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SCO's Cases in SCO v. Novell - Friedman v. Stacey Data
Saturday, October 16 2004 @ 11:12 PM EDT

Here is the second case relied upon by SCO in its Memorandum in Opposition to Novell's Motion to Dismiss [Docket #52], Lawrence Friedman v. Stacey Data Processing Services, Inc., again simplified by some editing for clarity.

****************************************
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS,
EASTERN DIVISION

Lawrence Friedman, Plaintiff, v. Stacey Data Processing Services, Inc., Defendant
No. 89 C 4444

OPINION: Ilana Diamond Rover, US District Judge

I. INTRODUCTION

Plaintiff Lawrence Friedman ("Friedman") brought this lawsuit against defendant Stacey Data Processing Services, Inc. ("Stacey") pursuant to the Copyright Act of 1976, 17 U.S.C. 101 et seq., alleging that Stacey was marketing software on which Friedman holds a copyright. Defendant filed a two-count counterclaim against plaintiff Friedman and his counsel, Marvin N. Benn ("Benn").

Count One of the counterclaim is brought pursuant to the Declaratory Judgment Act, 28 U.S.C. 2201-2202, and seeks a declaratory judgment that Friedman's copyright in the computer software programs at issue is invalid and unenforceable because of misrepresentations which Benn and Friedman allegedly made to the Copyright Office in obtaining the copyright.

Count Two of the counterclaim is brought pursuant to the Illinois Uniform Deceptive Trade Practices Act, Ill. Rev. Stat. ch. 121 1/2, paras. 311 et seq. and alleges unfair competition. Pending before the Court is Benn's motion to dismiss the counterclaim as to him because of a lack of pendent party jurisdiction over him. [1] For the reasons set forth below, Benn's motion is denied.

II. FACTS

On a motion to dismiss a counterclaim for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1), the trial court must accept as true the factual allegations of the counterclaim. See Sladek v. Bell Systems Management Pension Plan, 880 F.2d 972, 974-75 (7th Cir. 1989).

Plaintiff Friedman is an attorney who specializes in collection law, and defendant Stacey is a businessman who provides computer services. Benn is Friedman's attorney. Rotunda, Inc. ("Rotunda") is an Illinois corporation owned by Friedman's wife. In 1978, Rotunda employed Stacey to provide Friedman with a computerized debt-collection and court calendar processing system. Stacey hired Richard J. Pryzeki ("Pryzeki") as an independent contractor in order to assist Stacey in preparing the computer software necessary for this system.

Stacey completed development of the software by September 30, 1979. Following the completion of the project, Pryzeki entered into an agreement with Stacey in which he transferred all vested rights and interests in the program to Stacey. As a result, according to the counterclaim, Stacey achieved absolute ownership of the software and any copyright and/or intellectual property rights.

Stacey provided services to Friedman in connection with the software from 1979 to 1989. He has provided similar services to the legal community since 1981. Stacey's other clients include both past employees and competitors of Friedman, and Friedman was aware that such services had been provided to them.

Stacey charges that with the help of Benn, Friedman fraudulently obtained a copyright upon the debt collection software Stacey created for him, purportedly in order to gain an unfair advantage over his competitors and to interfere with Stacey's ability to use the software in providing services to other clients. Benn allegedly signed and certified the copyright application as true even though he was aware that it contained false representations, specifically, Stacey alleges that the application falsely asserted that the copyrighted work was a "work made for hire," and that Friedman was the author of the program.

This representation was made, Stacey contends, despite the fact that Friedman and Benn knew that Pryzeki was hired to work for Stacey as an independent contractor and that Friedman could not be deemed the author under the work-made-for-hire provisions of the Copyright Act because the parties to the software agreement were Rotunda and Stacey. According to the counterclaim, had these facts not been misrepresented, Friedman's application for registration of the copyright would have been denied. However, the application was granted. Following receipt of the registration and copyright, Friedman's wife assigned Rotunda's interest in the software to Friedman.

