Law Offices of Donald W. Hudspeth, P.C.

Brian K. Stanley, of counsel  (SBN 004619) Janae A. Perry-Meier  (SBN 031519) 3200 N. Central Avenue, Suite 2500 Phoenix, Arizona  85012  ·  602-265-7997 Court@AzBusLaw.Com

Attorneys for eUnify Defendants

In the United States District Court For the District of Arizona

Michael J. Magnotta, directly and derivatively on behalf of iColligo, LLC,

Plaintiff,

v.

Steven A. Serra et ux., et al.,

Defendants.

No. CV-18-02295-PHX-SRB

defendants’ Response to Motion to Remand

Memorandum in Response

1. Scope of Copyright Preemption

a. Controlling Statutes

On and after January 1, 1978, all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103, whether created before or after that date and whether published or unpublished, are governed exclusively by this title.  Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.

17 U.S.C. § 301 (a).

The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to … copyrights … . No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to … copyrights.

28 U.S.C. § 1338 (a).

b. When does a case or claim “arise under” the Copyright Act?

The Second Circuit’s learned discussion of district court jurisdiction of cases “arising under” various federal statutes in T. B. Harms Co. v. Eliscu, 339 F.2d 823 at 825-27 (2nd Cir. 1964) reflects that court’s consideration of federal jurisdiction of “copyright claims apparently not involving infringement.”  That discussion is preceded by the observation that “the undoubted truth that a claim for infringement ‘arises under’ the Copyright Act does not establish that nothing else can.”  339 F.2d at 825.  If this “undoubted truth” applies, there is no need to consider the more recondite aspects of the “T.B. Harms test.”  Thus, once a claim is identified as being effectively a claim for the alleged infringement of a right created by the Copyright Act, it must be recognized as a claim of federal, and exclusively federal, cognizance.

Under 17 U.S.C. § 106 (a), the owner of copyright under U.S.C. Title 17 has the exclusive right “to reproduce the copyrighted work in copies,” or to authorize such reproduction.  “Copyright in a work created on or after January 1, 1978, subsists from its creation,” 17 U.S.C. § 302 (a), and so the copying of such a work, without authorization by the copyright owner, infringes the owner’s rights as created by the Copyright Act.  If the wrong complained of by a plaintiff is revealed as consisting of such a copying, then to that extent his action must be classed as one for infringement of copyright, and thus one “arising under” the Copyright Act.

2. “Conversion” of Copyrightable Intellectual Property

In the digital millennium, an “original” and its “copy” alike consist of a sequence of electric or magnetic charges and as such are wholly indistinguishable.  If both descend from the initial creative act of a human author, it is pointless to debate their degrees of descent – practically, or for purposes of copyright law:

“Copies” are material objects … in which a work is fixed by any method now known or later developed, and from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.  The term “copies” includes the material object … in which the work is first fixed.

17 U.S.C. § 101.  As the Ninth Circuit recognized over a quarter-century ago, the use of computer software “necessarily includes the loading of the software into the computer’s random access memory (‘RAM’) by” the user.  Despite its impermanent nature, the copy “loaded into RAM” is a copy, the unauthorized making of which infringes the copyright owner’s exclusive § 106 rights.  MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511, 517-18 (9th Cir. 1992), cert. dismissed 510 U.S. 1033 (1994).

Given the § 101 definition of “copies” as including the object “in which a work is first fixed,” for copyright purposes there is no such thing as an “original.”  This corresponds well with digital reality, for today, when a programmer completes the final version of the source code of software – what would correspond most nearly to an “original,” as traditionally understood – it is almost always “fixed” as a series of charges or impulses residing on a hard disk drive or other non-volatile storage device attached to some computer, though not necessarily the one with which the programmer is directly interacting.  (For that matter, the same could probably be said of the last draft of most novels.)  The series of charges or impulses is a “copy” under the Copyright Act, and has usefulness of any kind, only because there exists a machine or device with the aid of which the software so stored can be perceived, reproduced, or otherwise communicated.

