state law claim falls within the subject matter of copyright and, if it does, the court must then determine “whether rights asserted under the state law are equivalent to the rights contained in 17 U.S.C. § 106, which articulates the exclusive rights of copyright holders.” Laws, 448 F.3d at 1137-38.
Although the Ninth Circuit “has not addressed whether copyright preemption is ‘complete' such that it provides a ground for removal on the basis of federal question jurisdiction,” several district courts in the Ninth Circuit have held that the complete preemption doctrine applies to the Copyright Act and provides a basis for removal jurisdiction. Yu v. ByteDance Inc., 2023 WL 5671932, at *4 n. 2 (N.D. Cal. Sept. 1, 2023) (citing Firoozye v. Earthlink Network, 153 F.Supp.2d 1115, 1121-23 (N.D. Cal. 2001)). See also, VEFXi Corp. v. Barkatullah, 2014 WL 12792780, at *3 (D. Or. May 12, 2014).
In addition, as TeraDact points out in its notice of removal (Doc. 1 at ¶ 19), the Ninth Circuit and a number of other courts have held in various contexts that unjust enrichment claims falling within the scope of the Copyright Act may be preempted. See e.g. Best Carpet Values, Inc. v. Google, LLC, 90 F.4th 962, 970-74 (9th Cir. 2024) (holding that the plaintiffs' state-law claim for unjust enrichment was preempted under federal copyright law); Doe 1 v. GitHub, Inc., 672 F.Supp.3d 837, 856-57 (N.D. Cal. May 11, 2023) (concluding state law unjust enrichment claim based on rights within those protected by the federal Copyright Act was subject to copyright preemption); Britware Consulting, Inc. v. Con-Tech Manufactuing, Inc., 528 F.Supp.3d 1031, 1037-38 (D. Minn. 2021) (concluding an unjust enrichment claim based on the contention that the defendant “knowingly received the benefits of [the plaintiff's] software without providing just compensation” was preempted by the Copyright Act).
B. Timeliness of Removal
Schrichte does not challenge the general principle that complete preemption under the Copyright Act may provide a basis for removal jurisdiction, but rather argues TeraDact failed to comply with the statutory time limits for removal. Schrichte contends that TeraDact's notice of removal was untimely under § 1446(b)(1) because TeraDact was served with the initial state court Complaint on September 7, 2022, but did not file its notice of removal until nearly a year-and-a-half later, on February 21, 2024. TeraDact counters that its notice of removal was timely under § 1446(b)(3) because the basis for removal was not unequivocally clear and certain until February 7, 2024,when it received discovery responses making clear that Schrichte's state law claim for unjust enrichment is preempted by the Copyright Act, and it filed its notice of removal two weeks later-on February 21, 2024.
TeraDact states in its notice of removal that it Schrichte responded to its discovery requests on February 14, 2024 (Doc. 1 at ¶¶ 2, 10), but clarifies in briefing that Schrichte served his discovery responses on February 7, 2024 (Doc. 32 at 11). Regardless of which date is accurate, TeraDact filed its notice of removal less than thirty days later, on February 21, 2024. (Doc. 1).
In support of remand, Schrichte argues the alleged basis for federal question jurisdiction under the Copyright Act was plainly apparent from the allegations of his initial state court Complaint, particularly his claim for unjust enrichment. Relevant to this claim, Schrichte's pleading alleged the following facts:
12. In conjunction with [the ABC] process, Tilleman and TeraDact Acquisitions, LLC made representations and promises to Schrichte regarding the percentage of ownership of TeraDact Acquisitions, LLC that Schrichte would acquire and the terms of Schrichte's ongoing employment by TeraDact Acquisitions, LLC.
13 Tilleman and TeraDact Acquisitions, LLC, promised and represented to Schrichte that if he continued to work on developing the software, marketing it to commercial and government entities, and promoting the business, he would receive compensation in the form of ownership of TeraDact Acquisitions, LLC, bonuses based on new contracts that were generated, and salary commensurate with his contributions to the new entity.
14. In reliance on these promises, Schrichte continued to work on the software and marketing and facilitated multiple new contracts with various commercial and government entities, from which TeraDact Acquisitions,
LLC, continues to reap the financial benefits. ...(Doc. 25-1 at ¶¶ 12-14). Based on these allegations, Schrichte's unjust enrichment claim alleged:
33. If TeraDact Acquisitions was not Schrichte's employer and if TeraDact Acquisitions did not enter into a contract with Schrichte, then TeraDact has been unjustly enriched by receiving the benefit of the services Schrichte provided.
34. It would be inequitable and unjust for TeraDact Acquisitions to retain the benefit of the services Schrichte provided without compensating Schrichte for the benefit he conferred upon TeraDact Acquisitions.(Doc. 25-1 at ¶¶ 33-34).
Schrichte's Complaint also included various allegations regarding the services and benefits he claims to have provided, including allegations related specifically to software. For example, Schrichte alleged that: (1) he had not received a paycheck for five weeks “despite having continued to work diligently to improve the software and promote the business”; (2) TeraDact agreed to employ him “to continue to develop and promote the software that had been acquired by TeraDact Acquisitions”; (3) he “relied to his detriment on the promises made by Tilleman and TeraDact when he agreed to continue working to develop and market the software”; and (4) “Tilleman and TeraDact Acquisitions benefitted from their broken promises because Schrichte made material and substantial improvements to the software and helped to facilitate additional contracts for the benefit of Tilleman and TeraDact Acquisitions.” (Doc. 25-1 at ¶¶ 21, 25, 39, 40).