Finally, Stacey alleges that Friedman's copyright infringement suit has irreparably injured and impaired Stacey's right to use and distribute portions of the software. Stacey further asserts that by refusing invitations to inspect the systems, Friedman has failed to establish a basis for the pending infringement claim.

In Count One of the counterclaim, Stacey seeks a declaratory judgment pursuant to 28 U.S.C. 2201 that Friedman's copyright is invalid and unenforceable in that it fails to meet the requirements of 17 U.S.C. 101, 201, 202, 204, 408, and 408 "and as a result of Friedman's unclean hands." Count Two of the counterclaim sets forth a claim of unfair competition under Illinois common law and the Illinois Uniform Deceptive Trade Practices Act, Ill. Rev. Stat. ch. 121 1/2, paras. 311, et seq.

III. ANALYSIS

Benn is not a party to the complaint; only the counterclaim confers that status upon him. Benn moves to dismiss the counterclaim as to him on the ground that neither of the counts set forth in the counterclaim provides a basis for federal jurisdiction, and that under the Supreme Court's recent decision in United States v. Finley, 490 U.S. 545, 109 S. Ct. 2003 (1989), the Court lacks pendent party jurisdiction over him. However, as set forth below, 28 U.S.C. 1338(b) provides an express grant of jurisdiction over the charge of unfair competition which Stacey has asserted against Benn, and consequently there is no need for resort to the related doctrines of ancillary or pendent party jurisdiction in order to bring Benn into the federal forum. [2]

The threshold premise of Benn's motion is incorrect. Count One of the counterclaim seeks a declaratory judgment that Friedman's copyright registration is invalid and unenforceable due to the fraudulent activity in which Friedman and Benn allegedly engaged. [3[ In relevant part, the Declaratory Judgment Act provides:

In a case of actual controversy within its jurisdiction, . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.

28 U.S.C. 2201(a).

Benn is correct in asserting that the Declaratory Judgment Act does not enlarge the jurisdiction of the federal Courts. See Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-72, 70 S. Ct. 876, 879 (1950); Nuclear Engineering Co. v. Scott, 660 F.2d 241, 253-54 (7th Cir. 1981), cert. denied, 455 U.S. 993, 102 S. Ct. 1622 (1982). However, the subject of Stacey's claim under the Act is the validity of Friedman's registration of copyright. The provisions of 28 U.S.C. 1338(a) thus come into play:

The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection, and copyright cases.

Stacey's claim is plainly one "arising under" the federal copyright statute; and by the plain terms of
1338(a), it is one over which the federal courts enjoy exclusive jurisdiction. Thus, contrary to Benn's assertion, Count One of Stacey's counterclaim does possess an independent basis for federal jurisdiction. Cf. Rengo Co. v. Molins Machine Co., 657 F.2d 535, 539 (3d Cir.) (assuming that district court lacked jurisdiction over plaintiff's complaint for patent infringement, jurisdiction over the action was nonetheless supplied by defendant's counterclaim seeking declaration that patent was invalid and had not been infringed), cert. denied, 454 U.S. 1055, 102 S. Ct. 600 (1981). See also Akzona Inc. v. E.I. du Pont de Nemours & Co., 662 F. Supp. 603, 619 (D. Del. 1987).

Nonetheless, Count One of the counterclaim does not supply jurisdiction over Benn. Although Benn is referenced in the allegations of Count One and his alleged acts of fraud partially form the basis for Stacey's claim that Friedman's copyright registration is invalid, Count One seeks no relief against Benn. Neither the complaint nor the counterclaim asserts that Benn holds any interest in the copyright at issue. Consequently, Stacey's request for a declaratory judgment to the effect that Friedman's copyright registration is invalid does not implicate any right belonging to Benn. Moreover, although Benn's motion to dismiss presumes that both counts of the counterclaim assert claims against Benn, Stacey's responsive memorandum refers consistently to a singular claim against Benn and appears to confirm that only Count Two of the counterclaim, alleging unfair competition, was intended to present a claim against Benn. That count expressly targets Benn's actions, as does the portion of the prayer for relief which is based upon that count (see id. at 19, para. E). Because only Count Two effectively names Benn as a defendant, that count becomes the focus of the jurisdictional inquiry.[4]

Although Count Two is based upon Illinois law, 28 U.S.C. 1338(b) supplies federal jurisdiction over that claim. Section 1338(b) provides:

The district courts shall have original jurisdiction of any civil action asserting a claim of unfair competition when joined with a substantial and related claim under the copyright, patent, plant variety protection or trademark laws.

