Opinion
05 Civ. 9646 (JFK).
October 31, 2006
J. Joseph Bainton, Esq., Michael J. Cohen, Esq., BAINTON McCARTHY LLC, New York, New York, For Plaintiff Ariel (UK) Limited.
David Yohai, Esq., Alan Feigenbaum, Esq., WEIL, GOTSCHAL MANGES LLP, New York, New York, For Defendants Reuters Group PLC, Reuters C LLC, Reuters Transaction Services Limited.
Doug Maynard, Esq., AKIN, GUMP, STRAUSS, HAUER FLED LLP, New York, New York, For Defendants NASDAQ Stock Market, Inc., Norway Acquisition Corp., Instinet Group, Inc.
William Sussman, Esq., ROPES GRAY LLP, New York, New York, For Defendants Silver Lake Partners II, L.P., Instinet Inc., Instinet Holdings, Inc., Instinet LLC.
OPINION and ORDER
Plaintiff Ariel (UK) Limited ("Ariel") has filed this action for copyright infringement, vicarious copyright infringement, breach of contract, and declaratory relief. The defendants are either successors to or acquirers of Institutional Networks Corporation ("Instinet"), a company with which Ariel entered into licensing agreements in 1972 and 1975. The defendants fall into three groups: Reuters Group PLC, Reuters C LLC, Reuters Transaction Services Limited ("Reuters"); NASDAQ Stock Market, Inc., Norway Acquisition Corp., Instinet Group, Inc. ("NASDAQ"); and Silver Lake Partners II, L.P., Instinet Inc., Instinet Holdings, Inc., Instinet LLC ("Silver Lake"). The defendants now move pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6), respectively, to dismiss Ariel's claims for lack of subject matter jurisdiction and failure to state a claim on which relief can be granted.
Defendant INET ATS, Inc., named in the caption, was a subsidiary of Defendant Norway Acquisition Group but has ceased to exist as a corporate entity. Norway Acquisition Group now operates what used to be INET.
Reuters, NASDAQ, and Silver Lake each has filed a separate motion to dismiss. Because the arguments contained in the motions are substantially similar, the Court discusses the motions collectively.
Because the defendants are valid licensees of the copyrights that Ariel claims to own and therefore cannot be sued for copyright infringement, the Court dismisses Ariel's copyright claims with prejudice. The remaining claims do not supply a basis for federal jurisdiction and, accordingly, are dismissed without prejudice.
BACKGROUND
The following facts are derived from Ariel's Amended Complaint ("Am. Compl.") and the exhibits attached thereto.
Ariel is a United Kingdom company that was founded in 1971 to develop and sell computerized securities trading systems. (Am. Compl. ¶¶ 1, 21.) Instinet was a United States company that was established in 1970. Like Ariel, Instinet developed and sold computerized securities trading systems. (Am. Compl. ¶¶ 22-23.) In 1972, Instinet obtained both European and U.S. patents on its original computer-based securities trading system ("Instinet System") before Ariel was able to do so. (Am. Compl. ¶¶ 24-25.) Ariel could not exploit its own trading system ("Ariel System") without using Instinet's patented technology. In 1972, therefore, Ariel entered into a licensing agreement with Instinet ("1972 Agreement"). (Am. Compl. ¶ 26.)
The 1972 Agreement is attached to the Amended Complaint as Exhibit A.
The 1972 Agreement gave Ariel a license to exploit Instinet's patented technology in Western Europe, as well as the right to exploit any enhancements or re-issuances of those patents. Under the 1972 Agreement, Instinet promised to disclose to Ariel any developments undertaken by Instinet relating to the patented technology. In exchange for the license, Ariel agreed to pay Instinet licensing fees, royalties, and stock options. The license had an initial term of 14 years. (Am. Compl. ¶ 27, 32-36.)
In 1973, Ariel obtained a United Kingdom patent on aspects of its own securities trading system (the Ariel System). (Am. Compl. ¶ 41.) In the course of developing the Ariel System, Ariel authored "four separate copyrighted works," consisting of source code, object code, functional specification, and system documentation, that underlay the Ariel System ("Ariel Works"). (Am. Compl. ¶ 42.)
After execution of the 1972 Agreement, at Instinet's behest, Instinet and Ariel worked together to develop a new, improved version of the Instinet System (the "Instinet II System"). (Am. Compl. ¶¶ 49-51.) Instinet agreed to pay Ariel for its programming help in developing the Instinet II System but never actually made payments. (Am. Compl. ¶¶ 53-54.) While developing the Instinet II System, Ariel authored computer code, functional specifications, and system documentation that pertained to the Instinet II System and that derived from the Ariel Works ("Ariel Derivative Works"). (Am. Compl. ¶ 53.) Ariel alleges that it holds U.K. copyrights in both the Ariel Works and the Ariel Derivative Works. (Am. Compl. ¶ 57.)
