Civil Procedure & Federal Courts Blog

Fees Award in Dismissal for Lack of Diversity Jurisdiction Reversed

Plaintiff, a Florida limited liability company, filed a diversity suit against Sheraton in the Southern District of New York.  After three years and much discovery, the action was dismissed without prejudice for lack of subject matter jurisdiction when it was revealed that at least one of the members of plaintiff's limited liability company was a New York citizen, as was Sheraton.  Plaintiff then tried to cure the jurisdictional defect by dropping the non-diverse member of its company and filing a new action alleging the same claims. 

The district court also dismissed the second action for lack of subject matter jurisdiction, ruling that 28 U.S.C. §1359 prohibited such "engineering" of diversity jurisdiction.  The court also granted Sheraton's motion for "just costs," including $200,000 in attorney's fees, under 28 U.S.C. §1919 ("Whenever any action or suit is dismissed in any district court . . . for want of jurisdiction, such court may order the payment of just costs.")

The Second Circuit reversed, holding that Section 1919's allowance of "just costs" did not include attorney's fees, and that the invocation of the common-law "bad faith" exception to the American Rule on attorney's fees was not appropriate in the case.  Castillo Grand, LLC v. Sheraton Operating Corp., No. 11-2457 (2d Cir. June 18, 2013).

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SCOTUS Cert Grant on Appellate Jurisdiction

This week the Supreme Court granted certiorari in Ray Haluch Gravel Co. v. Central Pension Fund (No. 12-992), which presents the question:

In Budinich v. Becton Dickinson & Co., 486 U.S. 196 (1988), this Court held that a district court’s decision on the merits that left unresolved a request for statutory attorney’s fees was a “final decision” under 28 U.S.C. § 1291. The question presented in this case, on which there is an acknowledged conflict among nine circuits, is whether a district court’s decision on the merits that leaves unresolved a request for contractual attorney’s fees is a “final decision” under 28 U.S.C. § 1291.

You can find a link to the First Circuit’s decision below and the cert-stage briefing at SCOTUSblog’s case file.

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SCOTUS Decision on Class Arbitration: Oxford Health Plans v. Sutter

Today was arbitration day at the Supreme Court (well, that and raisins). In addition to granting certiorari in BG Group PLC v. Argentina, the Court issued a unanimous decision in Oxford Health Plans LLC v. Sutter (No. 12-135). Justice Kagan writes the Court’s opinion in Oxford, which begins:

Class arbitration is a matter of consent: An arbitrator may employ class procedures only if the parties have authorized them. See Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662, 684 (2010). In this case, an arbitrator found that the parties’ contract provided for class arbitration. The question presented is whether in doing so he “exceeded [his] powers” under §10(a)(4) of the Federal Arbitration Act (FAA or Act), 9 U. S. C. §1 et seq. We conclude that the arbitrator’s decision survives the limited judicial review §10(a)(4) allows.

Here’s more from Justice Kagan’s opinion on the relationship between Oxford and Stolt-Nielsen [Op. at 6-7]:

Oxford’s contrary view relies principally on Stolt-Nielsen. As noted earlier, we found there that an arbitration panel exceeded its powers under §10(a)(4) when it ordered a party to submit to class arbitration. See supra, at 3. Oxford takes that decision to mean that “even the ‘high hurdle’ of Section 10(a)(4) review is overcome when an arbitrator imposes class arbitration without a sufficient contractual basis.” Reply Brief 5 (quoting Stolt-Nielsen, 559 U. S., at 671). Under Stolt-Nielson, Oxford asserts, a court may thus vacate “as ultra vires” an arbitral decision like this one for misconstruing a contract to approve class proceedings. Reply Brief 7.

But Oxford misreads Stolt-Nielsen: We overturned the arbitral decision there because it lacked any contractual basis for ordering class procedures, not because it lacked,in Oxford’s terminology, a “sufficient” one. The parties in Stolt-Nielsen had entered into an unusual stipulation that they had never reached an agreement on class arbitration. See 559 U. S., at 668–669, 673. In that circumstance, we noted, the panel’s decision was not—indeed, could not have been—“based on a determination regarding the parties’ intent.” Id., at 673, n. 4; see id., at 676 (“Th[e] stipulation left no room for an inquiry regarding the parties’ intent”). Nor, we continued, did the panel attempt to ascertain whether federal or state law established a “default rule” to take effect absent an agreement. Id., at 673. Instead, “the panel simply imposed its own conception of sound policy” when it ordered class proceedings. Id., at 675. But “the task of an arbitrator,” we stated, “is to interpret and enforce a contract, not to make public policy.” Id., at 672. In “impos[ing] its own policy choice,” the panel “thus exceeded its powers.” Id., at 677.

