United States District Court, W.D. Texas, Austin Division
DELL TECHNOLOGIES INC. AND DELL GLOBAL B.V. SINGAPORE BRANCH, PLAINTIFFS,
TIVO CORPORATION, ROVI CORPORATION, SONIC SOLUTIONS LLC, AND SONIC SOLUTIONS, DEFENDANTS.
MEMORANDUM OPINION AND ORDER
YEAKEL, UNITED STATES DISTRICT JUDGE.
the court in the above styled and numbered cause are
Dell's Motion for Remand or, in the Alternative, to
Dismiss filed August 29, 2018 (Dkt. No. 22), Defendants'
Response in Opposition to Dell's Motion to Remand or, in
the Alternative, to Dismiss filed October 26, 2018 (Dkt. No.
28), Dell's Reply in Support of its Motion for Remand or,
in the Alternative, to Dismiss filed November 2, 2018 (Dkt.
No. 34), Plaintiffs' Unopposed Motion to Provide
Supplemental Authority filed February 19, 2019 (Dkt. No. 40),
and Defendants' Response in Support of Plaintiffs'
Unopposed Motion to Provide Supplemental Authority filed
February 20, 2019 (Dkt. No. 41). On January 22, 2019, the
court held a hearing on the motion at which all parties were
represented by counsel. Having considered the motion,
response, reply, supplemental authority, arguments of
counsel, the applicable law, and the entire record.in this
cause, the court will grant the motion for the reasons to
are the days in which someone lugs around a Walkman, a CD
player, or a portable DVD player in order to listen to music.
Today, users can enjoy high-quality music and other audio on
small electronic devices, like phones and computers. Part of
what makes this possible is MP3 technology, which allows
audio files to be compressed and stored using less space, so
that a user can store thousands of songs on a small device,
rather than needing hundreds of CDs or DVDs. The process of
creating MP2 or MP3 audio requires encoding an audio signal
into the MP2 or MP3 format. The process of turning MP2 or MP3
audio into playable audio requires decoding the MP2- or
MP3-formatted audio back into playable audio.
Dell Technologies Inc. ("Dell Technologies") is a
Texas-based electronics seller. Dell Technologies is the
parent company to hundreds of Dell subsidiaries around the
globe. In 2001, Defendant Sonic Solutions, the
predecessor to Defendant TiVo Corporation, provided Dell with
audio MP3 software, marketed as Roxio Creator, which Dell
installed and sold on its computers. Defendant Rovi later
acquired TiVo through a complex corporate merger, and Dell
alleges that TiVo is a successor in interest to the
liabilities of Sonic Solutions. Non-party Dell Products,
L.P., a wholly-owned subsidiary of Dell Technologies, and
Sonic Solutions LLC ("Sonic") entered into a
software-licensing agreement effective August 30, 2001
("Licensing Agreement" or "Agreement").
Pursuant to a 2010 clarification agreement
("Clarification Agreement"), Plaintiff Dell Global
B.V. now holds all rights and obligations previously held by
Dell Products, L.P. under the Licensing Agreement. The
Clarification Agreement states that Dell Global holds the
rights and obligations under the Licensing Agreement "on
behalf of itself and each of its worldwide affiliates."
of the Licensing Agreement, Sonic represented that "the
Licensed Product(s) will operate substantially in accordance
with its written specifications." The written
specifications for Roxio software require that the Roxio
software enable MP3 decoding capability by using Microsoft
preloaded MP3 codec and not install any third-party MP3
codec. Dell alleges that Sonic represented that the Roxio
software would leverage and use Microsoft Windows operating
system for encoding, decoding, recording, and playing MP3
audio files in order to avoid potential liability for
third-party royalties. This representation is important
because a third party, Audio MPEG, Inc., holds the exclusive
rights to grant licenses to third parties for certain U.S.
and non-U.S. patent rights relating to the encoding and
decoding of MP3 audio. One of Audio MPEG's licensees is
Microsoft, which permits Microsoft to sell software capable
of encoding and decoding MP3 audio. Dell alleges it relied on
the written specifications and repeated representations made
by Sonic that Roxio would not utilize third-party codec when
it installed and continued to sell Roxio software on Dell
Licensing Agreement also states that "the Licensed
Product(s) shall not infringe any copyright, patent, trade
secret or any other intellectual property rights or similar
rights of any third party." Finally, under the
Agreement, Sonic agreed to fully indemnify, defend, and hold
Dell harmless "from and against any and all claims,
actions, suits, legal proceedings, demands, liabilities,
damages, losses, judgments, settlements, costs and expenses,
including, without limitation, attorneys' fees, arising
out of or in connection with any alleged or actual. . .
breach by Sonic and/or the Licensed Product(s) of any other
representations and/or warranties contained in this
Agreement." Sonic, at its own expense, must
"procure for Dell the right to exercise the rights and
licenses granted to Dell under this Agreement or modify the
Licensed Product(s) such that it is no longer infringing . .