Between 1972 and 1975, Instinet faced increasing financial difficulties, because its original system had performed poorly. (Am. Compl. ¶¶ 47-48.) Instinet was desperate for cash. (Am. Compl. ¶ 55.) Ariel, on the other hand, was experiencing considerable success with its system and was eager to exploit its technology without the geographical restrictions that had been imposed by the 1972 Agreement. (Am. Compl. ¶¶ 59-60.) Instinet and Ariel therefore negotiated a new agreement, which first took the form of an offer-letter memorializing key terms ("Cable Agreement") and then took the form of a formal contract ("1975 Agreement") which set forth in greater detail the key terms of the Cable Agreement. (Am. Compl. ¶¶ 64, 67.)
The Cable Agreement is attached to the Amended Complaint as Exhibit B. The 1975 Agreement is attached as Exhibit C.
Under the 1975 Agreement, Ariel and Instinet granted each other perpetual, royalty-free, world-wide, non-exclusive licenses to exploit the Ariel System, the Instinet System, and the Instinet II System. (Am. Compl. ¶ 70, Ex. C § 6.) Specifically, the 1975 Agreement provided that "Ariel and Instinet agree that each of them is free to operate and to license others to operate computerized communications systems in any part of the world. . . ." (Am. Compl. Ex. C § 6.) To that end, the 1975 Agreement provided that Ariel and Instinet
grant each to the other royalty free worldwide non-exclusive licenses
. . .
(b) to use their respective Know-how together in each case with the right to grant sub-licenses from time to time under under any such licenses in any country or countries[;]
(Am. Compl. Ex. C ¶ 5(1).) (emphasis added). In addition to the license to exploit each other's "Know-how", the 1975 Agreement gave Ariel and Instinet royalty free, worldwide, non-exclusive licenses to exploit and sub-license "Patents" and "Future Patents" pertaining to the Insintet, Ariel, and Instinet II Systems. (Am. Compl. Ex. C ¶ 5(1)-(2).)
"Know-how" is defined in the 1975 Agreement to include "all know-how[,] documentation[,] information[,] procedures[,] knowledge[,] experience[,] and data (a) developed up to 31st December 1975 by or for Instinet or Ariel and which relates in any way to the Instinet System, the Ariel System and the Instinet Two System and (b) developed after 31st December but prior to 30th June 1976 by Instinet in conjunction with Ariel and Datasynteks and which relates in any way to the Instinet Two System . . ." (Am. Compl. Ex. C § 1.)
"Patents" are defined to include all patents that related to the Ariel System, the Instinet System, or the Instinet II System that were in existence at the time of the 1975 Agreement's execution. "Future Patents" are defined to include applications for patents that "covered[ed]" the Ariel System, the Instinet System, or the Instinet II System that were pending at the time of the contract's execution, as well as "all such applications" made in the future. (Am. Compl. Ex. C § 1.) The viability of Ariel's breach of contract and related declaratory relief claims appears to depend, in large part, on whether the 1975 Agreement's definition of "Future Patents" includes patents issued after June 30, 1976. The Court takes no position on the meaning of the contractual language at issue, because Ariel's non-copyright claims are dismissed without prejudice for want of federal jurisdiction.
Under the 1975 Agreement, both parties were obligated to issue licensing agreements confirming each other's right to exploit, or grant sub-licenses in, the patented technology at issue. (Am. Compl. ¶ 73, Ex. C § 5(5).) The agreement also obligated each party to provide the other party, upon request, with information about new developments relating to the patented technology that underlay the Ariel System, Instinet System, and Instinet II System. (Am. Compl. ¶ 72, Ex. C, § 5(6).)
The 1975 Agreement further provided that Instinet absolved Ariel of all future royalty obligations. (Am. Compl. Ex. C § 4(1).) Ariel also was free to exploit the Instinet II technology worldwide, not just in Western Europe. (Am. Compl. Ex C(B).) In consideration for Instinet's broad grant of licensing rights and the removal of any temporal or geographical restrictions, Ariel paid Instinet a lump sum of cash less the amount Instinet owed Ariel for Ariel's programming work on the Instinet II System. (Am. Compl. Ex C § 3.)
In 1986, Reuters, a U.K. company with offices in New York, acquired Instinet. (Am. Compl. ¶¶ 9, 76.) Reuters formed Instinet Group, Inc., which continued to provide services identical to those that Instinet had provided. (Am. Compl. ¶ 8.) Instinet Group, Inc. and Reuters remained distinct as corporate entities, although the companies shared a common CEO, and Instinet's financial statements were consolidated into those of Reuters. (Am. Compl. ¶¶ 77-78.) In 1987, Reuters directed an Instinet programmer, who formerly worked for Ariel as a programmer, to prepare written specifications of the Instinet II System for Reuters' use in developing its own computerized trading technology. (Am. Compl. ¶¶ 84-87.) In developing its own similar computerized trading system, Reuters and "Instinet/Reuters" allegedly copied "aspects of the Instinet II System, the Ariel Works, and the Ariel Derivative Works." (Am. Compl. ¶ 88.)
