SNMP Research International, Inc. v. Nortel Networks, Inc. (In re Nortel Networks, Inc.)

Citations: 539 B.R. 704; 2015 U.S. Dist. LEXIS 119508Docket: Bankr. Case No. 09-10138-KG; Adv. Pro. No. 11-53454-KG; Civ. No. 15-449-LPS

Court: District Court, D. Delaware; September 9, 2015; Federal District Court

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SNMP Research International, Inc. and SNMP Research, Inc. filed a motion to withdraw reference in an adversary complaint against Nortel Networks, Inc. and Avaya, Inc. The Court denied this motion, referencing the background of the case which began when Nortel's U.S. subsidiaries filed for Chapter 11 bankruptcy on January 14, 2009, alongside insolvency proceedings in Canada. The Bankruptcy Court has coordinated cross-border guidelines for the administration of this case. SNMP sought relief from the automatic stay in the Canadian Court to file an adversary complaint, which was permitted under the condition of a stay until mediation concluded.

On November 2, 2011, SNMP filed its adversary complaint alleging unauthorized use and sale of its intellectual property by the Debtors and other defendants, including Avaya. The Debtors agreed to extend their response time to 30 days post Canadian Court ruling on the Stay Relief Motion. Avaya responded on March 2, 2012, while Radware moved to dismiss, which was granted by the Bankruptcy Court.

In February 2014, SNMP reached stipulations with both the Debtors and Avaya to stay proceedings until the Canadian Court ruled on the Stay Relief Motion. The Canadian Court denied this motion on February 27, 2015, allowing claims against the Canadian Debtors to proceed there, thus ending the stipulated stays. SNMP filed its Motion to Withdraw the Reference on June 2, 2015, which was opposed by the Debtors and Avaya. Following additional developments, including a Rule 14 Motion by the Debtors and a proposed stipulation to withdraw opposition from Avaya, a hearing was held on August 27, 2015, where counsel for all parties presented oral arguments.

SNMP asserts that 28 U.S.C. § 157(d) requires the Court to withdraw reference to the Bankruptcy Court due to the need for substantial consideration of the Copyright Act in resolving the adversary proceeding. If mandatory withdrawal is not granted, SNMP requests discretionary withdrawal for cause, citing the necessity for a jury trial on non-core claims against Avaya. The Debtors counter that no substantial and material consideration of the Copyright Act exists to warrant mandatory withdrawal and argue that factors for permissive withdrawal do not favor SNMP’s request. They also claim that SNMP has implicitly consented to the Bankruptcy Court's jurisdiction and waived its right to a jury trial.

The standard of review indicates that district courts have original but not exclusive jurisdiction over civil proceedings related to title 11. Under 28 U.S.C. § 157(a), cases are referred to Bankruptcy Court, but § 157(d) allows for withdrawal of reference either mandatorily or permissively. Mandatory withdrawal is required when the proceeding necessitates substantial and material consideration of federal law outside the Bankruptcy Code. The burden is on the party seeking withdrawal to demonstrate this necessity, while the presumption favors bankruptcy adjudication unless proven otherwise. The Court references established case law to outline these standards and the definitions of "substantial and material" in the context of mandatory withdrawal.

Orange, Rockland Utilities clarified that not all adversary complaints involving federal non-bankruptcy law necessitate substantial and material consideration of that law, emphasizing that mandatory withdrawal is not automatic when non-bankruptcy issues are present. The distinction between meaningful consideration and simple application of well-settled law is critical; withdrawal is unnecessary when only simple applications are required. Meaningful consideration involves issues of first impression or legal analysis beyond mere application. In the case at hand, SNMP’s claims do not originate under title 11, prompting the Court to assess whether substantial and material consideration of federal law is needed, ultimately concluding that it is not.

SNMP contends that withdrawal is essential due to complex federal copyright law issues, including ownership of code and derivative work analysis, which the Court finds to be factual questions requiring application of law rather than legal interpretation. Claims regarding complex damage calculations similarly involve applying law to facts. SNMP fails to demonstrate how the Bankruptcy Court's analysis necessitates significant consideration of federal law. Additionally, SNMP argues that the Debtors' Rule 14 Motion could warrant withdrawal due to potential issues of first impression. However, the Court views these concerns as speculative, noting that a hearing on the motion recently occurred and there is uncertainty surrounding its impact. SNMP has not substantiated how these issues demand meaningful consideration of federal non-bankruptcy law. Consequently, the Court concludes that there are no grounds for mandatory withdrawal of SNMP’s claims.

