Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-00489/USCOURTS-cand-3_05-cv-00489-0/pdf.json

Parties Involved:
Britevision Media, LLC
Plaintiff
Java Jacket, Inc.
Defendant

Document Text:

United States District Court

For the Northern District of California

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 The Court has jurisdiction pursuant to 28 U.S.C. § 636(c), based on the consent of the parties to

the jurisdiction of a United States Magistrate Judge.

2

 According to the License Agreement, Java Jacket “owns certain trade secrets and proprietary knowhow” relating to the insulating sleeves. Morrison Decl., Ex. A (License Agreement) at 1. 

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

BRITEVISION MEDIA, LLC., 

Plaintiff(s),

v.

JAVA JACKET, INC.,

Defendant(s).

___________________________________/

No. C-05-0489 JCS

ORDER DENYING MOTION FOR

PRELIMINARY INJUNCTION

 [Docket No. 8]

I. INTRODUCTION

On Friday, April 22, 2005, Plaintiff’s Motion for Preliminary Injunction (the “Motion”) came on for

hearing. For the reasons stated below, the Motion is DENIED.1

II. BACKGROUND

A. Facts

On January 1, 2001, BriteVision Media, LLC (“BriteVision”) and Java Jacket, Inc. (“Java Jacket”)

entered into a License Agreement that authorized BriteVision to market an insulating sleeve for hot

beverages using technology developed by Java Jacket.2 Declaration of Brian Morrison in Support of

Motion for Preliminary Injunction (“Morrison Decl.”), Ex. A (License Agreement). The License

Agreement established royalty rates for specified time periods during the term of the Agreement and

provided for an initial term of five years, with automatic renewal for one-year periods thereafter. Id.,

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Sections 3 & 4. The License Agreement could be terminated under a variety of circumstances, including by

mutual agreement of the parties. Id., Section 13. 

 The effect of termination was set forth in section 14, which provides as follows:

14. Effect of Termination

Upon the expiration or termination of this Agreement, the license

set forth herein shall automatically terminate and Licensee shall immediately

cease, and cause Manufacturer to immediately cease, to manufacture, offer

to sell, sell and distribute Licensed Products. Notwithstanding the

foregoing, if the term of this Agreement terminates for a reason other than

Licensee’s breach or Licensee’s violation of Section 13.2(b), Licensee may

continue to promote, distribute and sell any Licensed Product in their

normal and reasonable inventory at the time of the termination or expiration

of the term; provided, Licensee shall continue to pay Licensor royalties in

accordance with this Agreement.

Licensee acknowledges and admits that there would be no

adequate remedy at law for its failure to comply with any of the material

terms and conditions hereof, including, without limitation, its failure to cease

the manufacture and sale of Licensed Products upon termination of this

Agreement, and Licensee agrees that, in the event of any such failure,

Licensor shall be entitled to equitable relief by way of temporary restraining

order, temporary injunction and permanent injunction and such other and

further relief as any Court with jurisdiction may deem proper.

Id., Section 14. 

Finally, the License Agreement contains the following arbitration clause:

19. Disputes

In the event of a controversy between the parties or claim arising

out of or relating to this Agreement, including, without limitation, the

making, performance or interpretation of this Agreement, the parties agree

to participate in at least four hours of mediation in accordance with the

Mediation Procedures of the United States Arbitration and Mediation of

Oregon and to equally split the costs of such mediation. If such

controversy or claim is not settled in mediation within ten (10) days after

mediation is commenced, it shall be finally settled by arbitration in Portland,

Oregon, in accordance with the then-current Commercial Arbitration Rules

of the American Arbitration Association before a single arbitrator. The

non-prevailing party shall pay all arbitration costs of the other party,

including reasonable attorneys’ fees and costs. The parties agree that all

facts and other information relating to any arbitration arising under this

Agreement shall be kept confidential to the fullest extent permitted by law.

Id., Section 19.

In April and May 2004, BriteVision and Java Jacket discussed terminating the License Agreement. 