In 1995 and 1999, Reuters filed for United States patents relating to computerized securities trading systems ("1990s Patents"). Reuters eventually obtained those patents. Reuters' 1995 and 1999 patent applications cited both Ariel's 1973 U.K. patent and Instinet's 1972 U.S. patents as prior art. Ariel contends that Reuters' 1990s Patents "relate directly to and are enhancements of . . . the Instinet II System" and are therefore "Future Patents" within the meaning of the 1975 Agreement. (Am. Compl. ¶¶ 95-96.) Thus, Ariel claims that, under the terms of the 1975 Agreement, it owns licensing rights in the 1990s Patents.
In January 2004, Ariel and Bloomberg, L.P. were in negotiations regarding Ariel's sub-licensing of the 1990s Patents to Bloomberg. (Am. Compl. ¶¶ 104, 122(a).) Ariel allegedly asked Defendants Reuters and Instinet Group Inc. to confirm Ariel's right to grant Bloomberg a license to use the 1990s Patents, but Reuters and Instinet Group, Inc. refused to do so. (Am. Compl. ¶ 122(a).)
In December 2005, Reuters sold its interest in Instinet Group, Inc. to NASDAQ, through NASDAQ's subsidiary, Norway Acquisition Corp. Immediately thereafter, NASDAQ sold Instinet Group, Inc.'s institutional brokerage division to Defendant Silver Lake Partners II, through Silver Lake's wholly owned subsidiary, Defendant Instinet Holdings. NASDAQ retained INET, which provided computerized trading services to U.S. securities brokers, and Norway Acquisition Corp. continued to operate INET after that company was dissolved as a corporate entity. (Am. Compl. ¶¶ 4-16, 97-98.) Reuters, NASDAQ, and Silver Lake never entered into any licensing agreements with Ariel, nor did the defendant companies ever communicate with Ariel regarding the various corporate transactions that involved elements of Instinet (Am. Compl. ¶¶ 79-80, 99.)
Ariel broadly alleges that the defendants are "either successors to Instinet or companies with which successors to Instinet have been consolidated" and thus subject to the rights and obligations imposed by the 1975 Agreement. (Am. Compl. ¶ 103.) As a result of the transactions among the defendants, Ariel contends, Ariel's copyrights were exploited "by Reuters until December 8, 2005 and ha[ve] been recently transferred either in whole or in substantial part to NASDAQ and in turn in part to Silver Lake in derogation of Ariel's rights." (Am. Compl. ¶ 18.) By refusing to confirm Ariel's right to grant Bloomberg licenses in the 1990s Patents, therefore, all of the defendants became liable for copyright infringement and breach of the licensing agreements that Ariel originally entered into with Instinet. (Am. Compl. ¶ 122.)
In its unverified Amended Complaint, Ariel asserts five causes of action. The first and second claims, respectively, are for direct copyright infringement, against all of the defendants except for Silver Lake, and vicarious copyright infringement, solely against Silver Lake. (Am. Compl. ¶¶ 105-111.) The third and fourth claims are state law claims for declaratory judgments regarding Ariel's licensing rights as against all defendants. (Am. Compl. ¶¶ 112-119.) The fifth claim is a state law claim for breach of contract and is asserted against all defendants. (Am. Compl. ¶¶ 120-123.)
Ariel's original Verified Complaint, filed November 16, 2005, included claims for alter-ego liability and tortious interference with contract. The parties acknowledge that the defendants drafted motions to dismiss in response to Ariel's original complaint and showed those drafts to Ariel. Ariel then amended its complaint to omit the claims for alter-ego liability and tortious interference and filed its Amended Complaint on February 28, 2006.
Subject matter jurisdiction is conferred by 28 U.S.C. § 1338(a), which gives federal courts original jurisdiction of claims arising under federal copyright law, and 28 U.S.C. § 1367, which allows federal courts to exercise jurisdiction over related state law claims.
Ariel contends that the defendants, except for Silver Lake, "have copied, have used knowing of Ariel's copyrights, and are presently using knowing of" Ariel's copyrights in the Ariel Works and the Ariel Derivative Works without Ariel's consent. (Am. Compl. ¶ 107.) In its claim for vicarious copyright infringement, Ariel claims that Silver Lake supervised the infringing activities of Instinet's institutional brokerage division, which Silver Lake had acquired from NASDAQ, and thereby assumed vicarious liability. (Am. Compl. ¶¶ 110-111.)
Defendants argue, inter alia, that according to Ariel's Amended Complaint and the attached 1975 Agreement, the defendants are valid licensees of the works that Ariel claims the defendants have infringed and therefore, as a matter of law, the defendants cannot be sued for copyright infringement. The Court agrees.