It is undisputed that Count Two asserts a claim of unfair competition; consequently, this Court possesses original jurisdiction over that claim so long as it may be deemed joined with a
substantial and related copyright claim. Both the complaint and Count One of the counterclaim
supply that nexus. Count One of Friedman's complaint against Stacey asserts a claim of copyright infringement. Stacey's countercharge that the manner in which Benn and Friedman have obtained
the copyright in suit amounts to unfair competition may properly be deemed a claim of unfair competition joined with a substantial [5] and related [6] copyright claim. Cf. Rite-Hite Corp. v. Kelley Co., 629 F. Supp. 1042, 1046 (E.D. Wis. 1986), judgment aff'd, 819 F.2d 1120 (Fed. Cir. 1987) (in action for patent infringement, court had jurisdiction pursuant to 1338(b) over claims and counterclaims of unfair competition); Paine, Webber, Jackson & Curtis, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 587 F. Supp. 1112, 1114 (D. Del. 1984) (where plaintiff had filed suit seeking to declare defendant's patent invalid, court likely had jurisdiction over defendant's counterclaim of unfair competition).

At the same time, Stacey's unfair competition claim is both joined with and related to its claim that Friedman's copyright registration is invalid. Cf. Cutting Room Appliances Corp. v. Empire Cutting Machine Co., 186 F.2d 997, 998-99 (2d Cir. 1951) (in a patent infringement suit, district court had jurisdiction over defendant's counterclaim charging unfair competition under 28 U.S.C. 1338(b) where counterclaim also asserted that plaintiff's patent was invalid and unenforceable).

Accordingly, Section 1338 supplies original jurisdiction over Stacey's charge of unfair competition and thus over Benn. Accordingly, there is no need to resort to the doctrines of ancillary and pendent party jurisdiction implicated by Benn's motion to dismiss, nor to consider the impact of United States v. Finley upon those doctrines. See n.2, supra; see generally Aetna Casualty and Surety Co. v. Spartan Mechanical Corp., 738 F. Supp. 664, 669 (E.D.N.Y. 1990).

IV. CONCLUSION

For the reasons set forth above, Benn's motion to dismiss Stacey's counterclaim for lack of federal subject matter jurisdiction over him is denied. Briefing will proceed on Benn's motion to dismiss Count Two of the counterclaim for failure to state a cause of action against him. A schedule for the completion of that briefing will be set at a status hearing which the Court will conduct on July 16, 1991. At that hearing, the Court will also expect counsel to address any ethical considerations which may be raised by Benn's dual status as counsel and as a named counter-defendant in this case.

________________________


[1] Benn has also moved to dismiss both counts of the counterclaim as to him because they are not adequately pleaded. This issue has not been briefed by the parties and is not before the Court at this time.

[2] Benn has focused his analysis on the doctrine of pendent party jurisdiction. This doctrine is a
sister to pendent claim jurisdiction, which permits a federal court to entertain nonfederal claims
that share a "common nucleus of operative fact" with other claims which are properly before
the court and which are so related that they should be considered in a single proceeding. See
United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S. Ct. 1130, 1138 (1966); see also United States v. Finley, 490 U.S. at 548-49, 109 S. Ct. at 2006; Aldinger v. Howard, 427 U.S.
1, 8-9, 96 S. Ct. 2413, 2417-18 (1976). Pendent party jurisdiction supplies the court with
jurisdiction over the additional parties named in these nonfederal claims. See Finley, 490 U.S. at
549, 109 S. Ct. at 2006; Aldinger, 427 U.S. at 10, 96 S. Ct. at 2418.

