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Judge Gross Examines US Supreme Court Wellness International Decision in Holding that Non-debtor Plaintiff Did Not Consent to Bankruptcy Court Jurisdiction and Authority

By Charlene D. Davis

On June 2, 2015, Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) issued an opinion and order finding and determining that the Bankruptcy Court lacked authority to enter final judgments or orders with respect to non-debtor plaintiffs’, SNMP Research International, Inc. and SNMP Research, Inc. (“SNMP”), claims of copyright infringement, misappropriation of trade secrets under state law and breach of contract against non-debtor defendant, Avaya Inc. (“Avaya”).  SNMP Research International, Inc. et al. v. Nortel Networks Inc., et al. and Avaya Inc. (In re Nortel Networks, Inc., et al. case no. 09-10138(KG).  In arriving at its conclusion, the Bankruptcy Court discussed the recent United States Supreme Court decision in Wellness International Network, Ltd. v. Sharif wherein the Supreme Court held that parties may consent, expressly or impliedly, to adjudication of non-core matters so long as the consent is knowing and voluntary.  The Bankruptcy Court found that SNMP has not impliedly consented to its authority.

On January 14, 2009 (the “Petition Date”), Nortel Networks et al. (the “Debtors”) filed petitions for relief under Chapter 11 of the Bankruptcy Code.  Prior to the Petition Date, SNMP had entered into a licensing agreement with Nortel Networks Corporation (“NNC”) giving NNC and certain subsidiaries the right to use certain SNMP software in their products.  By order of the Bankruptcy Court dated September 16, 2009, the SNMP software rights were sold by the Debtors to Avaya.  Following the sale, Avaya and SNMP entered into an accession agreement governing Avaya’s use of the SNMP software.  Slightly more than two years later, on March 2, 2012, SNMP filed an adversary proceeding against the Debtors and Avaya asserting the copyright, trade secrets and contract claims.  The complaint in the proceeding as well as an amended complaint each (i) demand a jury trial; (ii) describe the claims against Avaya as non-core; and (iii) indicate SNMP’s intention to move to withdraw the reference of the adversary proceeding against Avaya.  In addition, SNMP filed a notice of intent to move for withdrawal of the reference on October 29, 2013, but did not actually move for withdrawal until March 17, 2015, almost 17 months later.

In response to the motion to withdraw the reference, Avaya and the Debtors  moved for a determination that the Bankruptcy Court had authority to enter final judgments and orders in the proceeding arguing that SNMP had implied consented to jurisdiction and authority by (i) filing the proceeding against Avaya in the Bankruptcy Court; (ii) not objecting to the Bankruptcy Court’s consideration of a motion to dismiss filed by another non-debtor party; and (iii) not timely moving to withdraw the reference of the adversary proceeding to the Bankruptcy Court.  Although Judge Gross found that Avaya and the Debtors made a strong case to find consent, they did not succeed.  The Bankruptcy Court was not willing to find an implied consent based on the filing of complaints in the Bankruptcy Court where SNMP expressly stated an intention to move to withdraw the reference.  It also found it inappropriate in the circumstances of the proceeding to base a finding of consent on the alleged untimeliness of the motion to withdraw the reference.  Finally it found that SNMP’s request for a jury trial was a request regarding fundamental right as to which findings of waiver are “greatly disfavored”.  Thus consent to Bankruptcy Court jurisdiction, where no jury trial is available, would not be implied under the circumstances.

A copy of the opinion and order is available here.

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