Avaya’s right to a jury trial is affirmed by the Court, rejecting the Debtors’ assertion that SNMP had impliedly consented to the Bankruptcy Court’s authority over non-core claims and waived its jury trial rights. The Bankruptcy Court determined that SNMP did not consent to the court's authority for a final judgment and that its late motion to withdraw did not constitute a waiver of jury rights. The Court explained that to evaluate waiver of the jury trial right, it must assess if the adversary proceeding is part of the claims resolution process. Since SNMP could not file a proof of claim against Avaya, a non-debtor, it did not invoke the claims allowance process and therefore retained its jury trial rights.

SNMP also sought permissive withdrawal under 28 U.S.C. § 157(d), which allows district courts to withdraw proceedings for "cause shown." The Third Circuit’s guidance on this includes promoting uniformity in bankruptcy administration and reducing confusion. While SNMP argues that withdrawal would prevent confusion regarding the Bankruptcy Court's authority, the Debtors contend it represents forum shopping. The Court found minimal risk of confusion, citing the Bankruptcy Court’s clear delineation of its authority in a prior order. It concluded that SNMP's choice of the Bankruptcy Court was logical, thus dismissing the forum shopping argument.

SNMP contends that the Bankruptcy Court is unable to issue final judgments on its non-core claims against Avaya, making a case for withdrawal to enhance efficiency. It emphasizes that any jury trial related to these claims must occur in this Court. However, the request for a jury trial alone does not necessitate withdrawal, as the Bankruptcy Court is capable of managing pre-trial matters similar to a magistrate. While this Court has greater experience in copyright litigation, the Bankruptcy Court is still well-equipped to assist in adjudicating these claims.

SNMP's claims are still in the preliminary stages, with discovery yet to commence, and it is uncertain whether a jury trial will ultimately be needed. Previous dismissals of other defendants suggest that some claims may not endure motions practice. Should the Court withdraw the case and claims against Avaya be resolved through settlement or dismissal, it could lead to complications in adjudicating a core claim against the Debtors, which is typically within the Bankruptcy Court's purview.

The Bankruptcy Court possesses more familiarity with the relevant proceedings and has established procedures for managing this complex cross-border bankruptcy case alongside the Canadian Court. Maintaining the Bankruptcy Court's oversight would prevent unnecessary costs and delays associated with this Court gaining familiarity with the case.

SNMP also argues that failing to withdraw could lead to inconsistent standards of review between core and non-core claims, potentially causing irrational outcomes upon appeal. This concern is supported by precedents indicating that differing standards could result in conflicting interpretations of the same facts in related claims, undermining judicial uniformity in bankruptcy administration.

SNMP contends that similar concerns to those in In re Appleseed’s are present in the current case, particularly regarding the classification of claims against Avaya as non-core and claims against the Debtors as core. The only common factual issue identified is whether the Debtors transferred software containing SNMP’s protected intellectual property to Avaya. Although inconsistencies could arise from differing standards of review, the Court finds SNMP's concerns to be overstated and largely speculative, impacting only a minor portion of the factual issues.

The Court outlines three potential actions: withdrawing the entire proceeding, withdrawing only SNMP’s claim against Avaya, or maintaining the current proceedings. It dismisses the second option to avoid diminishing judicial economy and reducing the risk of inconsistent decisions. The Court favors retaining the case in Bankruptcy Court, noting that SNMP's arguments for immediate withdrawal, such as the efficiency of having related cases before Judge Andrews and the desire to rule on the Debtors’ Rule 14 Motion, are unconvincing. The Bankruptcy Court is already scheduled to hear the Rule 14 Motion, and the Court could not match that timeline.

Ultimately, the Court concludes that allowing the Bankruptcy Court to manage pretrial matters and withdrawing only when ready for a jury trial promotes judicial economy and expedites resolution. Although this decision has procedural drawbacks—namely, that the Bankruptcy Court can issue final judgments on claims against the Debtors but only proposed findings on claims against Avaya—the Court acknowledges the complexities of bankruptcy jurisdiction. It also expresses confidence that the Bankruptcy Court will consider Avaya's concerns in scheduling the proceedings.

The Court has denied SNMP's Motion to Withdraw the Reference without prejudice, indicating that a renewed motion will only be considered when genuine issues of material fact are identified for jury trial, either by the parties' stipulation or the bankruptcy judge's decision. A separate order will be issued to close the case. The Court notes that SNMP has amended its Complaint, excluding the Canadian Debtors, Radware, and several causes of action. It addresses the Debtors' argument regarding waiver of the right to a jury trial, emphasizing that the precedent in this Circuit does not support the notion that failing to withdraw the reference at the first opportunity results in waiver. The Court expresses willingness to accommodate a trial date request from Judge Gross if deemed beneficial.