Summary
declining to exercise supplemental jurisdiction over state contract and tort law claims because of a related pending state court action
Summary of this case from Barua v. BaruaOpinion
No. 05 Civ. 261 (NRB).
August 3, 2005
Dana M. Susman, S. Reid Kahn, Kane Kessler, P.C., New York, NY, Attorneys for Plaintiff.
James A. Power Jr., Power Del Valle LLP, New York, NY, Attorney for Defendant.
MEMORANDUM AND ORDER
Plaintiff Q Marketing Group, Ltd. ("Q Marketing") brings this action against defendant P3 International Corporation ("P3") seeking (1) a declaration pursuant to the Declaratory Judgment Act ("the Act"), 28 U.S.C. § 2201, stating that a provision of an agreement between Q Marketing and P3 is unenforceable because it violates the Sherman Act, 15 U.S.C. § 1; (2) a declaration pursuant to the Act stating that the same provision, if deemed enforceable, is more limited in scope than it may appear on its face; and (3) a judgment that P3 has tortiously interfered with Q Marketing's contractual and business relationships, plus a permanent injunction and at least $1,100,000 in damages related thereto. Q Marketing asserts that this Court has subject matter jurisdiction over the first claim based on 28 U.S.C. §§ 1331 and 1337 and supplemental jurisdiction over the second and third claims based on 28 U.S.C. § 1367. P3 moves to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction. For the reasons set forth below, P3's motion is granted and the complaint is dismissed.
BACKGROUND
Q Marketing and P3 are competing manufacturers of consumer electronics. Both are based in New York State and sell their products throughout the country by mail order catalogs and retail outlets.
Unless otherwise noted, the information in the Background section is taken from Q Marketing's complaint. See Jackson Nat'l Life Ins. Co. v. Merrill Lynch Co., Inc., 32 F.3d 697, 699-700 (2d Cir. 1994) (on a 12(b) motion, courts must accept "as true the facts alleged in the complaint").
In or around March 2004, Q Marketing began distributing for sale a portable electronic air cleaner called the Bell+Howell Desktop Ionizer and Air Purifier ("B+H Ionizer"). Soon afterward, P3 contacted Q Marketing to assert that the instruction manual for the B+H Ionizer infringed upon the copyrighted instruction manual for P3's own air cleaning product, the Ionizair Tabletop Air Ionizer ("Ionizair"). Pl.'s Opp'n Mem. at 2. P3 further asserted that Q Marketing's sale of the B+H Ionizer constituted unfair competition.
In August 2004, Q Marketing responded to P3's assertions by making modifications to the "design, packaging and marketing material" of the B+H Ionizer. Compl. ¶ 9. Q Marketing also entered into an agreement with P3 ("the settlement agreement") that provided, in part, as follows:
5. Q Marketing . . . shall immediately and permanently refrain from the following acts:
(a) selling, distributing, advertising, marketing, promoting or offering for sale the BH ionizer for resale in a retail store;
(b) selling, distributing, advertising, marketing, promoting or offering for sale the BH ionizer to a catalog merchant, known to Q Marketing to be a customer of P3 who exhibits the P3 IonizAir in a mail order medium, for a period of two years from the date of this Agreement; and
(c) selling, distributing, advertising, marketing, promoting or offering for sale the BH ionizer, including any of the 6,700 pieces now held in Hong Kong, using a depiction or modified depiction of the P3 IonizAir, or using text or artwork which is a substantial copy, in whole or in part, of text or artwork used by P3 in connection with its marketing or sale of the IonizAir or any other P3 product.
Compl. Ex. A. Q Marketing asserts that it did not have an attorney review the settlement agreement prior to its execution. Pl.'s Opp'n Mem. at 3 n. 2.
In November 2004, Q Marketing placed the B+H Ionizer for sale in a catalog known as Taylor Gifts. On December 21, 2004, P3 sent a letter to Q Marketing asserting that Q Marketing was in violation of section 5(b) of the settlement agreement because P3 had displayed the Ionizair in Taylor Gifts "for a substantial period of time prior to the recent Q Marketing offer." Compl. Ex. B. The letter went on to "insist that Q Marketing immediately confirm to [P3] in writing . . . that it has not shipped the Bell+Howell desk top ionizer to Taylor Gifts, or that it has stopped shipment on or recalled all such product that has been shipped to that P3 customer, and that it has in all other ways fully complied with the terms of its agreement with P3." Id.
Q Marketing did not comply with P3's demands. It commenced the present suit on January 11, 2005. The first cause of action alleges that section 5 of the settlement agreement "is an agreement in restraint of trade which affects interstate commerce, and therefore violates the Sherman Act . . . and otherwise constitutes unfair competition." Compl. ¶ 15. Section 5 allegedly "further violates the Sherman Act because it bears no reasonable relationship to the copyrights which [P3] seeks to protect and is beyond the scope of any means necessary to protect [P3's] copyright interests." Compl. ¶ 16. On these grounds, Q Marketing seeks a judgment declaring that section 5 is unenforceable.
