The opinion of the court was delivered by: WEINFELD
A contract for the financing and production of a film has spawned this lawsuit replete with eight separate claims allegedly grounded upon federal statutory and pendent jurisdiction. Plaintiffs, producers of a documentary film on homeless children, commenced this action alleging that defendants, who entered into a contract to finance and market the film, have breached the contract, committed fraud in inducing plaintiffs to enter the contract, and violated the Lanham Act. Plaintiffs also make the seemingly inevitable civil RICO claim now commonly appended in actions sounding in contract and fraud. Defendants move to dismiss the civil RICO count for failure to state a claim upon which relief can be granted and move to dismiss the remaining seven Counts for lack of subject matter jurisdiction.
In 1983, Bear Creek, a film production company, completed filming a documentary about homeless children which was based upon a magazine article, "Streets of the Lost" (the "article") by Cheryl McCall, a co-plaintiff herein. In January 1984, in order to finance the post-production costs of the film, Bear Creek and Angelika Saleh ("Saleh") entered into a letter agreement whereby Saleh agreed to provide $150,000 toward the production of the film in exchange for a percentage of the film's profits and credit for Angelika Films, Inc. (owned by Saleh and her husband, Joseph, a co-defendant) as Executive Producer of the film. The agreement also granted Saleh an option to purchase all rights in the film, including its copyright, for an additional $200,000 (the "purchase price") payable in installments. Upon exercise of that option, all rights in the film were to pass to Saleh.
In the event that Saleh exercised her option to purchase the film, and until the installment payments were completed, Saleh was to pay to Bear Creek all gross proceeds from the film within 15 days of their receipt, as well as interest on the unpaid balance of the purchase price. Upon exercise of the option and payment of the first installment of the purchase price, Saleh would have the right to enter into agreements for the distribution of the film, but would be required to consult with Bear Creek regarding any sale or license of the rights in the film. Upon recoupment of her $350,000 investment, Saleh was to pay Bear Creek 40% of all gross proceeds from the film. Both parties were to "have a security interest in the Picture and its proceeds to secure payments due under the agreement."
Under an amendment to the agreement, Saleh agreed to pay an additional $40,000 in production costs, and the installment schedule for the Salehs' payments upon exercising the option was modified. The amendment expressly stated that "Saleh hereby exercises her option . . . to purchase the Picture" and "Bear Creek hereby assigns all rights in the Picture to Saleh pursuant to the terms of the Agreement, as amended."
The amendment also stated that "Saleh shall copyright the Picture in her name (or such other name as she shall determine)."
Plaintiffs' complaint, which includes as exhibits the parties' original agreement and the amendment thereto, sets forth eight separate counts. The first count alleges that Saleh materially breached the contract by failing to make payments, failing to pay 10% interest, withholding Bear Creek's share of the profits, failing to consult with Bear Creek regarding material matters, failing to permit Bear Creek to purchase prints of the film, and failing to give Bear Creek proper credit in advertising and other promotional materials. Count Two alleges that Saleh's husband induced her breaches of the contract. Count Three alleges that Saleh and her husband fraudulently induced Bear Creek to enter into the agreement by falsely representing that they would perform all of their obligations under the agreement. Count Four alleges that because Saleh failed to pay the purchase price, all rights in the film have reverted to or belong to Bear Creek and, therefore, defendants have violated Bear Creek's copyright in the film by reproducing, distributing, selling, and advertising the film. In Count Five, plaintiffs allege that defendants have engaged in false designation of origin and false representation in violation of section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), by failing to identify Bear Creek as the origin and source of the film in trailers, advertisements, and other promotional material. Count Six asserts a claim for enforcement of Bear Creek's security interest in the film and its proceeds. Count Seven alleges that defendants have committed civil RICO violations by engaging in acts of racketeering activity. Finally, Count eight alleges that the copyright of plaintiff Cheryl McCall in the article upon which film was based is being violated by defendants' distribution of the film and will be violated because defendants intend to use their copyrights in the film in a manner that exceeds the scope of the rights purportedly granted to Saleh.
Plaintiffs base federal subject matter jurisdiction over count Seven, the RICO Count, on 18 U.S.C. § 1964, a special provision for federal jurisdiction in RICO cases. they maintain that Counts Four, Five, and Eight fall within the federal jurisdiction over copyright and trademark matters created by 28 U.S.C. § 1338. Counts One through Three and Count Six are state law claims which, in a non-diversity case such as this, must be brought under pendent jurisdiction.
I. THE COPYRIGHT AND TRADEMARK CLAIMS
Section 1338 of the judicial code provides exclusive federal jurisdiction over claims "arising under" federal patent and copyright laws and concurrent jurisdiction over claims arising under the trademark laws. Analogous principles govern the exercise of federal jurisdiction in all three types of action. One such principle is that mere involvement of a patent, a copyright, or a trademark in a case is not sufficient to sustain federal jurisdiction. As Judge Friendly wrote in T.B. Harms Co. v. Eliscu,
the leading Second Circuit case on this subject, an action "'arises under' the Copyright Act":
if and only if the complaint is for a remedy expressly granted by the Act, e.g., a suit for infringement . . . or asserts a claim requiring construction of the Act, . . . or, at the very least and perhaps more doubtfully, presents a case where a distinctive policy of the Act requires that federal principles control the disposition of the claim. The general interest that copyrights, like all other forms of property, should be enjoyed by their true owner is not enough to meet this last test.
As this Court has noted in Stepdesign, Inc. v. Research Media, Inc.,
in assessing a plea of lack of jurisdiction, "the formal allegations of the complaint must yield to the substance of the claim."
Where the focus of the complaint is on state law principles of breach of contract
there is no jurisdiction under § 1338.
Plaintiffs assert that Count Four states a claim arising under the copyright laws of the United States. Yet while Count Four concludes that defendants' continued distribution of the film constitutes infringement, its focus is not on the law of copyright. There is no doubt that if plaintiffs own the copyright in the film, defendants' unauthorized distribution of the film would violate the Copyright Act.
The real issue in the case is who owns the copyright. Thus, appropriately enough, the principal allegations of Count Four reiterate the allegations made under plaintiffs' contract and fraud counts, namely, that because of Saleh's material breaches of contract and fraud, "all right, title and interest in the copyrights in and to the Film belong and/or have reverted to Bear Creek."
As defendants have noted, the plaintiffs' allegation that the copyright remained with Bear Creek flies in the face of the parties' amended agreement, which explicitly transferred all rights in the film to Saleh upon exercise of her option to purchase. Defendants also correctly note that the parties' contract, like the contract at issue in Stepdesign,11 contains no express provision for reversion of the copyright in the event of a breach of contract. Plaintiffs' responses that reversion may take place without an express provision and that plaintiffs' security interest in the film permits them to reclaim the copyright are to no avail. Far from enabling plaintiffs to distinguish Stepdesign and T.B. Harms, these arguments aimed at establishing copyright ownership all concern state law and do nothing more than demonstrate why plaintiffs' claim belongs in state court. In the absence of an express provision for reversion and a substantial question as to infringement, plaintiffs' claim does not "arise under" federal copyright law.
Plaintiffs' second attempt to assert federal jurisdiction under the copyright laws is Count Eight, which alleges that defendants have violated individual plaintiff McCall's copyright in the article upon which the film was originally based. The Count first realleges the breach of contract, common law fraud, and other Counts which are claims in favor of only plaintiff Bear Creek. McCall, the ...