In their Notice of Removal, Defendants cited a number of authorities for the proposition that a conversion claim will be preempted by the Copyright Act if the plaintiff has alleged the unlawful retention of intellectual property rights rather than the unlawful retention of a tangible object embodying the work.  The closest Plaintiff comes to addressing these authorities is his discussion of an unreported decision of this Court, rendered on July 28, 2009 in the case of Merchant Transaction Sys., Inc. v. Nelcela, Inc., No. CV 02-1954-PHX-MHM.  Even assuming Plaintiff’s citation of this unpublished decision were appropriate, it would provide scant support for Plaintiff’s position, at best.  To begin with, the cited decision quotes Firoozye v. Earthlink Network, 153 F.Supp. 2d 1115 (N.D. Cal. 2001) with approval twice: first, for the proposition that, to avoid preemption, “the ‘extra element’ required by state law [must] change the nature of the action so that it is qualitatively different from a copyright infringement claim,” and second, observing that “while a claim for conversion typically involves tangible property and thus may be immune from preemption, where a plaintiff is only seeking damages from a defendant’s reproduction of a work – and not the actual return of a physical piece of property – the claim is preempted.”

Moreover, in its July 28, 2009 unreported decision the Merchant Transaction Sys. court expressly reaffirmed its unpublished decision of March 18, 2009, precluding a conversion claim as preempted by the Copyright Act:

Conversion claims with respect to intellectual property arise from the reproduction, copying and misuse of a work … and are “clearly equivalent to [those of] a copyright claim.” Thus, to the extent that Nelcela alleges the conversion of copyrightable or otherwise noncopyrightable intellectual property contained within the Nelcela software, the conversion claim is preempted by the Copyright Act.

Finally, even the quote from Merchant Transaction Sys. which Plaintiff presents has been artfully manipulated.  Plaintiff’s quote contains an ellipsis between “distribution” and “In addition.”  That ellipsis conceals the mysteriously omitted sentence, explaining the court’s holding that one of the conversion claims there presented was not preempted:

But here, MTSI’s conversion claim “requires [MTSI] to demonstrate that [the Nelcela Parties] wrongfully obtained possession over a specific piece of property,” i.e., the MTSI software.

Slip decision 4:6-8.  The paragraphs of Plaintiff’s Motion for Partial Summary Judgment describing what Defendants purportedly “converted” and how they did this (quoted in the Notice of Removal at 3:4-13 and quoted again on page 7 of this Memorandum, below) make it clear that what was allegedly taken is a copy of the ICS software as it was stored on one or more Amazon Web Services (“AWS”) servers and that Defendant Steve Serra accomplished this “taking” by making or causing the making of such copy.

Plaintiff argues that Serra did this in order to “steal” from iColligo, while Serra explains that prior to these actions – a distorted version of which is presented in the paragraphs of the Motion for Partial Summary Judgment quoted in the Notice of Removal – under the original AWS account (with respect to which his own company eUnify and not iColligo was identified as the AWS customer) AWS was billing for servers used by both iColligo and Serra’s separate corporation, eUnify.  Anticipating the likely appointment of a receiver for iColligo, Serra caused the creation of a new AWS account, this one with iColligo as the identified customer, and the removal of the iColligo servers and their associated stored data to this account.  The result was the segregation of the iColligo servers and data from the eUnify servers and data, which was obviously a convenience for iColligo’s receiver as well as for eUnify’s management.

As is the case whenever electronically stored information is “moved,” what actually happened is that ESI stored at location A was copied to location B and then deleted from location A.  Once the operation was completed it would be impossible to tell whether it was the iColligo servers or the eUnify servers or both that had been replicated.  What is significant for purposes of the matter at hand (the application of the Merchant Transaction Sys. decision of 07/28/2009, including the sentence mysteriously omitted from Plaintiff’s quote, to the case at bar) is that there is no possible room for a suggestion that Serra “wrongfully obtained possession over” the software in order to cause it to be replicated.  Although it is not mentioned in the two paragraphs of the Motion for Partial Summary Judgment quoted in the Notice of Removal (and quoted again on page 7 of this Memorandum, below) elsewhere in that paper it is made abundantly clear that Serra was and was acting as the manager of iColligo.  There were to begin with AWS servers supporting iColligo’s operation with a copy of the ICS object code only because Serra, as iColligo’s manager, had made the arrangements.  What is certain is that the ICS source and object code, as in use in 2016, were created by and in the possession of eUnify personnel, despite Plaintiff’s disputed claim to contributory authorship of an earlier version.

3. The Nature of the Rights Plaintiff Seeks to Vindicate

a. Plaintiff’s Newly Revealed Contentions.