The defendants assert the following additional arguments in favor of dismissal of the copyright claims:
(1) Ariel has not pled with sufficient specificity where or when the alleged infringements occurred; what works the defendants copied; or when the alleged copying occurred;
(2) Ariel has not alleged any acts of copyright infringement in the United States;
(3) The doctrine of laches bars the copyright claim;
(4) Ariel does not actually own copyright in the Ariel Derivative Works, because the works were produced as a work-forhire for Instinet; and
(5) Forum non conveniens doctrine demands that the action be litigated in the UK, rather than in the United States.
Because the Court finds that the defendants' status as licensees mandates dismissal of the copyright claims, the Court need not discuss these additional arguments.
DISCUSSION
Legal StandardOn a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted, the court must accept the factual allegations of the complaint as true. Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996). The issue is not whether the plaintiff will ultimately prevail, but whether it is entitled to offer evidence to support its claim.Id. Dismissal is not warranted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief." Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957) (internal quotations omitted)). A court should "read the complaint generously and draw reasonable inferences in favor of the pleader." Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). However, where allegations set out in the complaint are contradicted by other matters asserted or by materials attached to or incorporated by reference in the complaint, the court is not obliged to credit the allegations in the complaint. Brown v. New York City Hous. Auth., No. 05 Civ. 7332, 2006 U.S. Dist. LEXIS 30193, at *4-5 (S.D.N.Y. May 16, 2006). Where the plaintiff's allegations are contradicted by a document that the plaintiff has attached as an exhibit in support of its complaint, the document controls. See Matusovsky v. Merrill Lynch, 186 F. Supp. 2d 397, 400 (S.D.N.Y. 2002).
The defendants argue that, as a matter of law, Ariel cannot sue the defendants for copyright infringement because the defendants possess licenses to use Ariel's copyrighted works. "A copyright owner who grants a nonexclusive license to use his copyrighted material waives his right to sue the licensee for copyright infringement." Graham v. James, 144 F.3d 229, 236 (2d Cir. 1998). This is because the "licensee of any of the rights comprised in the copyright, though it is capable of breaching the contractual obligations imposed on it by the license, cannot be liable for infringing the copyright rights conveyed to it."United States Naval Inst. v. Charter Communications, Inc., 936 F.2d 692, 695 (2d Cir. 1991). Dismissal of a claim for copyright infringement is proper where a contract underlying the suit clearly and unambiguously demonstrates the existence of the defendant's license to exploit the plaintiff's copyrights and where plaintiff has not shown any limitation on that license.See Jasper v. Sony Music Entm't, Inc., 378 F. Supp. 2d 334, 338 (S.D.N.Y. 2005); Chapman v. N.Y. State Div. for Youth, No. 04 Civ. 867, 2005 U.S. Dist. LEXIS 40916 (N.D.N.Y. Sept. 29, 2005). Even though a defendant's status as a valid licensee may be characterized as an affirmative defense, see, e.g., Bourne v. Walt Disney Co., 68 F.3d 621, 631 (2d Cir. 1995), such defenses also "may be raised by a pre-answer motion to dismiss under Rule 12(b)(6), without resort to summary judgment procedure, if the defense appears on the face of the complaint."Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 74 (2d Cir. 1998) (emphasis added).
Instinet's License
Under the 1975 Agreement, Ariel and Instinet granted each other the right to "be free to operate and to authorise others to operate computerized communications systems in any part of the world." (Am. Compl. Ex. C § 6.) Included in this very broad grant was the right to use or sub-license, without limitation, the "Know-how" of each party. "Know-how", as defined in the 1975 Agreement, included, among other things, all documentation, information, and data that pertained to the computerized securities trading systems that the parties had developed at the time of the agreement's execution. It is undisputed, therefore, that "Know-how" encompassed the Ariel Works and the Ariel Derivative Works, which underlay, respectively, the Ariel System and the Instinet II System, and which Ariel had authored prior to 1975. (Am. Compl. ¶¶ 42, 53). Thus, under the 1975 Agreement, Instinet was free without temporal or geographical limitation to exploit or sub-license the Ariel Works and the Ariel Derivative Works. As Ariel states in its Amended Complaint, the 1975 Agreement "grant[ed] Instinet the rights in the Ariel Derivative Works that it required." (Am. Compl. ¶ 60.) From the 1975 Agreement and Ariel's allegations in the complaint, it is clear, therefore, that Instinet held an express, non-exclusive license to exploit or sub-license the works in which Ariel claims to own copyright.
Defendants' Licenses
Under the Copyright Act of 1909, a licensee has no right to sell or sub-license the rights acquired unless expressly authorized so to do by the licensor or by the terms of the licensing agreement. See Ward v. Nat'l Geographic Soc'y, 208 F. Supp. 2d 429, 441 (S.D.N.Y. 2002); Gardner v. Nike, Inc., 279 F.3d 774, 778 (9th Cir. 2002); 3 Nimmer, Nimmer on Copyright § 10.01. Here, the 1975 Agreement expressly authorized Instinet to grant sub-licenses. The 1975 Agreement unequivocally states that Instinet received not only a perpetual, world-wide non-exclusive license to use Ariel's "Patents," "Future Patents," and "Knowhow", but also the right to grant sub-licenses, without restriction. (Am. Compl. Ex. C § 5(1)-(2).)