The contrast with this case is stark. In Stolt-Nielsen, the arbitrators did not construe the parties’ contract, and did not identify any agreement authorizing class proceedings. So in setting aside the arbitrators’ decision, we found not that they had misinterpreted the contract, but that they had abandoned their interpretive role. Here, the arbitrator did construe the contract (focusing, per usual, on its language), and did find an agreement to permit class arbitration. So to overturn his decision, we would have to rely on a finding that he misapprehended the parties’ intent. But §10(a)(4) bars that course: It permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly. Stolt-Nielsen and this case thus fall on opposite sides of the line that §10(a)(4) draws to delimit judicial review of arbitral decisions.

Note, however, footnote 2 of Justice Kagan's opinion:

We would face a different issue if Oxford had argued below that the availability of class arbitration is a so-called “question of arbitrability.” Those questions—which “include certain gateway matters, such as whether parties have a valid arbitration agreement at all or whethera concededly binding arbitration clause applies to a certain type of controversy”—are presumptively for courts to decide. Green Tree Financial Corp. v. Bazzle, 539 U. S. 444, 452 (2003) (plurality opinion). A court may therefore review an arbitrator’s determination of such a matter de novo absent “clear[] and unmistakabl[e]” evidence that the parties wanted an arbitrator to resolve the dispute. AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 649 (1986). Stolt-Nielsen made clear that this Court has not yet decided whether the availability of class arbitration is a question of arbitrability. See 559 U. S., at 680. But this case gives us no opportunity to do so because Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures. See Brief for Petitioner 38, n. 9 (conceding this point).  

Justice Alito writes a concurring opinion, joined by Justice Thomas:

As the Court explains, “[c]lass arbitration is a matter of consent,” ante, at 1, and petitioner consented to the arbitrator’s authority by conceding that he should decide in the first instance whether the contract authorizes class arbitration. The Court accordingly refuses to set aside the arbitrator’s ruling because he was “‘arguably construing . . . the contract’” when he allowed respondent to proceed on a classwide basis. Ante, at 8 (quoting Eastern Associated Coal Corp. v. Mine Workers, 531 U. S. 57, 62 (2000)). Today’s result follows directly from petitioner’s concession and the narrow judicial review that federal law allows in arbitration cases. See 9 U. S. C. §10(a).

But unlike petitioner, absent members of the plaintiff class never conceded that the contract authorizes the arbitrator to decide whether to conduct class arbitration. It doesn’t. If we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred “[a]n implicit agreement to authorize class-action arbitration . . . from the fact of the parties’ agreement to arbitrate.” Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662, 685 (2010).

With no reason to think that the absent class members ever agreed to class arbitration, it is far from clear that they will be bound by the arbitrator’s ultimate resolution of this dispute....

Class arbitrations that are vulnerable to collateral attack allow absent class members to unfairly claim the “benefit from a favorable judgment without subjecting themselves to the binding effect of an unfavorable one,” American Pipe & Constr. Co. v. Utah, 414 U. S. 538, 546–547 (1974). In the absence of concessions like Oxford’s, this possibility should give courts pause before concluding that the availability of class arbitration is a question the arbitrator should decide. But because that argument was not available to petitioner in light of its concession below, I join the opinion of the Court.

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SCOTUS Cert Grant on Arbitration: BG Group PLC v. Argentina

Today the Supreme Court granted certiorari in BG Group PLC v. Republic of Argentina (No. 12-138), which presents the question: “In disputes involving a multi-staged dispute resolution process, does a court or instead the arbitrator determine whether a precondition to arbitration has been satisfied?”

You can find links to the D.C. Circuit’s decision below and the cert-stage briefing at SCOTUSblog’s case file.