The iColligo software was historically hosted on an AWS account ending in 4354 and paid exclusively by iColligo. (SOF ¶ 78.) On July 19, 2016, Serra opened a new AWS account ending in 5419, deposited a copy of iColligo’s software on the 5419 account, removed iColligo’s name from the servers on the original 4354 account, and purported to turn over iColligo’s AWS account to the Receiver. (SOF ¶ 79.) In actuality, Serra provided the Receiver with access to the “dummy” 5419 account and commandeered the 4354 account for himself.  (SOF ¶ 80.)

… To this day, Serra exercises exclusive control over iColligo’s software and continues to “license” its use on behalf of eUnify for a fee of no less than $30,000 every month. (SOF ¶ 82.)

Motion for Partial Summary Judgment (f. 06/22/2018) 13:1-7, 10-12.

Since Defendant Serra “deposited a copy of [the ICS] software on the 5419 account” and then turned that account over to the iColligo receiver, there is only one thing that could give Serra (speaking broadly enough to include eUnify, the corporation of which he is the sole shareholder) “exclusive control over” that software – the corporation’s ownership of the copyright, which is evidenced by a certificate of registration.  However, the truth is that the receiver never made any use of the copy of the software provided to him, and that this was probably not because he was concerned about violating eUnify’s copyright.  In any event, it is irrelevant which of these indistinguishable electronic copies of the software Serra is accused of misappropriating.  Whichever set of servers – those for the use of which AWS charges its account 4354 or those for the use of which AWS charges its account 5419 – may house the copy which Plaintiff purports to find offensive, there is no “extra element” that changes the nature of the action so that it is qualitatively different from a copyright infringement claim.

To determine whether a plaintiff’s state-law claim seeks to assert rights that are equivalent to those protected by the Copyright Act, a court must analyze the elements of the state-law cause of action to see if the right defined by state law may be abridged by an act which in and of itself would infringe one of the exclusive rights in the Act. Conversely, if there is an “extra element” that is required in place of or in addition to the acts of reproduction, performance, distribution, or display in order to constitute a state-law cause of action, and the “extra element” required by state law changes the nature of the action so that it is qualitatively different from a copyright infringement claim, the state-law claim is not preempted.

Firoozye v. Earthlink Network, 153 F.Supp.2d 1115, 1125 (N.D. Cal. 2001).

In Arizona, “[C]onversion is any act of dominion wrongfully exerted over another’s personal property in denial of or inconsistent with his rights therein.”  Shartzer v. Ulmer, 85 Ariz. 179, 333 P.2d 1084, 1088 (1959).  Where the personal property in question is intangible and is actually a composition which exists and has ever existed only as a unit of electronically stored information – a unit which can only be used, indeed, whose content can be known only through the generation of a copy – a claim for the “conversion” of such property seeks to assert rights that are equivalent to those protected by the Copyright Act.

b. Plaintiff’s Requests for Relief.

Plaintiff demands summary judgment for “[c]onversion against defendants Serra and eUnify, with an order to return iColligo’s property and the amount of damages to be determined following a damages hearing.”  Motion for Partial Summary Judgment f. 06/22/2018, 1:24-26.  In so doing he continues his tactic of speaking of the software as if it were a tangible chattel and iColligo’s ownership of that chattel were established.  He also complains that Serra (actually, eUnify) exercises control over the copies of the software retained by it and continues to license their use (specifically, to Defendant appLega, LLC) for a substantial monthly fee.  MPSJ 13:10-12.

Since Plaintiff himself states that the software was copied to an AWS account that was turned over to the iColligo receiver, what can Plaintiff as iColligo’s representative mean by demanding the “return” of this “property”?  Plaintiff defeated the appLega Defendants’ suggestion of exclusive federal jurisdiction by insisting that he complains because Defendants “literally took … the actual software. … It is akin to a thief stealing someone’s actual book, not making an unauthorized copy of someone’s book” and citing a Colorado case from the report of which it cannot be determined exactly what the defendant was found to have taken or how, but which held the defendant liable with the words

In the case of a novel, for example, a writer prepares an original manuscript of the work. If another person exercises control over that manuscript under circumstances constituting civil theft under Colorado law, he or she would be liable for theft of the manuscript … .