The 1909 Act, rather than the Copyright Act of 1976, applies to copyrighted works created prior to January 1, 1978.See Playboy Enters. V. Dumas, 831 F. Supp. 295, 301 (S.D.N.Y. 1993). Thus, the 1909 Act applies to the works at issue in this case. Under the 1976 Act, however, the result is the same: a non-exclusive license holder cannot assign the license unless expressly authorized to do so. See, e.g., In re Patient Educ. Media, Inc., 210 B.R. 237 (Bankr. S.D.N.Y. 1997).
According to Ariel's allegations, the defendants are either "successors to Instinet or companies with which successors to Instinet have been consolidated." (Am. Compl. ¶ 103.) More specifically, the Amended Complaint characterizes each of the ten defendants as a successor to Instinet (Instinet Group, Inc.; Instinet Inc.; Reuters C LLC; and Instinet LLC); an acquirer of Instinet (Reuters Group PLC; Reuters Transaction Services Limited); or an acquirer of elements of Instinet (NASDAQ Stock Market; Norway Acquisition Corp; Silver Lake Partners II; and Instinet Holdings, Inc.). (Am. Compl. ¶¶ 2-17.) Under the explicit terms of the 1975 Agreement, Instinet was free to grant, and the defendants-as successors to or acquirers of Instinet-were equally free to receive, sub-licenses that encompassed Ariel's works. The 1975 Agreement contains no provision restricting or qualifying Instinet's right to grant sub-licenses in the intellectual property at issue.
Ariel does not attempt to argue that the defendants are not recipients of such sub-licensing rights. In fact, Ariel concedes that the defendants are valid licensees. In its brief, Ariel speaks of the "license granted to Instinet and the Reuters Parties by the Agreements", "the license granted by the Agreements," and "the purported assignment of a license of the Works to the Nasdaq Parties and Silver Lake Parties." (Ariel's Mem. of Law, at 21.) Ariel also describes the "Reuters parties" as "licensees of the Works under the 1975 Agreement" (Ariel's Mem. of Law, at 26.) Similarly, at oral argument, Ariel's counsel flatly conceded that the defendants "used intellectual property licensed to them in the first instance in 1972." (Tr. Or. Arg. 31.) Ariel's counsel further admitted the point by stating, "In 1987, we were rooting for [the defendants]. We were hoping they were going to turn this perpetual license of ours into something of value." (Tr. Or. Arg. 32.) (emphasis added). The Court therefore concludes that, under the clear terms of the 1975 Agreement and according to Ariel's own allegations and arguments, the defendants are licensees of the works in which Ariel claims to hold U.K. copyrights.
In connection with its non-copyright claims, Ariel alleges that the defendants, as successors to Instinet or companies with which Instinet has been consolidated, are bound by the terms of the 1975 Agreement because an assignment clause in the 1972 Agreement was incorporated by reference into the 1975 Agreement via the Cable Agreement. The defendants counter that the express language of the 1975 Agreement terminated the 1972 Agreement and that the Cable Agreement was replaced by the 1975 Agreement and thus has no legal effect. The parties do not dispute, however, the continuing validity of the 1975 Agreement. Whether the 1972 Agreement's assignment clause has survived to bind the defendants to the contracts that Ariel entered into with Instinet is irrelevant for purposes of determining Defendants' status as licensees of Ariel's intellectual property. The defendants' status as licensees derives from Instinet's clear right, under the 1975 Agreement, to sub-license Ariel's works to whomever it wanted.
Ariel's Rescission Argument
As discussed above, Ariel does not dispute the defendants' status as licensees of the works under the clear terms of the 1975 Agreement. Rather, Ariel responds to the defendants' licensing arguments by asserting that those licenses are no longer valid, because Reuters' and Instinet Group, Inc.'s refusal, in January 2004, to confirm Ariel's right to license the 1990s Patents to Bloomberg was a material breach of the licensing agreements that automatically triggered a rescission of those contracts and resulted in revocation of the license. Therefore, the continued use of Ariel's intellectual property by Reuters, NASDAQ, and Silver Lake after the automatic revocation of the license in January 2004 constituted copyright infringement. (Ariel's Mem. of Law, at 20-21.)
Ariel's rescission argument fails for two reasons.
First, Ariel failed to plead the factual allegation of rescission in either its original complaint or in its Amended Complaint. "Factual allegations contained in legal briefs or memoranda are . . . treated as matters outside the pleading for purposes of Rule 12(b)." Fonte v. Board of Managers of Continental Towers Condominium, 848 F.2d 24, 25 (2d Cir. 1988). It is "axiomatic that the Complaint cannot be amended by the briefs in opposition to a motion to dismiss." Stillman v. Townsend, No. 05 Civ. 6612, 2006 U.S. Dist. LEXIS 50770, at *9 (S.D.N.Y. July 26, 2006). In its Amended Complaint, Ariel insisted, in essence, that the 1975 Agreement was alive and well. In its memorandum of law, however, Ariel claims that Reuters repudiated the 1975 Agreement and Ariel "acceded" to Reuters' decision. (Ariel's Mem. of Law, at 21.) Ariel asserts that this repudiation and accession entitles it to a right of rescission. Ariel thus tries to smuggle in new facts through its legal argument. Under well-settled law, Ariel's rescission argument cannot be considered and is insufficient to defeat the defendants' motions to dismiss.