See Morrison Decl., ¶ 3 (stating that in April and May 2004, BriteVision’s president, Brian Morrison and

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Java Jacket’s president, Jay Sorensen, discussed the termination of the License Agreement and the

“possibility of forming a new agreement”); Declaration of Jay Sorensen in Opposition to Motion for

Preliminary Injunction (“Sorensen Decl.”), ¶ 3 (stating that in April 2004, Morrison informed Sorensen that

BriteVision “could no longer survive under the 8 percent/$16,000 minimum royalty provision,” and that in

May 2004, Morrison and Sorensen agreed to terminate the License Agreement effective May 31, 2004,

and to “work on renegotiating the compensation provisions”). On May 4, 2004, Morrison sent Sorensen a

letter confirming the termination of the License Agreement, stating in part as follows:

This will confirm that, per our conversation of yesterday, we have

agreed that the License Agreement between Java Jacket, Inc. (“Java

Jacket”) and BriteVision Media LLC (“BVM”) dated as of January 1,

2001, has been terminated, effective as of June 1, 2004. Accordingly,

BVM will be paying royalties to Java Jacket under the Agreement on Net

Revenues received or accrued by BVM through May 31, 2004.

Separately, we discussed the possibility of entering into a new

agreement, the scope, term and details of which will, of course, be worked

out. . . . 

Morrison Decl., Ex. B (May 4, 2004 Letter).

On May 20, 2004, Morrison sent Java Jacket a proposed Production and Sale Agreement, which

was to be effective as of June 1, 2004. Sorensen Decl., ¶ 5; Declaration of Ronald T. Adams in

Opposition to Motion for Preliminary Injunction (“Adams Decl.”), Ex. A (Production and Sale Agreement). 

That agreement was rejected by Sorensen on the advice of Java Jacket’s attorneys. Sorensen Decl., ¶ 5. 

On May 28, 2004, Morrison sent Sorensen a letter via e-mail which stated, in part, as follows:

Jay, 

Per our talk this morning . . . since it looks like we won’t have any new

agreement in place until sometime in June, please sign and return the

attached document to me today so we can continue manufacturing [and]

using your design in June. Without this assurance, I wouldn’t feel

comfortable using the existing plates for any production next month. The

500 cases equates to 6000/12 which we agreed. . . .

Brian Morrison

Adams Decl., Ex. C (May 28, 2004 Letter). The letter that was attached to Morrison’s e-mail, set up for

Sorensen’s signature, stated as follows:

Dear Brian,

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This is to confirm that in consideration for up to 500 cases of 4-color Java

Jackets at a rate of $15.00 per case F.O.B. Portland, Oregon, Britevision

is granted the full right and permission to utilize Java Jackets’ Patent

#5,426,497 for any production it wishes to execute during the month of

June 2004.

As previously agreed, the Agreement dated January 1, 2002 has been

terminated effective June 1, 2004. Accordingly, BriteVision Media will be

paying all Royalties due to Java Jacket under the Agreement through May

31, 2004.

Morrison Decl., Ex. C (May 28, 2004 Letter (hereinafter, “the May 28 Agreement”)). Sorensen signed

and returned the May 28 Agreement. Id., ¶ 5.

On June 16, 2004, Sorensen sent Morrison a proposed amendment to the Production and Sale

Agreement. Sorensen Decl., ¶ 7. In the meantime, BriteVision and Java Jacket continued to operate under

the May 28 Agreement at least into August 2004. Id., ¶ 8 (stating that Java Jacket permitted Brite Vision

to continue to do business under the May 28 Agreement in July and August 2004); see also Morrison

Decl., ¶ 9 (stating that BriteVision and Java Jacket continued to operate under the May 28, 2004

Agreement until October 2004). At some point in the second half of 2004, BriteVision rejected Java

Jacket’s proposed amendment to the Production and Sales Agreement and the parties ceased to do

business. Sorenson Decl., ¶ 9; Morrison Decl., ¶ 9.

B. Procedural Background

On December 27, 2004, Java Jacket filed an arbitration demand with the American Arbitration

Association (“AAA”), invoking the arbitration clause in the License Agreement. Declaration of Jared S.