Steward Software Co. v. Kopcho, 266 P.3d 1085, 1088 (Colo. 2011), quoted in Plaintiff’s Opposition to Applega Defendants’ Motion for Partial Judgment on the Pleadings f. 11/07/2017 at 7:16-19.  Only Plaintiff knows exactly what he meant when he referred to the “literal taking” of the “actual software,” but his argument certainly suggested that he intended to prove the physical asportation and detention of a tangible chattel, an argument which, he correctly pointed out, is not inconsistent with the bare words of the conversion count of the (Second) Amended Complaint.

Plaintiff’s Motion for Partial Summary Judgment, however, revealed that there was no physical taking nor any tangible chattel, but rather the objects of Defendants’ alleged misdeeds were electronic copies, and the “taking” was accomplished by Defendant Steve Serra, either by having the software copied to a virtual server and then (nefariously?) turning over control of the server to the iColligo receiver, or by leaving copies on servers that remained in the control of eUnify.  If any rights that iColligo may have in the software (a work of authorship that comes within the subject matter of copyright) have been infringed by the making, existence or use of these copies, they must clearly be equivalent to rights within the general scope of copyright.  See 17 U.S.C. § 301 (a).

What can iColligo’s representative (the Plaintiff) mean by demanding the “return of its property”?  By his own account, iColligo has “its property,” unless something has happened to the copy which Plaintiff describes as having been “deposited on” a server that was then put under the control of the iColligo receiver.  And if something has happened to that copy, all Defendants could possibly do for iColligo would be to make another one; there is no tangible chattel to “deliver.”  Undoubtedly, what Plaintiff actually wants is for Defendants to stop using (i.e., stop copying) the copies of the software which they now possess.  Again, if iColligo has any right to demand this, it is a right “equivalent to rights within the general scope of copyright.”

4. Conclusion.

It would be idle to deny that Defendants were from the outset suspicious of Plaintiff’s characterization of his conversion claim and doubted that the retention of a tangible object would ever be shown.  On their faces, however, the initial complaints, original and amended, were not inconsistent with Plaintiff’s “tangible chattel” characterization of his conversion counts, and so the cases stated by these pleadings were not removable.  The true nature of the conversion claim, and that because of it the case was or had become removable, could not be ascertained until Plaintiff served his pending Motion for Partial Summary Judgment.

Other aspects of the Motion to Remand may be addressed briefly.  Plaintiff correctly observes that 28 U.S.C. § 1446(b)(2)(a) requires that all defendants join in or consent to the removal of an action.  It is not clear to what purpose he observes, also correctly, that the Defendant Estate of Anthony M. Serra, Deceased, did not join but rather consented.  (As for his reference to Arizona ER 4.2, Plaintiff should know that Comment [1] to that Rule expressly states that notwithstanding the Rule, “parties to a matter may communicate directly with each other.”)

As for the question whether the Defendants lacked an objectively reasonable basis for seeking removal, Defendants respectfully submit that it would be in the interest of judicial economy to address that question if there is occasion to do so after the Motion to Remand is decided, and hereby seek leave to brief this issue if and when Plaintiff’s Motion may be granted.

DATED: August 10, 2018.

LAW OFFICES OF DONALD W. HUDSPETH, PC

By:            /s/Brian K. Stanley                            

     Brian K. Stanley,                                 

     Of Counsel                                 

Attorneys for eUnify Defendants

Udall Shumway PLC

By:            /s/Joel E. Sannes                                  

     Joel E. Sannes                                

Attorneys for appLega Defendants

Kadish & Anthony Law Group

By:            /s/Stephen J. Anthony                          

     Stephen J. Anthony                   

Attorneys for Employee Defendants

A true copy of the foregoing was served upon the following, by mailing and emailing, on August 10, 2018:

Ms. Kate Benveniste Mark A. Nadeau, Esq. DLA Piper LLP 2525 E. Camelback Rd., Suite 1000 Phoenix, AZ 85016-4245 kate.benveniste@dlapiper.com mark.nadeau@dlapiper.com Attorneys for Plaintiff

Ms. Victoria L. Buchinger Dickinson Wright 1850 N. Central Ave., Suite 1400 Phoenix, AZ 85004 vbuchingeri@dickinsonwright.com Attorneys for Def. Estate of Anthony Serra

By:      /s/Michelle Arrington                     Michelle Arrington            Legal Secretary