. and reimburse Dell for any royalty payments paid for the
2015, Audio MPEG sued Dell Inc. in the United States for
patent infringement based, in part, for having distributed
the Roxio software. See Audio MPEG, Inc. v. Dell
Inc., No. 2:15-cv-73 (E.D. Va.). Audio MPEG's parent
company Sisvel sued Dell Inc. and Dell GmbH in Germany for
patent infringement also based, in part, on sales of the
Roxio software. During the course of the litigation, Dell
learned that the Roxio software included unlicensed MP3
functionality and did not use the pre-programed Microsoft
functionality for encoding and decoding MP3. Dell states that
before settling and during the litigation, Dell requested
that TiVo indemnify and defend Dell, but TiVo refused. Dell
Technologies-as the parent company of Dell Inc., Dell GmbH,
and Dell Global B.V.-entered into a settlement agreement and
license with Audio MPEG, Sisvel, and the patent owners to
resolve, inter alia, the infringement claims related
to the distribution of Roxio's software.
Technologies and Dell Global B.V. filed suit in Texas state
court asserting the following state-law claims against TiVo:
(1) negligent misrepresentation, (2) fraudulent
misrepresentation, (3) fraudulent nondisclosure, and (4)
breach of contract. Dell claims that TiVo breached the
Licensing Agreement in three ways: (1) the Roxio software did
not follow the written specifications related to the software
functionality; (2) the Roxio software infringed on the
intellectual property rights of a third party; (3) TiVo did
not comply with its obligations to indemnify, defend, and
hold harmless Dell for its losses resulting from Roxio's
infringement. Dell's misrepresentation and nondisclosure
claims are based on repeated representations made by TiVo
that Roxio contained the proper functionality.
answered, asserting defenses of noninfringement and patent
exhaustion. TiVo also asserted counterclaims seeking a
declaratory judgment that the Roxio software did not infringe
on the Audio MPEG patents and that the Audio MPEG patents
were exhausted by a third-party license with Microsoft.
then removed the case to this court, asserting jurisdiction
under Sections 1331, 1332, 1441, 1454, 1446. TiVo asserts
that this court has diversity jurisdiction under Section
1332, because Dell improperly joined Dell Technologies, a
non-diverse plaintiff, in state court in order to defeat
diversity jurisdiction. See 28 U.S.C. §§
1332, 1441. TiVo also asserts that this court has
jurisdiction under Section 1454, because TiVo's
counterclaims for a declaration of noninfringement and patent
exhaustion arise under federal patent law. See 28
U.S.C. § 1454. Finally, TiVo asserts that this court has
original jurisdiction to hear this case under Section 1331,
because Dell's state-law claims arise under federal
patent law. The owners of the Audio MPEG patents, Audio MPEG,
and Sisvel are not parties to this case.
moves to remand this case to state court, claiming that Dell
Technologies is not improperly joined and that this court
lacks subject-matter jurisdiction over TiVo's
counterclaims and Dell's state-law claims, because the
claims do not arise under federal patent law.
DIVERSITY JURISDICTION AND IMPROPER JOINDER
purposes of diversity jurisdiction, "a corporation shall
be deemed to be a citizen of every State and foreign state by
which it has been incorporated." 28 U.S.C. §
1332(c)(1). Plaintiff Dell Technologies is incorporated in
Delaware, and Plaintiff Dell Global B.V. is incorporated in
The Netherlands. Defendants TiVo Corporation and Rovi
Corporation are incorporated in the Delaware, and Defendant
Sonic Solutions LLC is incorporated in California. Because
one of the Plaintiffs, Dell Technologies, and two of the
Defendants, TiVo and Rovi, are citizens of Delaware, there is
not complete diversity of citizenship between the Plaintiffs
and Defendants as pleaded. See 28 U.S.C. §
1332(a)(1). TiVo argues, however, that Dell Technologies was
improperly joined in order to defeat federal diversity
seeking to remove bears the burden of showing that federal
jurisdiction exists and that removal was proper. Manguno
v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720,
723 (5th Cir. 2002) (citingAcuna v. Brown & Root,
Inc., 200 F.3d 335, 339 (5th Cir. 2000)). The removal
statutes are construed restrictively, so as to limit removal
jurisdiction. See Shamrock Oil & Gas Corp. v.