Macdonald in Support of Motion for Preliminary Injunction (“MacDonald Decl.”), Ex. A (December 27,

2004 Arbitration Demand). In the Demand, Java Jacket stated that there were “outstanding issues under

the License Agreement” and listed a number of specific issues, including whether BriteVision had given

proper notice of termination of the License Agreement to all of its manufacturers, whether it had paid all

royalties due under the License Agreement and whether BriteVision was continuing to have cup holders

manufactured after termination of the License Agreement. Id.

In response, BriteVision sent Java Jacket a letter disputing the jurisdiction of the AAA, arguing that

because the parties had terminated the License Agreement and entered into a new legal relationship, that is,

the May 28 Agreement, there was no agreement to arbitrate. Java Jacket argued further that some of the

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issues raised in the arbitration demand went beyond the scope of the License Agreement. MacDonald

Decl., Ex. B (February 2, 2005 Letter). On the same day, BriteVision filed an action in this Court seeking

declaratory relief. In the complaint, BriteVision asks the Court for a determination that because the License

Agreement has been terminated, BriteVision has no obligation to submit any dispute under the License

Agreement to arbitration.

BriteVision now seeks a Preliminary Injunction enjoining Java Jacket from proceeding with

arbitration pending a judicial determination as to the arbitrability of the claims raised by Java Jacket in its

Arbitration Demand. BriteVision contends that it is likely to succeed on the merits on this issue and further,

that it will suffer irreparable harm if the arbitration is not stayed. With respect to the likelihood of success,

BriteVision cites to the rule that “arbitration is a matter of contract and a party cannot be required to submit

to arbitration any dispute which he has not agreed to submit.” AT & T Techs., Inc. v. Communications

Workers of America, 475 U.S. 643, 647 (1986) (citation omitted). Here, BriteVision argues, there is no

agreement to arbitrate because the May 28 Agreement constituted a novation, thus eviscerating the prior

License Agreement. BriteVision argues in the alternative that even if the License Agreement was not

replaced by the May 28 Agreement, Section 14 of the License Agreement (entitled, “Effect of

Termination”) makes clear that the parties envisioned that the arbitration provision of the License

Agreement would cease to apply after termination. In particular, Section 14 provides for “equitable relief .

. . as any Court with jurisdiction may deem proper.” According to BriteVision, because arbitrators are not

authorized to fashion such equitable relief, Section 14, by its plain terms, must reflect an understanding by

the parties that post-termination disputes could be resolved through litigation.

In response to the Motion, Java Jacket argues that the May 28 Agreement did not constitute a

novation. (Java Jacket does not, however, dispute that the License Agreement was terminated). Further,

with respect to BriteVision’s alternative position, based on Section 14 of the License Agreement, Java

Jacket disputes BriteVision’s interpretation of that provision, noting that the AAA rules allow arbitrators to

award “any remedy that the arbitrator deems just and equitable and within the scope of the agreement.” 

Rule R-43, AAA Commercial Arbitration Rules. Finally, Java Jacket asserts that in any event, the Court

does not have jurisdiction over the action because the $75,000.00 amount-in-controversy requirement

required for diversity jurisdiction is not satisfied.

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III. ANALYSIS

A. Legal Standard for Preliminary Injunction

In the Ninth Circuit, a plaintiff can meet its burden for a preliminary injunction by showing “either

(1) a combination of probable success on the merits and the possibility of irreparable injury, or (2) that

serious questions are raised and the balance of hardships tips sharply in favor of the moving party.” 

Stuhlbarg Int’l Sales Co., Inc. v. John D. Brush & Co., Inc., 240 F.3d 832, 839-840 (9th Cir. 2001). 

These standards are not separate tests but rather, represent the “outer reaches of a single continuum.” Id.

(quoting Int’l Jensen, Inc. v. Metrosound U.S.A., 4 F.3d 819, 822 (9th Cir.1993)). 

B. Who Decides Whether An Agreement to Arbitrate Exists?

In their briefs, the parties are in agreement that the question of arbitrability is one for the Court to

decide rather than the arbitrator. See Motion at 5; Opposition at 5. The question of whether the Court or

the arbitrator should decide specific issues related to the validity of an agreement to arbitrate is an area of

law in which “confusion . . . abounds.” 6 Bruner and O’Connor on Construction Law § 20:46 (2005). As

Judge Posner has noted, the distinctions drawn by courts in this area of law are often “razor-thin.” 

