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Dell Technologies Inc. v. TiVo Corp.

United States District Court, W.D. Texas, Austin Division

June 6, 2019

DELL TECHNOLOGIES INC. AND DELL GLOBAL B.V. SINGAPORE BRANCH, PLAINTIFFS,
v.
TIVO CORPORATION, ROVI CORPORATION, SONIC SOLUTIONS LLC, AND SONIC SOLUTIONS, DEFENDANTS.

          MEMORANDUM OPINION AND ORDER

          LEE YEAKEL, UNITED STATES DISTRICT JUDGE.

         Before 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 follow.

         I. FACTUAL BACKGROUND

         Gone 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.

         Plaintiff 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.[1] 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."

         As part 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 computers.

         The 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 Licensed Product(s)."

         In 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.).[2] 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.[3] 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.

         Dell 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.

         TiVo 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.

         TiVo 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.

         Dell 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.

         II. DIVERSITY JURISDICTION AND IMPROPER JOINDER

         For the 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 jurisdiction.

         A party 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. § 1447(c).

         "The 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").

         Joinder 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).

         A. Breach of Contract

         TiVo 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.

         In 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 ...


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