However, these twin concepts of pendent jurisdiction traditionally have been applied to nonfederal claims raised in the plaintiff's complaint. Where jurisdictional questions arise with respect to
nonfederal charges raised in a counterclaim, the concept of ancillary jurisdiction comes into play.
See Aldinger, 427 U.S. at 11, 96 S. Ct. at 2419; Ruiz v. Estelle, 679 F.2d 1115, 1147 n.219 (5th Cir.), amended in part and vacated in cart on other grounds, 688 F.2d 266 (5th Cir. 1982), cert. denied, 460 U.S. 1042, 103 S. Ct. 1438 (1983); Federman v. Empire Fire and Marine Ins. Co., 597 F.2d 798, 810
(2d Cir. 1979). "The concept of ancillary jurisdiction allows a district court once it has acquired jurisdiction over a case or controversy to decide matters incident to the main claim which otherwise could not be asserted independently." Id. Although this doctrine is closely akin to pendent jurisdiction, at least until the recent enactment of 28 U.S.C. 1367, the two doctrines remained distinct, if only
in name. See Aldinger, 427 U.S. at 12-13, 96 S. Ct. at 2419-20. There is one significant limitation
upon ancillary jurisdiction as it has been applied to counterclaims in this Circuit: Courts may assert ancillary jurisdiction over nonfederal counterclaims which qualify as compulsory under Fed. R. Civ.
P. 13(a), but counterclaims which are merely permissive as defined in Rule 13(b) require an
independent federal jurisdictional basis. See Harbor Ins. Co. v. Continental Bank Corp., 922 F.2d
357, 360 (7th Cir. 1990).

Congress recently merged and codified the concepts of pendent and ancillary jurisdiction in 28
U.S.C. 1367(a), which provides for "supplemental jurisdiction" over nonfederal claims which form
part of the same case or controversy as claims which have an independent federal jurisdictional
basis, even in instances where the nonfederal claims involve the joinder or intervention of additional parties. This statute effectively overrules the Supreme Court's decision in Finley, supra, which
ascribed a narrow reach to the concept of pendent party jurisdiction. See Harbor Ins. Co. v.
Continental Bank Corp., 922 F.2d 357, 362 (7th Cir. 1990).

The parties' briefing on Benn's motion to dismiss rests upon the interplay of the doctrine of
pendent party jurisdiction, the Finley decision, and 1367. As set forth below, because 28
U.S.C. 1338(b) provides an express grant of jurisdiction over Stacey's claim against Benn, it
need not wade into that theoretical thicket.


[3] Count One also seeks a declaration that Stacey is the proper owner of the copyright.

[4] As set forth in n.1, supra, Benn has also moved to dismiss both counts of the counterclaim
as to him on the ground that neither count adequately states a claim against him. As to Count One, Benn specifically contends that the counterclaim fails to plead fraud with the requisite degree of specificity required when such a claim is made against an attorney. However, although Count One alleges that Benn and Friedman engaged in fraudulent conduct, it does not seek recovery in fraud
but rather a declaration that Friedman's copyright registration is invalid based upon the misrepresentations allegedly made in connection with that registration. Moreover, as set forth
above, this count seeks no relief against Benn given that he holds no interest in the copyright.
Under these circumstances, Benn's arguments as to the adequacy with which Count One is pleaded
are moot.

[5] No party contends that either of the two copyright claims asserted in the complaint and counterclaim is insubstantial.

[6] A claim of unfair competition may be deemed "related" to a copyright claim for purposes of
1338(b) if there is a significant overlap of proof between the two claims. See Mattel, Inc. v. Hyatt, 664 F.2d 757, 760-61 (9th Cir. 1981) (per curiam). Because Stacey's charge of unfair competition is based to a substantial extent upon allegations of fraud in Friedman's registration of the copyright in suit, the charge is sufficiently related to Friedman's claim of copyright infringement as well as Stacey's counter-assertion that the copyright registration is invalid and unenforceable.






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