Matterhorn, Inc. v. NCR Corp., 763 F.2d 866, 872 (7th Circuit). Based on a careful reading of the case

law, the Court concludes that the parties are only partially correct. In particular, while the question of

whether there has been a novation is one for the Court to decide, the effect of termination in the absence

of a novation – namely, whether the parties envisioned that under the License Agreement, posttermination disputes would be arbitrated or litigated – are properly resolved by the arbitrator. 

“[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any

dispute which he has not agreed to submit.” AT & T Technologies, Inc. v. Communications Workers of

America, 475 U.S. 643, 648 (1986). The question of arbitrability is governed by the Federal Arbitration

Act (“FAA”), which gives federal courts jurisdiction over contracts affecting interstate commerce that

contain an arbitration provision. 9 U.S.C. § 4. Where a contract affects interstate commerce, the court’s

role under the FAA is limited to determining: 1) whether a valid agreement to arbitrate exists and if it does,

(2) whether the agreement encompasses the dispute at issue. Chiron Corp. v. Ortho Diagnostic Sys.,

Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).

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While the existence of an agreement to arbitrate is a question for the court to decide, questions

concerning termination provisions are, generally, properly decided by the arbitrator. See Brotherhood of

Teamsters and Auto Truck Drivers Local #70 v. Interstate Distributor Co., 832 F.2d 507 (9th Cir.

1987). In Brotherhood of Teamsters, the Teamsters entered into a collective bargaining agreement with

Interstate containing a broad arbitration provision. Id. at 508. The agreement also contained a standard

termination clause specifying that the agreement would expire on March 31, 1985, and providing for

automatic one-year renewals in the absence of advance written notification of intent to terminate. Id. In

January 1985, approximately two months prior to the expiration of the agreement, Interstate notified the

Teamsters that it wanted to modify the agreement. Id. A week later, the Teamsters responded that they

were willing to “open” the agreement. Id. No further discussions occurred until June 1985, when Interstate

notified the Teamsters that it was going to withdraw recognition at the end of the month. Id. at 509. On

July 2, 1985, Interstate made changes to its operations that the Teamsters asserted violated the collective

bargaining agreement and sought to submit the dispute to arbitration. Id. Interstate, however, refused to

arbitrate on the basis that the agreement to arbitrate had been terminated on March 31, 1985, when the

initial term of the agreement expired, and therefore there was no agreement to arbitrate. Id.

The court in Brotherhood of Teamsters concluded that the question of whether the agreement to

arbitrate expired or was terminated was a question for the arbitrator rather than the court. Id. at 510. The

court explained its conclusion as follows:

 In the case before us, the real question is one step removed from the issue

of substantive arbitrability discussed in AT & T Technologies. The

disagreement between the parties here is not primarily over what the

arbitration clause provides, or what its scope is, but rather concerns the

effect to be given a letter--or an exchange of letters--under the terms of the

termination or expiration clause of the parties' collective bargaining

agreement. In short, the real dispute is over the proper meaning or

interpretation of the termination clause. Where, as here, the petitioner

claims that the parties have agreed to allow an arbitrator to decide whether

a contract containing an arbitration agreement has been terminated or

remains in effect, the proper judicial inquiry is not the one that the district

court made--i.e., what does the termination clause provide and how should

it be construed?--but rather, have the parties agreed that an arbitrator

should decide that question? And, where as here, the agreement contains a

broad arbitration clause covering all disputes concerning the meaning of the

terms and provisions of the agreement and the clause does not expressly

exclude disputes over the termination provision, the answer is, again,

simple. Disputes over expiration or termination must be submitted to

arbitration.

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Id. 

On the other hand, courts seem to agree that the question of whether a subsequent agreement

constitutes a novation is a question to be decided by the court rather than the arbitrator. See, e.g., Great

American Trading Corp. v. I.C.P. Cocoa, Inc.,, 629 F.2d 1282, 1287 (7th Cir. 1980) (holding that

question of whether subsesequent agreement effected a novation of earlier agreement went to whether there

existed an agreement to arbitrate and therefore was for the court to decide); Stinson v. America’s Home

Place, 108 F. Supp. 2d 1278, 1287 (M.D. Ala. 2000) (treating question of whether subsequent agreement

constituted a novation as one for court to decide); China Resource Products Ltd. v. Fayda Int’l, Inc.,

747 F. Supp. 1101 (D. Del. 1990) (same). This distinction makes sense because, as discussed below, the

focus of the inquiry with respect to novation is the intent of the parties with respect to the subsequent

agreement rather than interpretation of the termination provisions in the contract containing the arbitration

clause.