Sometime after the initiation of this case, P3 commenced a breach of contract action against Q Marketing in New York state court. Def.'s Reply Mem. at 5.
DISCUSSION
The parties to this litigation are not "citizens of different States," 28 U.S.C. 1332(a)(1), so subject matter jurisdiction must arise from a federal question. See Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987) ("Absent diversity of citizenship, federal-question jurisdiction is required.").
Q Marketing has invoked federal question jurisdiction under 28 U.S.C. § 1331 and § 1337, both of which employ the phrase "arising under." Our analysis acknowledges that the standard is the same under both sections. See Franchise Tax Bd. of State of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 8 n. 7 (1983) ("we have not distinguished between the `arising under' standards of § 1337 and § 1331").
Federal law dictates that "[t]he district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. "The question whether a claim `arises under' federal law must be determined by reference to the `well-pleaded complaint.'"Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. 804, 808 (1986); see also Beneficial Nat. Bank v. Anderson, 539 U.S. 1, 6 (2003). The so-called well-pleaded complaint rule dictates that:
[A] suit arises under the Constitution and laws of the United States only when the plaintiff's statement of his own cause of action shows that it is based upon those laws or that Constitution. It is not enough that the plaintiff alleges some anticipated defense to his cause of action and asserts that the defense is invalidated by some provision of the Constitution of the United States.Louisville Nashville R. Co. v. Mottley, 211 U.S. 149, 152 (1908).
In declaratory judgment actions, which "generally commence at the instance of a party facing potential liability to another who may have an accrued claim at that time but has not yet commenced coercive litigation to pursue relief," Dow Jones Co., Inc. v. Harrods, Ltd., 237 F. Supp.2d 394, 405 (S.D.N.Y. 2002), the jurisdictional analysis involves a few special considerations. First, the Act itself cannot be the basis for federal question jurisdiction. See Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-72 (1950). More importantly, as a sort of converse to the well-pleaded complaint rule, "federal jurisdiction in an action for a declaratory judgment is determined by the character of the threatened action." City of Rome, N.Y. v. Verizon Communications, Inc., 362 F.3d 168, 174 n. 3 (2d Cir. 2004) (quoting Hunter Douglas Inc. v. Sheet Metal Workers Int'l Assoc., Local 159, 714 F.2d 342, 345 (4th Cir. 1983)); see also Skelly Oil, 339 U.S. at 673-74; Public Service Commission of Utah v. Wycoff Co., Inc., 344 U.S. 237, 248 (1952) ("Where the complaint in an action for declaratory judgment seeks in essence to assert a defense to an impending or threatened state court action, it is the character of the threatened action, and not of the defense, which will determine whether there is federal-question jurisdiction in the District Court."). Thus federal question jurisdiction is not proper if, "but for the availability of the declaratory judgment procedure, the federal claim would arise only as a defense to a state created action." City of Rome, 362 F.3d at 174 n. 3 (quotingFranchise Tax Bd., 463 U.S. at 16).
Q Marketing's Sherman Act claim does not create federal question jurisdiction in this case because the "threatened action" is a breach of contract suit brought by P3, and such suits are governed by state, not federal law. See, e.g., Pan Am. Petroleum Corp. v. Superior Court of Del. in and for New Castle County, 366 U.S. 656, 663 (1961) (claims that do not "invoke a federal right" belong in state court); Marcella v. Dist. Physicians' Health Plan, 293 F.3d 42, 50-51 (2d Cir. 2002) (holding that the district court lacked subject matter jurisdiction over plaintiff's claims for breach of contract and intentional infliction of emotional distress and remanding the case to state court). Q Marketing filed its complaint shortly after receiving P3's letter regarding the Taylor Gifts catalog and the settlement agreement. The timing of filing, as well as the tone of P3's letter, reveal that Q Marketing's first and second claims were intended to preempt what it saw as P3's impending coercive action. The Sherman Act relates to the controversy between the parties only insofar as it may render section 5 unenforceable; that is, the Sherman Act may provide a defense for Q Marketing against P3's efforts to enforce the settlement agreement. Indeed, Q Marketing can assert its Sherman Act claim as an affirmative defense in the case by P3 that is currently pending in New York state court. See Andrea Theatres, Inc. v. Theatre Confections, Inc., 787 F.2d 59, 63 (2d Cir. 1986) (explaining in context of the Sherman Act that "state courts may properly consider federal claims raised as defenses in a state court action, including claims over which federal courts have exclusive jurisdiction").