Second, even if this Court were to entertain the rescission argument, the remedy of rescission is not justified under the facts alleged by Ariel. Rescission of a contract is "an extraordinary remedy." Krumme v. Westpoint Stevens Inc., 238 F.3d 133, 143 (2d Cir. 2000). "New York law does not presume the rescission or abandonment of a contract and the party asserting rescission or abandonment has the burden of proving it."Graham, 144 F.3d at 238. To determine whether breach of a licensing agreement justifies rescission, "a district court must determine whether the complaint alleges a breach of a condition to, or a covenant of, the contract licensing or assigning the copyright." Schoenberg v. Shapolsky Publishers, 971 F.2d 926, 932 (2d Cir. 1992) (citing Costello Publishing Co. v. Rotelle, 670 F.2d 1035, 1045 (D.C. Cir. 1981)). If the court finds that plaintiff has alleged a breach of a condition precedent to the license, the plaintiff may sue for copyright infringement, rather than for breach of contract. Id. This is because, in the event of a breach of a condition to the license, "it follows that the rights dependant upon satisfaction of such condition have not been effectively licensed, and therefore, any use by the licensee is without authority from the licensor and may therefore, constitute an infringement of copyright." Graham, 144 F.3d 238. "However, if the complaint merely alleges a breach of a covenant in the agreement licensing or assigning the copyright, then the court must next determine whether the breach is so material as to create a right of rescission in the grantor." Schoenberg, 971 F.2d at 932. To justify rescission, the breach must be "so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract." Septembertide Pub., B.V. v. Stein Day, Inc., 884 F.2d 675, 678 (2d Cir. 1989).
Although the licensing agreements do not contain choice-of-law clauses, and the Amended Complaint is silent as to where Ariel, a U.K. company, and Instinet, a U.S. company, substantially negotiated those contracts, both parties cite New York state law in their legal memoranda and do not dispute its application. (See, e.g., Reuters Mem. of Law, at 14; Ariel's Mem. of Law, at 36.) New York law therefore should be applied here because "in the absence of a strong countervailing public policy, the parties to litigation may consent by their conduct to the law to be applied." Robi Ltd. v. Proksch, No. 99 Civ. 1924, 2000 U.S. Dist. LEXIS 3632, at *2 n. 1 (S.D.N.Y. Feb. 10, 2000). Here, the parties have clearly consented to the application of New York's law.
The 1975 Agreement does not state any conditions that either party needed to satisfy prior to obtaining its license. Similarly, the 1975 Agreement does not contain any clause that mentions conditions under which the license would automatically revert to either party or under which either party would obtain a right of rescission. Nor does Ariel even allege that the agreement imposed any conditions precedent to the grant of licensing rights or that the agreement contains any language that could be interpreted as a rescission clause. Ariel merely alleges that, 30 years after execution of the last contract, Instinet's successors breached various provisions of the 1975 Agreement that required the parties to confirm each other's licensing rights and keep each other informed as to developments relating to the Instinet II System's patents. These allegations constitute breaches of covenants rather than of conditions precedent.
Having found that there was no allegation of a breach of a condition precedent to the license, the Court next must determine whether the alleged breaches were so fundamental as to trigger a right of rescission in Ariel. Ariel argues that the defendants' breaches were so substantial as to destroy the "object of the Agreements" and therefore "entitle Ariel to the remedy of rescission of the license granted to Instinet and the Reuters Parties by the Agreements," (Ariel's Mem. of Law at 20-21.) However, the breaches alleged simply do not "strongly tend to defeat the object of the parties in making the contract."Septembertide Pub., 884 F.2d at 678. Both Ariel and Instinet received the benefits of their bargain after the 1975 Agreement was executed: Instinet obtained much-needed cash; Ariel was absolved of all future royalty obligations, and all temporal and geographical restrictions on Ariel's right to exploit or sublicense the Instinet II technology were lifted. The parties coexisted peacefully under the terms of the 1975 Agreement for nearly three decades. As counsel for Ariel conceded at oral argument, Ariel "had the benefit of the bargain until 2004." (Tr. Or. Arg. 34.) Furthermore, as noted above, the 1975 Agreement does not contain any clause providing for reversion of the licensing rights or stating conditions under which rescission of the contract may occur. The absence of a rescission or reversion clause in a licensing agreement is a factor that weighs against rescission. See, e.g., Morris v. Castle Rock Entm't, 246 F. Supp. 2d 290, 294 (S.D.N.Y. 2003); USAR Sys. v. Brain Works, 897 F. Supp. 163, 167 (S.D.N.Y. 1995). Thus, Ariel has failed to allege facts that would justify rescission.
