The opinion of the court was delivered by: Oliver W. Wanger United States District Judge
ORDER DENYING PLAINTIFF'S MOTION TO REMAND
On March 25, 2008, Plaintiff XCEL Data Systems, Inc. ("XCEL") filed a complaint in the Superior Court of the State of California, County of Kern, alleging breach of contract by Defendant Derek Best. Compl. On May 2, 2008, Defendant Derek Best ("Best") removed the action to federal court on federal question and diversity jurisdiction grounds. Doc. 1, Def.'s Notice of Removal. Plaintiff XCEL moves to remand. Doc. 10, filed May 28, 2008, Pl.'s Mot. Remand. Oral argument was heard July 21, 2008.*fn1
From 1997 to 1998, Defendant Derek Best developed Microsoft Windows based computer software known as XPAWN. Doc. 15, filed July 7, 2008, Def.'s Opp'n Pl.'s Mot. Remand, Ex. II, Derek Best Decl. Opp'n Pl.'s Mot. Remand ¶ 3. XPAWN is designed to manage transactions for small, independent pawnshops. Best began selling the software for commercial use in 1999 and launched the website "xpawn.com" during the same period. Id. ¶¶ 3, 6. On June 28, 2000, Best received a certificate of copyright registration for the software. Doc. 15, Def.'s Opp'n Pl.'s Mot. Remand, Ex. I. That same month he moved to California and entered into a partnership with Michael Moreno, the author of another, older software program for pawnshops. Doc. 15, Def.'s Opp'n Pl.'s Mot., Ex. II, Derek Best Decl. Opp'n Pl.'s Mot. Remand ¶¶ 7-9. A year later Best and Moreno formed XCEL Data Systems, Inc., the plaintiff in this action. Id. Best and Moreno were co-directors of XCEL Data Systems, Inc., which sold both Moreno's older program and Best's XPAWN software, and was based in Bakersfield, California. Id. As co-directors, Best and Moreno jointly leased property, took out loans, and operated XCEL. Id.
Best grew dissatisfied for reasons not relevant here and parted ways with Moreno. Id. ¶¶ 10, 14. On March 6, 2002, Moreno and Best entered into a Software Purchase Agreement (the "contract") in which Best agreed to resign as co-director, surrender any shares he owned, and transfer to XCEL all rights associated with XPAWN, including intellectual property, among other things, such as the "xpawn.com" domain name and website. Contract §§ 1.01, 1.03(f)-(j). The contract required a third-party to keep the copyright and trademark certificates in escrow until "[XCEL's] satisfactory performance," and, until the certificates' release, XCEL agreed not to remove from XPAWN's opening screen the words "(c) Copyright: Derek Best." Id. §§ 1.01(b), 3.06. In consideration of the sale, XCEL promised Best $69,154.30 (purchase price), profits or draws due as of March 31, 2002, repayment of $12,500 in loans, a $150 royalty fee for each software sold, rented, or licensed within 48 months of the contract's execution, and $10,000 in fees for servicing Best agreed to render. Id. §§ 1.01(a)-(d). XCEL also agreed to assume all notes and leases Best had entered into as co-director. Id. § 1.01(k). The contract also gave Best an exclusive license to sell, distribute, and use the software in the United Kingdom and retain as security ownership in the software and associated intellectual property. Id. §§ 1.04(a), 3.05. The contract closed in Bakersfield, California "or such other location as may be agreed upon," with a provision specifying California law as the choice of law and a provision providing for attorneys' fees. Id. §§ 1.07, 5.14-15.
After the contract was executed, Best allegedly developed substantial modifications to XPAWN, including additional modules and interface compatibility with the "Quickbooks" accounting system, which Best claims created an independent copyright in those modifications. Doc. 15, Def.'s Opp'n Pl.'s Mot., Ex. II, Derek Best Decl. Opp'n Pl.'s Mot. Remand ¶¶ 18, 20. Best claims these modifications constitute a derivative work not subject to the terms of the contract. Doc. 15, Def.'s Opp'n Pl.'s Mot. Remand at 4.
Best apparently sent XCEL a cease-and-desist letter dated February 24, 2008 that claims XCEL breached the contract by failing to make payments. Doc. 14, filed July 2, 2008, James M. Duncan Decl., Ex. C, Cease and Desist Letter. The letter also claims ownership of XPAWN and associated intellectual property. Id. A month later XCEL filed a complaint alleging breach of contract arising from Best's failure to place the copyrights and registration certificates in escrow, failure to transfer ownership in the domain name and other intellectual property, and competition against XCEL through the continued sale, distribution, and use of the software in the United States. Compl. ¶ 16. The complaint seeks a declaration that the contract was terminated by Best's failure to perform and that plaintiff is the owner of all copyrights, trademarks, and rights related to the software, and the plaintiff intellectual property rights in the software subject to is the owner of the software itself, and all no claim of right by the defendants.
Compl. "Prayer." In addition, the complaint seeks a declaration that XCEL is under no further obligation under the contract. Id. The complaint also seeks costs of suit incurred, including reasonable attorney's fees allegedly in excess of $5,000 as authorized under the contract. Id.
XCEL originally filed this action in the Superior Court of the State of California, County of Kern. Best removed the case to federal district court pursuant to 28 U.S.C. § 1446(b). Doc. 1, Def.'s Notice of Removal ¶ 2. Best asserts federal question jurisdiction exists under 28 U.S.C. § 1331 because the complaint alleges claims that arise under federal copyright laws. Best asserts a declaration of the parties' respective rights requires an application of federal copyright laws to determine the scope of the copyright assigned to XPAWN, given the existence of Best's derivative work. Doc. 15, Def.'s Opp. Pl.'s Remand at 16-17. Best argues the complaint alleges infringement and seeks a remedy expressly granted by the Copyright Act. Id. at 12-14. Best also asserts diversity jurisdiction exists under 28 U.S.C. § 1332 because plaintiff is a California corporation with its principal place of business in California, defendant resides in Michigan, and the amount in controversy allegedly exceeds $75,000 in potential pecuniary losses to defendant, exclusive of interest and costs. Id. at 11.
XCEL moves to remand the action to state court, arguing that the district court lacks federal question jurisdiction because the claims do not arise under federal copyright laws. Doc. 10, Pl.'s Mot. Remand. XCEL contends that a declaration of the parties' respective rights involves an interpretation of the underlying contract as opposed to an application of federal copyright laws. Doc. 16, filed July 14, 2008, Pl.'s Reply 6. XCEL argues its ownership rights are derived from the contract, and that its claims are based on state law. Id. XCEL argues it has not asserted any claims alleging infringement and does not seek a remedy expressly granted by the Copyright Act. Id. XCEL further argues that the district court lacks diversity jurisdiction because the complaint only alleges reasonable costs exceeding $5,000 and the defendant has not provided competent evidence that his potential pecuniary losses exceed $75,000, exclusive of interest and costs. Id. at 2. This is also shown by Best's settlement letter dated May 1, 2008 that XCEL contends reflects Best's estimate of the value of the action to be $35,000. Doc. 17, filed July 14, 2008, James M. Duncan Decl. Supp. Pl.'s Reply, Ex. 1, Settlement Letter.