Q Marketing suggests that it commenced this action to avoid the possibility of being criminally sanctioned for abiding by the terms of section 5 and thereby violating the Sherman Act. Pl.'s Opp'n Mem. at 3, 9. While creative, there is no indication that Q Marketing is actually threatened with criminal sanctions.
Q Marketing also relies on a passage in Franchise Tax Board stating that district courts have jurisdiction over any claim in which "the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal law." Id. at 27-28; Pl.'s Opp'n Mot. Dismiss at 4-7. Q Marketing argues that this passage supports the conclusion that federal jurisdiction lies simply because this Court would have to apply the Sherman Act in deciding whether to issue the requested declaratory judgment. The Second Circuit recently addressed a similar argument based on a similar passage from Franchise Tax Board. City of Rome, 362 F.3d at 176. The Court's words there are equally appropriate here:
[Respondent] has, however, stretched the language upon which it relies . . . far beyond the extent of its accepted applications. The Supreme Court itself, in Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. 804 (1986), cautioned that the seemingly expansive language of Franchise Tax Board should be read narrowly. Merrell Dow, 478 U.S. at 809. [The] Court emphasized that "Franchise Tax Board . . . did not purport to disturb the long-settled understanding that the mere presence of a federal issue in a state cause of action does not automatically confer federal question jurisdiction." Id. at 813.City of Rome, 362 F.3d at 176; see also Merrell Dow Pharmaceuticals, 478 U.S. at 814 ("far from creating some kind of automatic test, Franchise Tax Board thus candidly recognized the need for careful judgments about the exercise of federal judicial power in an area of uncertain jurisdiction"); cf. Zimmerman v. Conrail, 550 F. Supp. 84, 85-87 (S.D.N.Y. 1982) (discussing cases in which questions of federal law were only "tangentially" related to the underlying disputes). In declaratory judgment actions in federal court, as already stated above, the presence of an issue whose resolution requires application of federal law will not always create jurisdiction. Jurisdiction does not lie here because the Sherman Act, though a federal law, functions only as a way for Q Marketing to potentially avoid its obligations under the settlement agreement. It is "simply a claim made in anticipation of a defense to be raised in an action having its origin in state law." Duke Power Co. v. Carolina Environmental Study Group, Inc., 438 U.S. 59, 69 n. 13 (1978).
Q Marketing also argues that in Connell Construction Co., Inc. v. Plumbers and Steamfitters Local Union No. 100, 421 U.S. 616 (1975), federal subject matter jurisdiction was available for an action seeking a declaratory judgment that a contract was unenforceable under the Sherman Act. In Connell Construction, however, the basis for federal question jurisdiction appears to have been federal labor law, not the Sherman Act.
One final issue deserving mention is the complete preemption doctrine, which is a corollary to the well-pleaded complaint rule. The doctrine provides that district courts have exclusive jurisdiction over any claim based on a state law that has been "completely preempted" by a federal law. Thus "any federal statute that both preempts state law and substitutes a federal remedy for that law [creates] an exclusive federal cause of action." Briarpatch Ltd., L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 305 (2d Cir. 2004). Although Q Marketing uses the word "preemption" and cites to several cases, including Beltone Electronics, 1977 WL 18398, at *1 ("where interstate commerce is involved, the Federal anti-trust laws operate to preempt the field and to oust the State courts of jurisdiction"), Pl.'s Opp'n Mem. at 7, the complete preemption doctrine is irrelevant to this case. Q Marketing has not met its burden of proving that a state antitrust claim is a part of P3's well-pleaded complaint in the state court action, or that any of P3's state law claims will be completely preempted by a federal statute. See Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 65, 67 (1987); see also Linardos v. Fortuna, 157 F.3d 945, 947 (2d Cir. 1998) ("the party invoking federal jurisdiction bears the burden of proving facts to establish [federal] jurisdiction").
Jurisdictional issues aside, we briefly note that Q Marketing's Sherman Act claim is weak on its face. Q Marketing alleges that P3 did nothing other than "attempt to enforce" the settlement agreement. Compl. ¶ 17. That agreement was, by all accounts, entered into voluntarily by both parties. It only temporarily divides the market and restrains Q Marketing's sales. Q Marketing has not alleged that it and P3 control a significant part of the air cleaner market. In short, it is hard to see how these facts amount to a Sherman Act violation.
Q Marketing's remaining two claims are state contract and tort law claims. Because we find that Q Marketing has not pleaded a federal claim, and because of the pending state court action, we decline to exercise supplemental jurisdiction over these state law claims. 28 U.S.C. § 1367(c)(3); see KMB Warehouse Distrib., Inc. v. Walker Mfg. Co., 61 F.3d 123, 130-31 (2d Cir. 1995).
CONCLUSION
For the above stated reasons, we grant P3's motion to dismiss for lack of subject matter jurisdiction. The Clerk of the Court is respectfully requested to close this case on the Court's docket.