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Class Settlement of Plumbing Fittings Products Liability Litigation Upheld

     These class actions (consolidated in an MDL in Minnesota) are notable for the whimsical names of their subclasses, the Soggy Plaintiffs and the Cloggy Plaintiffs.  The Eighth Circuit upheld the settlement of several class actions alleging damage caused by defective brass plumbing fittings sold by defendants Radiant and Uponor.  The Soggy Plaintiffs have already experienced leaking (in some cases causing severe damage) and the Cloggy Plaintiffs have not yet experienced leaks but have the same fittings.
     "The proposed settlement agreement stipulated that after two leaks, soggy plaintiffs would be entitled to have their entire plumbing system replaced at Uponor and Radiant's expense. Cloggy plaintiffs who had demonstrated 'by way of a flow test that a differential in water flow . . . of more than 50% [exists] between the hot and cold lines' would also be entitled to replacement of their brass fittings, and if that proved insufficient, to a new plumbing system."
     After notice of the proposed settlement had been sent, Ortega, a California resident, moved to intervene as of right.  His motion was denied as untimely.  He and 26 other class members then objected to the settlement, arguing that notice had been deficient, that the scope of the release of defendants was overbroad, and that the settlement did not account for a cause of action available under California law.  All of these arguments were rejected and the district court's approval of the settlement was upheld.  In re Uponor, Inc., F1807 Plumbing Fittings Products Liability Litigation, No. 12-2761 (8th Cir. June 7, 2013).

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Third Circuit Holds GlaxoSmithKline Companies Delaware Citizens for Diversity Purposes

In an absurdly lengthy opinion, which I must admit to only skimming, the Third Circuit has held that a ten-by-ten foot subleased office makes Delaware the principal place of business of a GlaxoSmithKline holding company, and thus upheld diversity jurisdiction over a personal injury action involving thalilomide.  (Yes, thalilomide, the anti-nausea-in-pregnancy drug from the late 50's and early 60's that caused birth defects.)  Plaintiffs claim to have discovered new evidence showing that defendants were aware of the drug's defects while marketing it.  Johnson v. SmithKline Beecham Corp., No. 12-2561 (3d Cir. June 7, 2013.)

The plaintiffs are Pennsylvania citizens and they claimed that four defendants were also Pennsylvania citizens. So when defendants removed the action from Pennsylvania state court, plaintiffs moved to remand. That motion was denied and the issue certified for interlocutory appeal. Apparently the issue of these companies' citizenship for diversity purposes has come up in several other cases and the district court rulings have conflicted.

As a naive law student, I concluded that any corporate structure that I could not understand was up to no good, and I have found no reason to change my mind about this well into middle age.  Three of the four defendants that plaintiffs claimed were Pennsylvania citizens are entities affiliated with GlaxoSmithKline plc, the British entity that is the "global head" of the GlaxoSmithKline group of companies.  Defendant SmithKline Beecham Corp. was once a Pennsylvania corporation, but it converted in 2009 to a Delaware LLC.  As far as I understood, the purpose of the conversion was to avoid "unnecessary tax liability."  (Wish I could convert myself to a Delaware LLC!)  SmithKline Beecham then dissolved.  The court thus held that SmithKline Beecham was not a Pennsylvania citizen because it had converted itself into a new entity, defendant GSK LLC.

GSK LLC operates the US division of GlaxoSmithKline plc.  Its headquarters is still in Philadelphia, "where it occupies 650,000 square feet of office space and employs 1,800 people" – the same as when it was still SmithKline Beecham.  SmithKline Beecham's board of directors became GSK LLC's "board of managers."  Does that mean GSK LLC's principal place of business is still Pennsylvania? 

No.  As an LLC, GSK LLC's citizenship for diversity purposes is derivative of its owner's (or "member's") citizenship.  Its sole member is GSK Holdings, a Delaware corporation with its principal place of business in (according to the Third Circuit) Delaware.  GSK Holdings subleases a ten-by-ten foot office in Delaware.  It has one employee who works about 20 hours per year.  Its three directors hold quarterly 15-30 minute meetings in Delaware (at least one of the directors is usually physically present at the meetings) to discuss GSK Holdings' investments.   

As for the fourth defendant at issue, Avantor, it evidently moved its principal place of business to Pennsylvania five days after the removal, so the court held that it was still a New Jersey citizen at the time of removal.  

