Sirius XM Radio Inc. v. Adeptus Partners LLC

Background

Sirius XM Radio Inc. alleged that Adeptus Partners, LLC and Lewis Stark breached contractual and common-law duties while performing a financial audit. The audit concerned Sirius’s 2018 royalty payments to SoundExchange, a central collection and distribution agency for royalties on copyrighted music. Sirius alleged that it gave the defendants confidential financial information in exchange for their promise to act as qualified, independent auditors under professional standards issued by the American Institute of Certified Public Accountants.

Sirius filed the case in the Commercial Division of the New York Supreme Court, New York County. The defendants removed it to the U.S. District Court for the Southern District of New York, arguing that the defendants’ role as qualified auditors raised a federal question under the Copyright Act. Sirius moved to remand, meaning to return the case to state court, and also requested attorneys’ fees and costs related to the removal.

Federal-question jurisdiction

Because the opinion states that diversity jurisdiction was unavailable, removal could be sustained only if the case presented a substantial federal question. For a federal question embedded in a state-law claim to support federal jurisdiction, the issue must be necessarily raised, actually disputed, substantial, and capable of resolution in federal court without disrupting the federal-state balance.

The court focused on whether the federal issue was substantial. Sirius characterized the case as a contract and tort dispute governed by the parties’ agreement and professional auditing standards. The defendants argued that the dispute was tied to federal regulations governing royalty audits, including regulations referring to audits by a “Qualified Auditor.”

The court agreed with Sirius that the central issue was whether the defendants complied with their contractual duty to remain independent. It held that resolving that issue required applying ordinary contract principles and accounting standards, rather than interpreting the Copyright Act. The federal law established a basic right to audit royalty payments and required the use of a qualified auditor, but it did not establish the detailed audit standard at issue. The regulations instead referred to the meaning of “Qualified Auditor” under the American Institute of Certified Public Accountants’ professional code. The court therefore concluded that the dispute did not involve a substantial federal question and did not address the test’s final requirement concerning the federal-state balance.

Fees and costs

The court separately considered Sirius’s request for attorneys’ fees and costs under 28 U.S.C. § 1447(c). Fees generally are not awarded when the removing party had an objectively reasonable basis for removal. The court found that the defendants’ removal was not objectively unreasonable. It noted that the case had been accepted as related to another matter before the court that plainly raised a substantial federal issue, and that the two matters involved similar parties and some common facts. The court therefore denied Sirius’s request for fees and costs.

Disposition

The court granted Sirius’s motion to remand and denied its request for attorneys’ fees and costs. The Clerk of Court was directed to terminate the motion at ECF No. 9 and remand the case to the New York State Supreme Court, New York County. Judge Naomi Reice Buchwald signed the order.