Moreover, even if the facts as alleged weighed in favor of granting Ariel a right of rescission, Ariel cannot point to any step it actually took to attempt to rescind the 1975 Agreement. Even when a breach is so material as to give rise to a right of rescission, rescission does "not occur automatically without some affirmative steps" by a party to the agreement. Graham, 144 F.3d at 238. "New York law does not presume the rescission or abandonment of a contract and the party asserting rescission or abandonment has the burden of proving it." Id. See also TVT Records v. Island Def Jam Music Group, 412 F.3d 82, 93 (2d Cir. 2005) (observing that a license must be rescinded formally before a plaintiff may sue for copyright infringement).
Ariel cites a Ninth Circuit case, Rano v. Sipa Press, Inc., 987 F.2d 580 (9th Cir. 1993), for the proposition that a "party's continued use of a protected work after the party's license has been rescinded is tantamount to infringement." (Ariel's Mem. of Law at 21.) But in Rano the Ninth Circuit found only that a breach that constituted "total failure in the performance of a contract" would give rise in the licensor "to a right of rescission which allows the nonbreaching party to terminate the agreement." Rano, 987 F.2d at at 586 (emphasis added).
In its memorandum in opposition, Ariel argues that Reuters and Instinet Group, Inc. "affirmatively stated their intention not to honor the terms and conditions of the license granted by the Agreements, a decision to which Instinet acceded." (Ariel's Mem. of Law, at 21.) Ariel cites to paragraph 122 of its Amended Complaint in support of this assertion. (Ariel's Mem. of Law, at 21.) Paragraph 122, however, contains only Ariel's various breach of contract claims, the most specific of which is the allegation that, in January 2004, Defendants Reuters and Instinet Group, Inc. breached the licensing agreements by refusing to confirm Ariel's right to grant a sub-license to Bloomberg. Ariel's contention that the defendants "affirmatively stated" an intention to breach the 1975 Agreement and that Ariel "acceded" to the defendants' refusal find absolutely no support in paragraph 122 or anywhere else in the Amended Complaint. Ariel itself appears to concede that, at most, it is entitled to a right of rescission, which it has not yet exercised. (see Ariel's Mem. of Law, at 21.) Ariel's counsel conceded that Ariel has yet to attempt rescission, stating, "We contend that [the breach of contract that occurred in 2004] entitles us, and the law does not require that we do it at this time, to a remedy for breach of a particular type of contract, which is a license agreement." (Tr. Or. Arg. 31.)
In sum, Ariel's rescission argument has no merit because Ariel has not alleged that the defendants breached a condition precedent to the licensing agreement or that defendants' breach was so material as to give rise to a right of rescission. In addition Ariel cannot claim rescission because it has not alleged that it took any steps to rescind the 1975 Agreement. Any claim of rescission by Ariel is without merit in this case.
Ariel makes one additional attempt to counter defendants' claim that they are valid licensees by asserting that the issue of whether a defendant is a valid licensee is "an issue of fact that cannot be resolved on a motion to dismiss." (Rep. Mem. of Law, at 22.) For authority, Ariel cites Roberts v. Keith, No. 04 Civ. 10079, 2006 U.S. Dist. LEXIS 8959 (S.D.N.Y. Mar. 3, 2006). Ariel misstates the law, however, and cites an inapposite case. InRoberts, the court stated only that the defendant's argument that it was a valid licensee failed because neither the complaint, nor attached documents, nor any documents incorporated by reference established that the defendant was a licensee. Id. at *14-15. Here, by contrast, the 1975 Agreement and the Amended Complaint expressly establish that Instinet and its successors are valid licensees of Ariel's copyrighted works. And, as discussed above, federal courts have dismissed claims for copyright infringement on the basis of complaints and attached documents that show a valid licensing arrangement between plaintiff and defendant. See Jasper, 378 F. Supp. at 338;Chapman, 2005 U.S. Dist. LEXIS 40916. Here, as discussed, the defendants' status as licensees or sub-licensees of Ariel's protected works is evident from Ariel's Amended Complaint and from the 1975 Agreement that Ariel has attached to the complaint.
Ariel therefore is precluded as a matter of law from suing valid licensees of the allegedly copyrighted works for copyright infringement.
If the direct infringement claim is dismissed, the vicarious claim (against Silver Lake) must also be dismissed, because "a direct infringement must have occurred" to hold a defendant vicariously liable. Mathew Bender co., Inc. v. West Pub. Co., 158 F.3d 693, 706 (2d Cir. 1998).