According to Schrichte, his Complaint thus plainly alleged that he conferred a benefit on TeraDact Acquisitions by continuing to revise the source code after the ABC process was completed, and that TeraDact Acquisitions would be unjustly enriched if it were permitted to retain that benefit without compensating him. (Doc. 25 at 7, citing Doc. 25-1 at ¶¶ 12-14, 32-35). Because it was apparent on the face of the Complaint that he was asserting a claim for unjust enrichment based on TeraDact's use of his improvements to the software source code, Schrichte contends, the alleged basis for removal under the Copyright Act was clear when TeraDact was first served with the Complaint in September 2022.
TeraDact disagrees, and argues it was not clear from the face of the initial state court Complaint that Schrichte's unjust enrichment claim is a potentially preempted Copyright Act claim. The Court agrees.
As TeraDact points out, the original state court Complaint did not mention the Copyright Act or include any other indication that Schrichte was asserting a federal claim. The Complaint did not assert that Schrichte has ownership rights in TeraDact's code or software, but rather that TeraDact owes him compensation in the form of an ownership interest in the company itself and a salary commensurate with his contributions to the new entity. Although Schrichte alleged he was not properly compensated for the work he did to improve and market TeraDact's software, he did not assert a right to or interest in the software itself. Likewise, Schrichte's claim to an ownership interest in TeraDact did not imply a claim for ownership of its assets, including its software. See U.S. v. Bennett, 621 F.3d 1131, 1136 (9th Cir. 2010) (“A basic tenet of American corporate law is that the corporation and its shareholders are distinct entities. An individual shareholder, by virtue of his ownership of shares, does not own the corporation's assets.”) (quoting Dole Food Co. v. Patrickson, 538 U.S. 468, 474-75 (2003)). TeraDact rightly argues that Schrichte's allegations were not sufficient to put it on notice that the subject matter of Schrichte's unjust enrichment claim “falls within the subject matter of copyright or that the rights asserted are equivalent to the ‘exclusive rights of copyright holders'” under § 106 of the Copyright Act. (Doc. 32 at 8).
TeraDact explains that it first began to suspect Schrichte was asserting an interest in TeraDact's software itself, not just salary compensation or an ownership stake in the company, in September 2023 when it received Schrichte's responses to a series of discovery requests that are now the subject of a motion to compel. (Doc. 32 at 11). TeraDact states that in order to be certain its suspicions were correct, it propounded a set of additional discovery requests in January 2024, including Request for Admission No. 5:
Admit that Plaintiff alleges that one or both Defendants have been unjustly enriched by the unauthorized use of certain of Plaintiff's alleged software code improvement to Defendants' then-existing software code.(Doc. 1 at ¶¶ 9-10). TeraDact maintains the basis for removal was not unequivocally clear and certain until February 7, 2024, when it received Schrichte's admission to this discovery request. Schrichte, on the other hand, contends his response to this request for admission simply confirmed what was clear from the state court Complaint-that he was asserting a claim for unjust enrichment based on TeraDact's use of improvements Schrichte made to the software code without any compensation being paid by TeraDact. (Doc. 38 at 2).
But contrary to Schrichte's characterization, he did not clearly allege in his initial Complaint that TeraDact has been unjustly enriched by the “unauthorized use” of the improvements he claims to have made to TeraDact's software. As used by the courts in the context of federal copyright preemption, “unauthorized use” carries special significance. See e.g. Firoozye, 153 F.Supp.2d at 1128 (holding that an “unjust enrichment claim, which at its core allege[d] that the defendants unfairly benefitted from their unauthorized use of” the plaintiff's software, was “equivalent to the rights protected in section 106 of the Copyright Act and [was] therefore preempted”). The Complaint alleged that TeraDact has been unjustly enriched by receiving the benefit of services provided Schrichte, including software improvements, but these allegations were grounded on the theory that Schrichte was owed salary compensation or an ownership interest in the company. The Complaint did not refer to TeraDact's alleged unauthorized use of the improvements Schrichte claims to have made or otherwise assert an interest in the software itself.
The Court agrees with TeraDact that Schrichte's response to TeraDact's request for admission made it “unequivocally clear and certain” for the first time that he was potentially asserting a property interest equivalent to a 17 U.S.C. § 106 exclusive right in TeraDact's software, not just salary compensation or an ownership stake in the company.
The 30 day period for removal under § 1446(b)(3) was thus triggered on February 7, 2024, when TeraDact received Schrichte's response to its request admission. Because it filed a notice of removal two weeks later, on February 21, 2024, TeraDact has met its burden of demonstrating that its notice of removal was timely under § 1446(b)(3).
Finally, the Court notes that although Schrichte does not presently challenge TeraDact's assertion that his unjust enrichment claim would be subject to copyright preemption if, as the Court has determined, removal was timely, he makes clear in his reply brief that he does not concede that any of his claims are preempted. (Doc. 38 at 2). In concluding that TeraDact's notice of removal was timely, the Court does not address the question of whether Schrichte's unjust enrichment claim is in fact preempted by the Copyright Act.
III. Conclusion
For the reasons outlined above, IT IS RECOMMENDED that Schrichte's motion to remand this case to state court pursuant to 28 U.S.C. § 1447(c) (Doc. 24) be DENIED. If presiding United States District Court Judge Dana L. Christensen adopts this Findings and Recommendation, the Court will address the pending discovery motions (Docs. 19, 21) by separate order.
NOW, THEREFORE, IT IS ORDERED that the Clerk shall serve a copy of the Findings and Recommendation of the United States Magistrate Judge upon the parties. The parties are advised that pursuant to 28 U.S.C. § 636, any objections to the findings and recommendations must be filed with the Clerk of Court and copies served on opposing counsel within fourteen (14) days after entry hereof, or objection is waived.