Federal Subject Matter Jurisdiction is not Lost by Voluntary Dismissal of the only Claim Conferring Jurisdiction

Originally published by Sim Israeloff.

The Fifth Circuit has reiterated the rule that federal subject matter jurisdiction is measured at the time of removal and is not destroyed by subsequent events including the voluntary dismissal of the only claim conferring federal question jurisdiction.

In GlobeRanger Corp. v. Software AG, No. 15-10121 (5th Cir. Sept. 7, 2016), the court untangled a jurisdictional knot worthy of a law school exam.  GlobeRanger sued Software AG in federal court for trade secret misappropriation.  Software AG objected claiming no federal jurisdiction so GlobeRanger dismissed and refiled in state court asserting numerous claims including conversion.  Software AG then removed the case arguing that most of the claims were preempted and barred by the federal Copyright Act.  GlobeRanger moved to remand but the district court denied the motion and dismissed the case under Rule 12(b)(6), leading to the first appeal. GlobeRanger Corp. v. Software AG, 691 F.3d 702, 709 (5th Cir. 2012) (“GlobeRanger I”) held that at least some of the factual allegations were outside the subject matter of the Copyright Act and therefore not preempted.  It also affirmed the denial of GlobeRanger’s motion to remand.  The opinion suggested that the district court could have found on remand with a more developed record that the conversion claim was not fully preempted.  But that issue was never reconsidered because GlobeRanger dropped the conversion claim, leaving only a state law claim for misappropriation of trade secrets to be tried in federal court under supplemental jurisdiction.

The jury found that Software AG had misappropriated trade secrets and awarded $15 million to GlobeRanger, leading to the second appeal.  In the second appeal the parties’ jurisdictional positions again flipped from where they were in GlobeRanger I.  Now GlobeRanger argued that there was federal jurisdiction while Software AG argued there was none.

Software AG argued that GlobeRanger was in a jurisdictional dilemma.  Either the trade secret claim was governed and preempted by federal copyright law, or it wasn’t governed by federal law and there was no federal jurisdiction.

The circuit court began with the preemption question, whether the misappropriation of trade secrets claim was equivalent to the anti-copying principle of federal copyright law.  It agreed with GlobeRanger that state law prevents acquisition through a breach of a confidential relationship or improper means and thus involves an extra element not found in copyright law.  “Because trade secret law protects against not just copying but also any taking that occurs through breach of a confidential relationship or other improper means, all ten circuits that have considered trade secret misappropriation claims have found them not preempted by the Copyright Act.”

The court then considered Software AG’s alternative argument that no federal question jurisdiction existed (the only asserted basis for federal jurisdiction) so the case should have been remanded to state court.  The opinion started with the “fundamental principle” that jurisdiction is determined at the time of removal, citing Pullman Co. v. Jenkins, 305 U.S. 534, 537 (1939).  A dismissal of some claims does not undo an initial determination of jurisdiction.  It does create a question whether the remaining state law claims should be retained as a discretionary exercise of the court’s supplemental jurisdiction, but Software AG never asked the district court to exercise that discretion and thus waived the issue.

Ironically, GlobeRanger’s federal judgment was saved by its dismissed conversion claim.  The court found that the original complaint alleged conversion of only intangible property, which is preempted by federal copyright law and thus supported federal question jurisdiction at the time of removal.  Even though the conversion claim was later dismissed, the district court continued to have supplemental jurisdiction over the state law misappropriation of trade secrets claim.  So by asserting a claim that was preempted and barred by federal law, GlobeRanger was able to retain a federal court verdict and judgment over a purely state law claim.

GlobeRanger Corp. v. Software AG, No. 15-10121 (5th Cir. Sept. 7, 2016)

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