Here, BriteVision advances two arguments in support of its contention that it is not bound to

arbitrate the issues raised by Java Jacket in its Arbitration Demand. First, BriteVision argues that the May

28 Agreement constitutes a novation of the agreement to arbitrate in the License Agreement. Second,

BriteVision asserts that it is clear from the language used in Section 14 of the License Agreement,

addressing the effect of termination, that the parties did not intend that the arbitration clause would survive

termination of the agreement. In particular, BriteVision points to the reference to “relief as any Court with

jurisdiction may deem proper” in Section 14. 

The latter issue involves a question of interpretation of Section 14 of the License Agreement – a

question which the parties agreed to arbitrate in Section 19, which covers “any controversy between the

parties . . . including interpretation of this Agreement.” Therefore, for the reasons set forth in

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 The Court rejects BriteVision’s assertion that this case is distinguishable from Brotherhood of

Teamsters because that case concerns a collective bargainingagreement. See Motionat 6 n. 3. The reasoning

that justifies the court’s holding in Brotherhood of Teamsters – that the parties agreed to arbitrate issues

related to the interpretation of the agreement and therefore, disputes involving the effect of termination are

themselves governed by the arbitration clause – is equally applicable here. However, even if the Court were

to reach the question of whether Section 14 creates an exception to the obligation to arbitrate under Section

19, the Court would reject Britevision’s position. Section 19 creates a broad obligation to arbitrate any

“controversy between the parties or claim arising out of or relating to this Agreement, including, without

limitation, the making, performance or interpretation of this Agreement.” Morrison Decl., Ex. A (Settlement

Agreement), § 19. In order to create an exception to this broad requirement, the termination provision must

negate the presumption favoring arbitrability “expressly or by clear implication.” See Homestake Lead Co.

v. Doe Run Res. Corp., 282 F. Supp. 2d 1131, 1140 (N.D. Cal. 2003) (holding that arbitrationagreements

have a “life and validity separate and apart from the agreement in which they are embedded” and therefore,

“where the dispute is over a provisionofthe agreement, the presumption favoring arbitrability must be negated

expressly or by clear implication”). Section 14 does not meet this standard. First, it contains no express

exceptionto the arbitrationrequirement. Second, the mere reference in Section 14 to “relief as any Court with

jurisdiction may deem proper” is too vague to create an exception “by clear implication.” See id. That

language indicates that the parties agreed as to the types of remedies that would be available. It does not

clearly indicate agreement as to the forum in which those remedies would be available.

4 The existence of a novation is governed by state law. Perry v. Thomas, 482 U.S. 483, 491 n. 9

(1987). Here, the License Agreement specifies that Oregon law governs the interpretation of the Agreement.

However,the partiesdid not briefthe questionofwhetherthis provisionshould be applied where the agreement

that allegedly supercedes the License Agreement does not contain a choice of law provision. Given that

BriteVision is a California corporation, it is possible that California law rather than Oregon law governs this

issue. The Court need notreachthisissue, however, because the relevant lawconcerning novationisthe same

under California and Oregon law.

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International Brotherhood, this issue is properly decided by the arbitrator.3 On the other hand,

BriteVision’s argument that the May 28 Agreement constituted a novation must be addressed by the Court.

C. Novation

BriteVision asserts that the arbitration clause in the License Agreement is a nullity because the

obligations under the License Agreement were substituted by the May 28 Agreement, which contains no

arbitration clause. The evidence in the record does not support BriteVision’s assertion.

A novation is the substitution of a new obligation for an existing one and occurs when “the parties

intend the new contract to replace all of the provisions of the earlier contract . . . .” Restatement (Second)

of Contracts § 279; see also Eagle Indus., Inc. v. Thompson, 321 Or. 398 (1995); Eckhart v. Brown,

34 Cal. App. 2d 182 (1939).4 Where a novation has occurred, the obligations of the original agreement

are extinguished. The burden is on the party claiming the novation to establish that a novation has occurred. 