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Oklahoma Supreme Court Holds Entire "Tort Reform" Bill Void

In a stunning development, the Oklahoma Supreme Court has invalidated a sweeping tort reform bill passed in 2009.  The particular provision at issue in Douglas v. Cox Retirement Properties, Inc., 2013 OK 37, a wrongful death action against a nursing home, was the requirement of an expert's "affidavit of merit" to be filed with or shortly after the filing of the complaint in a professional negligence claim.  When the plaintiff failed to file the affidavit of merit, the trial court granted defendant's motion to dismiss.  The Oklahoma Supreme Court reversed.

The expert affidavit of merit requirement was just one portion of Oklahoma H.B. 1603, the so-called Comprehensive Lawsuit Reform Act of 2009. The bill has 90 separate sections encompassing such disparate topics as transfer of cases, limitations on noneconomic damages, suing fast food providers, and a host of other provisions.  The court held that H.B. 1603 violated Article 5, Section 57 of the Oklahoma Constitution ("Every act of the Legislature shall embrace but one subject, which shall be clearly expressed in its title"), commonly known as the single-subject rule.  "The purposes of the single-subject rule are to ensure the legialtors or voters of Oklahoma are adequately notified of the potential effect of the legislation and to prevent logrolling."

A separate opinion, Wall v. Marouk, 2013 OK 36 (June 4, 2013), also invalidated the affidavit of merit requirement in a medical malpractice action.  The court held that the requirement violated two other Oklahoma constitutional provisions, one prohibiting "special laws" (Okla. Const. art. 5, §46), and the other guaranteeing right of access to the courts (Okla. Const. art. 2, §6).

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Twelve Asbestos Plaintiffs' Claims Dismissed Under Rule 41(b) for Noncompliance with Administrative Order

The Third Circuit has upheld the dismissal of twelve plaintiffs' claims in the Asbestos MDL for failure to comply with an administrative order requiring them to include specific histories of their exposure to asbestos.  The first paragraph of the opinion is:

This appeal comes to us from Multidistict Litigtion case number 875 ("MDL 875"), otherwise known as the "Asbestos MDL," involving asbestos cases from around the country, pending before Judge Robreno in the United States District Court for the Eastern District of Pennsylvania.  The District Court, overseeing several thousand asbestos cases, dismissed the claims of twelve Plaintiffs pursuant to Rule 41(b) of the Federal Rules of Civil Procedure based on non-compliance with the District Court's Administrative Order No. 12 ("AO 12").  Specifically, Judge Robreno determinated that the Plaintiffs' submissions were fatally flawed in that they failed to include specific histories of Plaintiffs' exposure to asbestos.  Plaintiffs contend on appeal, as they did in the District Court, that AO 12 did not impose this requirement, and urge, alternatively, that even if it did, under a proper balancing of the factors we outlined in Poulis v. State Farm Fire and Casulaty Company, 747 F.2d 863 (3d Cir. 1984), dismissal with prejudice was not warranted.  For the reasons discussed below, we will affirm the District Court's dismissal of the twelve cases at issue.

In re: Asbestos Products Liability Litigation, No. 12-2061 (3d Cir. May 31, 2013).

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SCOTUS Grants Cert in Another Class Action Fairness Act Case

Today the Supreme Court granted certiorari in Mississippi ex rel. Hood v. AU Optronics Corp. (No. 12-1036), which presents the question:

Whether a state’s parens patriae action is removable as a “mass action” under the Class Action Fairness Act when the state is the sole plaintiff, the claims arise under state law, and the state attorney general possesses statutory and common-law authority to assert all claims in the complaint.

You can find a link to the Fifth Circuit’s decision below and the cert-stage briefing at SCOTUSblog’s case file.

It will be the second Supreme Court case to interpret CAFA in as many Terms, following the decision this March in Standard Fire Insurance Co. v. Knowles.

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Sequel to the Fifth Circuit’s Quorum Conundrum: Comer v. Murphy Oil II

Two years ago we covered the strange set of developments in Comer v. Murphy Oil USA, a class action lawsuit against a number of chemical and energy companies based on their alleged contribution to climate conditions that exacerbated the force and effect of Hurricane Katrina. The district court had dismissed the case on political question grounds, but a Fifth Circuit panel reversed — rejecting the political question argument and finding that the plaintiffs had standing. See 585 F.3d 855 (2009).