Dismissal of the Copyright Claims with Prejudice
The Court declines to allow Ariel to re-plead the copyright claims. Upon granting a motion to dismiss, it is the usual practice to allow the plaintiff leave to re-plead. See Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991). "When the plaintiff never requests leave to amend, however, there is no error in not granting such leave sua sponte if the complaint could not be amended in a manner that would survive dismissal." Schloss v. Danka Bus. Sys. PLC, No. 00-7403, 2000 U.S. App. LEXIS 29317, at *8 (2d Cir. Nov. 13, 2000) (citing Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 76 (2d Cir. 1998)). Courts of this Circuit have refused to grant leave to re-plead after dismissing copyright claims, pursuant to Rule 12(b)(6), on the ground that defendants are licensees of the copyrights. See, e.g., Jasper, 378 F. Supp. At 334;Chapman, 2005 U.S. Dist. LEXIS 40916.
The instant complaint is Ariel's second attempt at pleading its copyright claims. Ariel has not requested, either in its brief or at oral argument, leave to re-plead in the event that the Court dismisses its claims. In any event, the Court does not see how Ariel could satisfactorily plead its claims a third time without alleging that defendants are licensees. Any complaint alleging that defendants do not hold licenses in the intellectual property at issue would necessarily and impermissibly contradict the 1975 Agreement's plain language and the facts alleged in Ariel's earlier two pleadings. Where, as here, the claims contained in an amended complaint are contradicted by the plain language of a document attached to an earlier pleading, amendment "would be an exercise in futility as well as a waste of judicial resources to allow further amendment." Rapoport v. Asia Elecs. Holding Co., 2000 U.S. Dist. LEXIS 3891, at *27-28 (S.D.N.Y. Mar. 30, 2000). Accordingly, Ariel's copyright claims are dismissed with prejudice.
Dismissal of the Remaining Claims Without Prejudice
The defendants argue, correctly, that if Ariel's copyright claims are dismissed, the remaining claims do not supply any basis for federal jurisdiction. Although Ariel's breach of contract claims stem from the defendants' alleged violation of agreements that involve patents, the mere fact that a disputed contract revolves around patent rights is insufficient to create federal jurisdiction. See, e.g., Design Science Toys v. McCann, 931 F. Supp. 282, 283 (S.D.N.Y. 1996) (stating that the "fact that a patent is the property that is the subject of a contractual or ownership claim does not make that claim any less a question of state law"); Kaufman Malchman Kirby, P.C. v. Hasbro, Inc., 897 F. Supp. 719, 721 (S.D.N.Y. 1995) ("[W]hen patent issues are merely implicated incidentally in a cause of action . . . federal courts do not have jurisdiction of the case pursuant to [28 U.S.C.] § 1338."). Similarly, the declaratory relief claims, standing alone, do not create federal jurisdiction. The Declaratory Judgment Act, 28 U.S.C. § 2201, "does not independently create federal jurisdiction" because "an action for declaratory judgment may be brought in federal court ordinarily only if there would exist a basis for federal jurisdiction in a coercive action between the two parties."Tasini v. New York Times Co., 184 F. Supp. 2d 350, 358 (S.D.N.Y. 2002) (quoting Warner-Jenkinson Co. v. Allied Chem. Corp., 567 F.2d 184, 186 (2d Cir. 1977) (internal quotations and alterations omitted). In addition, there is no jurisdiction through diversity, because both plaintiffs (Ariel) and at least one of the defendants (Reuters Services) are citizens of the United Kingdom. The presence of an alien on both sides of the litigation destroys diversity. See Universal Licensing Corp. v. Paola del Lungo S.P.A., 293 F.3d 579, 581 (2d Cir. 2002).
Because Ariel's copyright claims must be dismissed and there is no basis for federal jurisdiction over the remaining claims, pursuant to 28 U.S.C. § 1367(c), the Court may decline to exercise pendent jurisdiction over those claims. "In general, where the federal claims are dismissed before trial, the state claims should be dismissed as well." Marcus v. ATT Corp., 138 F.3d 46, 57 (2d Cir. 1998). Where a federal district court declines to hear the pendent claims, those claims should be dismissed without prejudice and "left for resolution to state tribunals." Giordano v. City of New York, 274 F.3d 740, 754 (2d Cir. 2001) (quoting United Mine Workers v. Gibbs, 383 U.S. 715, 726-27, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966)). Thus, the Court declines to exercise jurisdiction over Ariel's claims for breach of contract (Claim Four) and the related claims for declaratory relief (Claims Two and Three) and dismisses those claims without prejudice.
CONCLUSION
The Court finds that the defendants are valid licensees of the works in which Ariel claims to own copyright. Therefore, as a matter of law, the defendants cannot be sued for infringing use of those works. Ariel will be unable to re-plead its claims for copyright infringement without either contradicting its earlier pleadings or again alleging that the defendants hold express, non-exclusive licenses in the copyrighted works at issue. Therefore, the Court dismisses Ariel's copyright claims with prejudice.
Because the remaining claims are state law claims and there is no remaining ground for federal jurisdiction, the Court declines to exercise pendent jurisdiction and dismisses Ariel's claims for breach of contract and declaratory relief without prejudice.
The Court orders this case closed and removed from the docket of this Court.