See China Res. Products (U.S.A.) Ltd., 747 F. Supp. at 1106 (citing 15 S. Williston, A Treatise on the

Law of Contracts § 1869 at 615 (3d ed. 1972)).

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Here, the May 28 Agreement that BriteVision argues constitutes a novation contains none of the

typical language associated with a novation. See, e.g., Eagle Indus., 321 Or. at 406 (holding that where

subsequent agreement expressly stated that it “supercede[d] all prior written and oral communications or

understandings and agreements between the parties relating to the subject matter hereof,” that agreement

substituted and supplanted prior contracts on the same subject matter). To the contrary, it is clear on its

face that the May 28 Agreement was merely an interim arrangement to allow the parties to continue to do

business for the month of June. The circumstances surrounding the May 28 Agreement further support this

conclusion. In particular, at the time the parties entered into the May 28 Agreement, they were continuing

to exchange proposals regarding a Production and Sales Agreement. That proposed agreement was a

comprehensive agreement and included an arbitration clause. Further, the letter from Morrison that

accompanied the May 28 Agreement requested that Sorensen sign it “since it looks like we won’t have any

new agreement in place until sometime in June.” Based on the undisputed facts, the Court concludes that

there was no novation. Therefore, BriteVision has not demonstrated sufficient likelihood that it will prevail

in this action to justify the imposition of a preliminary injunction.

D. Amount in Controversy Requirement

Java Jacket argues that there is no jurisdiction under 28 U.S.C. § 1332, governing diversity

jurisdiction, because the amount in controversy is less than $75,000.00. In support of this assertion, Java

Jacket points to its Arbitration Demand, in which it expressly seeks relief in the amount of $50,000.00. See

MacDonald Decl., Ex. A (December 27, 2004 Arbitration Demand). BriteVision counters that Java

Jacket’s position fails because it has not demonstrated to a legal certainty that the amount in controversy is

less than $75,000.00 or that BriteVision’s invocation of diversity jurisdiction is in bad faith. The Court

agrees. 

The amount in controversy requirement is generally determined by the amount claimed in the

complaint, and this amount “controls if the claim [was] made in good faith.” See St. Paul Mercury Indem.

Co. v. Red Cab Co., 303 U.S. 283, 288-89 (1938). However, a district court may be justified in

dismissing the action where it appears to a legal certainty that the actual claim is less than the jurisdictional

amount. Id. “Only three situations clearly meet the legal certainty standard: 1) when the terms of a contract

limit the plaintiff's possible recovery; 2) when a specific rule of law or measure of damages limits the amount

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of damages recoverable; and 3) when independent facts show that the amount of damages was claimed

merely to obtain federal court jurisdiction.” Pachinger v. MGM Grand Hotel-Las Vegas, Inc., 802 F.2d

362, 364 (9th Cir. 1986) (citing 14A Wright, Miller, and Cooper, Federal Practice and Procedure,

Jurisdiction, § 3702 at 48-50 (2d ed. 1985)). 

Here, the arbitration demand is for $50,000.00. In addition, because Section 19 of the License

Agreement expressly provides for an award of attorneys’ fees to the prevailing party in the arbitration,

BriteVision may be liable for substantially more than $50,000.00. See Galt G/S v. JSS Scandinavia, 142

F.3d 1150, 1156 (9th Cir. 1998) (holding that where attorneys’ fees are recoverable by statute or pursuant

to contract, they may be included in the amount in controversy). In light of this evidence and in the absence

of any of the three conditions stated above, the Court cannot say to a legal certainty that the amount in

controversy requirement has not been met. Therefore, the Court rejects Java Jacket’s assertion that there

the requirements of diversity jurisdiction have not been met.

IV. CONCLUSION

For the reasons stated above, the Motion is DENIED. The next case management conference is

currently scheduled for June 3, 2005.

IT IS SO ORDERED.

Dated: May 10, 2005

/s/ Joseph C. Spero 

JOSEPH C. SPERO

United States Magistrate Judge

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