Article by Clyde Shuman
A federal judge in Texas remanded Dell Technologies Inc.’s breach of contract case against TiVo Corp. to state court, finding that the state’s interest in enforcing contracts takes precedence over any patent law issues arising out of the underlying software licensing dispute.
In Dell Technologies Inc. et al. v. TiVo Corp. et al., case number 1:18-cv-00666 (W.D. Tex.), defendant Sonic Solutions LLC, the predecessor to defendant TiVo Corp., provided Dell with Roxio Creator audio MP3 software, which Dell installed and sold on its computers.
A Dell subsidiary and Sonic had entered into a software licensing agreement under which, inter alia, Sonic represented that "the Licensed Product(s) will operate substantially in accordance with its written specifications." Per Dell, Sonic represented that the Roxio software would use Microsoft Windows operating system for encoding, decoding, recording, and playing MP3 audio files to avoid potential liability for third-party royalties. Notably, a third party holds the exclusive rights to grant licenses for certain patent rights relating to encoding and decoding MP3 audio. Dell claimed it relied on the written specifications and representations made by Sonic that Roxio would not utilize third-party codec when installed on Dell computers.
The 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," and that Sonic agreed to fully indemnify, defend, and hold Dell harmless "from and against any and all claims, actions, suits, legal proceedings, [etc.]…arising out of or in connection with any alleged or actual. . . breach by Sonic [ ] of any other representations and/or warranties contained in this Agreement."
In 2015, Audio MPEG, Inc. the third party with exclusive licensing rights for encoding/decoding MP3, sued Dell for patent infringement based, in part, for having distributed the Roxio software. During the course of the litigation, Dell learned that the software included unlicensed MP3 functionality and did not use the pre-programed Microsoft functionality for encoding/decoding MP3. Dell claims it requested indemnification from TiVo, which was refused. Dell entered into settlement agreement and license with Audio MPEG.
Dell then sued TiVo in Texas state court, asserting state law claims for, inter alia, breach of contract. TiVo removed the case to federal court, asserting various bases for federal subject matter jurisdiction, including counterclaims for a declaration of noninfringement and patent exhaustion. TiVo also argued that Dell's state-law claims arise under federal patent law. Dell moved to remand this case back to state court, claiming lack of subject matter jurisdiction over its claims.
The federal judge agreed with Dell, remanding the case to the state court where Dell had sued, saying the patent-related aspect of the case “does not outweigh the interest of the state” in hearing contract cases. Per the court, “Allowing this case to proceed forward in federal court would disrupt federal-state balance, and diminish the role of the state of Texas in regulating commercial agreements and misrepresentations.”
The federal district judge based his decision, in large part, on the U.S. Supreme Court’s 2013 decision in Gunn v. Minton, which held that legal malpractice cases involving patents do not belong in federal court. In Gunn, the Court held that a state law claim like breach of contract can be heard in federal court only if it meets certain criteria, including that it is "substantial" and can be resolved "without disrupting the federal-state balance." According to the federal judge here, the dispute between Dell and TiVo did not satisfy this criterion.
The federal judge specifically noted that the patent suit against Dell had been settled, that the plaintiff there was not a party to the contract case, and that the relevant patents had expired. Per the court, this meant that the outcome of the contract case would not change the result of the patent case. He also rejected TiVo’s subject matter jurisdiction claim based on its patent counterclaims, again noting that the exclusive licensee was not a party to the contract suit and that, in any case, the infringement case was over. Per the court, "There is no precedent for a declaratory judgment in the absence of the patent owner, where the patents are expired, the underlying patent-infringement case is settled, and the patents are fully licensed."