The en banc Fifth Circuit granted rehearing, although due to several recusals only nine of the sixteen Fifth Circuit judges were able to vote. Then one of those nine judges recused, thus depriving the en banc court of its quorum. However, the quorum-less en banc court chose not to revert to the Fifth Circuit panel’s decision, which would have reversed the district court’s dismissal and remanded the case for further proceedings. Rather, the quorum-less en banc court (per five of the remaining eight judges) dismissed the appeal in its entirety, thereby reinstating a district court ruling that had already been unanimously reversed by a three-judge Fifth Circuit panel. See 607 F.3d 1049 (2010).

In 2011, the plaintiffs filed a new lawsuit alleging many of the same claims. This week, a Fifth Circuit panel affirms the dismissal of that lawsuit, finding it barred by res judicata. In Comer II (No. 12-60291, May 14, 2013), the panel concludes that — despite the unusual chain of events at the Fifth Circuit two years ago — the first lawsuit satisfied all the elements of res judicata: “(1) the parties are identical or in privity; (2) the judgment in the prior action was rendered by a court of competent jurisdiction; (3) the prior action was concluded by a final judgment on the merits; and (4) the same claim or cause of action was involved in both actions.” [Slip Op. 7]

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(Hat Tip: David Coale)

Fifth Circuit Decision on Personal Jurisdiction, McIntyre, and the Stream of Commerce

Last week, the U.S. Court of Appeals for the Fifth Circuit issued an important decision on personal jurisdiction: Ainsworth v. Moffett Engineering, Ltd., No. 12-60155 (May 9, 2013). In an opinion by Judge Patrick Higginbotham (joined by Judges Jerry Smith and Jennifer Elrod), the court reaffirms its “stream-of-commerce approach to personal jurisdiction” [Slip Op. 1] in the wake of J. McIntyre Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011). Below are some excerpts (footnotes omitted). From Slip Op. 3-4:

In cases involving a product sold or manufactured by a foreign defendant, this Circuit has consistently followed a “stream-of-commerce” approach to personal jurisdiction, under which the minimum contacts requirement is met so long as the court “finds that the defendant delivered the product into the stream of commerce with the expectation that it would be purchased by or used by consumers in the forum state.” Under that test, “mere foreseeability or awareness [is] a constitutionally sufficient basis for personal jurisdiction if the defendant’s product made its way into the forum state while still in the stream of commerce,” but “[t]he defendant’s contacts must be more than ‘random, fortuitous, or attenuated, or of the unilateral activity of another party or third person.’”

On interlocutory appeal, Moffett argues that application of the Fifth Circuit’s stream-of-commerce approach is no longer proper after the Supreme Court’s decision in McIntyre…. We disagree and find that application of the stream-of-commerce approach in this case does not run afoul of McIntyre’s narrow holding….

Turning to the McIntyre decision, Judge Higginbotham writes [Slip Op. 5-6]:

The Supreme Court reversed but did not produce a majority opinion. Justice Kennedy authored a plurality opinion, joined by Chief Justice Roberts, Justice Scalia, and Justice Thomas. Under the plurality’s approach to personal jurisdiction, “[t]he defendant’s transmission of goods permits the exercise of jurisdiction only where the defendant can be said to have targeted the forum; as a general rule, it is not enough that the defendant might have predicted that its goods will reach the forum State.” Our stream-of-commerce test, in not requiring that the defendant target the forum, is in tension with the plurality opinion, under which Moffett would likely not be subject to personal jurisdiction in Mississippi. But that does not answer the question before us. The reasoning of a Supreme Court opinion that does not command a majority vote is not binding precedent. Instead, “[w]hen a fragmented Court decides a case and no single rationale explaining the result enjoys the assent of five Justices, ‘the holding of the Court may be viewed as that position taken by those Members who concurred in the judgments on the narrowest grounds.’” In McIntyre, Justice Breyer’s concurring opinion, joined by Justice Alito, furnished the narrowest grounds for the decision and controls here.

Justice Breyer made clear that his view that “resolving [the] case require[d] no more than adhering to [the Supreme Court’s] precedents” and that his decision was “based on the facts,” which involved only a single sale in New Jersey. He explained that under any of the Court’s precedents “a single isolated sale” is not an adequate basis for personal jurisdiction. Here, from 2000 through September 2010, Cargotec sold 203 Moffett forklifts to customers in Mississippi—a far cry from the single sale in McIntyre….