Sheets, 313 U.S. 100, 108-09 (1941). Any ambiguities are
construed against removal and in favor of remand to state
court. Id. A plaintiff may seek to have a case
remanded to the state court from which it was removed, if the
district court lacks jurisdiction over the case or if there
is a defect in the removal procedure. 28 U.S.C. §
starting point for analyzing claims of improper joinder must
be the statutes authorizing removal to federal court of cases
filed in state court." Smallwood v. Illinois Cent.
R. Co., 385 F.3d 568, 572 (5th Cir. 2004) (en banc).
Section 1441 allows for the removal of a state-court suit
where all parties are diverse. See 28 U.S.C.
§§ 1441(b), 1332(a). Even if the parties are
completely diverse, a district court may not exercise its
diversity jurisdiction, however, if "any party, by
assignment or otherwise, has been improperly or collusively
made or joined to invoke the jurisdiction of such
court." 28 U.S.C. § 1359; see also 28
U.S.C. § 1441(b) ("A civil action otherwise
removable solely on the basis of [diversity jurisdiction] may
not be removed if any of the parties in interest properly
joined and served as defendants is a citizen of the State in
which such action is brought").
of a non-diverse plaintiff is deemed improper, and that
plaintiffs presence in the lawsuit is ignored for the
purposes of determining diversity, where there is no
reasonable possibility that the plaintiff would be able to
establish a cause of action against a defendant in state
court. See Smallwood, 385 F.3d at 573. "The
burden of persuasion on those who claim [improper] joinder is
a heavy one," Travis v. Irby, 326 F.3d 644, 649
(5th Cir. 2003), and TiVo must show that "there is no
reasonable basis for the district court to predict that [Dell
Technologies] might be able to recover against [TiVo]."
Smallwood, 385 F.3d at 573. To determine whether
Dell Technologies can reasonably establish a cause of action
against TiVo, the court conducts "a Rule 12(b)(6)-type
analysis, looking initially at the allegations of the
complaint to determine whether the complaint states a claim
under state law against the in-state defendant."
Id. "All unchallenged factual allegations,
including those alleged in the complaint," must be
viewed "in the light most favorable to [Dell
Technologies]" and "[a]ny contested issues of fact
and any ambiguities of state law" must be resolved in
[Dell Technologies'] favor. Travis, 326 F.3d at
649. Importantly, the court does not determine "whether
the plaintiff will actually or even probably prevail on the
merits of the claim, but look[s] only for a possibility that
the plaintiff might do so." Guillory v. PPG Indus.,
Inc., 434 F.3d 303, 309 (5th Cir. 2005).
Breach of Contract
argues that Dell Technologies cannot state a
breach-of-contract claim because Dell Technologies is not a
signatory or third-party beneficiary to the Licensing
Agreement. Dell Products L.P. was the original signatory to
the Agreement, and under the Clarification Agreement, Dell
Global B.V. now holds all rights and obligations previously
held by Dell Products, L.P. under the Agreement "on
behalf of itself and each of its worldwide affiliates."
Dell contends that Dell Technologies, as the parent company
of Dell Global B.V., is a third-party beneficiary of the
Agreement between Dell Global B.V. and TiVo and must be
indemnified under the Agreement in the event of a breach.
diversity cases, "substantive law ... is established by
the usual principles of conflict of laws, but procedural
rules are the rules of the forum." Condit Chem.
& Grain Co. v. Helena Chem. Corp.,789 F.2d 1101,
1102 (5th Cir. 1986); see also Erie R. Co. v.
Tompkins,304 U.S. 64, 78 (1938) (state law applies
except when issue is governed by federal law). The parties
agree the Licensing Agreement is governed by Texas law. A
party who is not a signatory to a contract may "sue for
damages caused by its breach if the person qualifies as a
third-party beneficiary." First Bank v.
Brumitt,519 S.W.3d 95, 102 (Tex. 2017). "[A]s a
general proposition, a corporate parent is not a third-party
beneficiary of its subsidiary's contract merely by virtue
of their relationship." Basic Capital Mgmt., Inc. v.
Dynex Commercial, Inc.,348 S.W.3d 894, 900 (Tex. 2011).
However, contracting parties may "intend to grant the
third party the right to be a claimant in the event of a
breach." Brumitt, 519 S.W.3d at 102. "To