He also notes [Slip Op. 7-8]:

The only other circuit court to squarely address McIntyre’s narrowest holding reached a similar conclusion. In AFTG-TG, LLC v. Nuvoton Tech. Corp., the Federal Circuit explained that “the crux of Justice Breyer’s concurrence was that the Supreme Court’s framework applying the stream-of-commerce theory—including the conflicting articulations of that theory in Asahi—had not changed, and that the defendant’s activities in McIntyre failed to establish personal jurisdiction under any articulation of that theory.” It found that “[t]he narrowest holding is that which can be distilled from Justice Breyer’s concurrence—that the law remains the same after McIntyre.” Because it concluded “that McIntyre did not change the Supreme Court’s jurisdictional framework,” the Federal Circuit went on to “apply [its] precedent that interprets the Supreme Court’s existing stream-of-commerce precedents.”

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Hat Tip: Texas Appellate Watch (@AppellateWatch)

NY Times on SCOTUS's Pro-Business Civil Procedure Decisions

Today’s New York Times features a story by Adam Liptak, Corporations Find a Friend in the Supreme Court, which discusses several of the Court’s recent decisions on civil procedure, including Comcast v. Behrend, Wal-Mart v. Dukes, AT&T Mobility v. Concepcion, Kiobel v. Royal Dutch Petroleum, and Standard Fire Insurance v. Knowles.

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Company Cannot Assert Attorney-Client Privilege Against Its Director, Delaware Court Holds

Plaintiff is a director of the defendant Company, a Delaware corporation, and he owns an entity that was the Company's largest shareholder. The remaining directors of the Company are also defendants. The Board of Directors established a Special Committee to explore strategic alternatives for the Company. Plaintiff was a member of the Special Committee. Later, the entity owned by Plaintiff announced it would nominate candidates for election at the Company's annual meeting. The defendants then secretly "sprang into action" and 11 days later, Company counsel notified Plaintiff by email that a special Board meeting would occur the next day to approve a recapitalization in which an entity controlled by one of the defendants would emerge as the largest shareholder of the Company. At meetings of the Special Committee and the Board of Directors the next day, the recapitalization was approved over Plaintiff's negative vote. The day after that, the Company announced the recapitalization and also announced that it was postponing the annual meeting and deferring the record date. That same day, Plaintiff filed suit challenging the recapitalization and the postponement of the annual meeting and record date.

Plaintiff subpoenaed counsel to the Company and to the Special Committee for documents relating to the planning and scheduling of the special meetings and the structuring of the recapitalization. Defendants asserted the attorney-client privilege and work product protection.

The court granted Plaintiff's motion to compel, holding that until the day the Board voted to approve the recapitalization, the Company could not assert either privilege against Plaintiff, who was a director of the Company. After the Board voted to recapitalize, however, sufficient adversity existed between Plaintiff and the Company such that Plaintiff could no longer have a reasonable expectation that he was a client of the Board's counsel. Kalisman v. Friedman, 2013 Del. Ch. LEXIS 100 (Delaware Court of Chancery, April 17, 2013).

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Ninth Circuit Requires Evidentiary Hearing on Enforceability of Forum Selection Clause

            Pro se plaintiff Robin Petersen was recruited to work in Saudi Arabia as a flight instructor for a subsidiary of Boeing Corporation.  His complaint alleged that on arrival in Saudi Arabia, he was forced to sign an employment agreement which he was not given time to read and which he was told he must sign or else return immediately to the U.S. at his own expense.  This agreement contained a forum selection clause requiring any contractual disputes to be resolved in the Labor Courts of Saudi Arabia.  Petersen then alleged a series of wrongful incidents in Saudi Arabia perpetrated by his employer. Finally returning to the U.S. after the intervention of the U.S. Consulate, he filed suit alleging breach of contract and other claims.  He submitted an affidavit along with his complaint claiming that he was not financially capable of returning to Saudi Arabia to pursue the lawsuit, that he would be subject to harsh conditions there, and that the forum selection clause was foisted on him through fraud and undue pressure.  He also submitted a report from the U.S. Department of State indicating that, among other things, he would not be able to obtain a fair trial in Saudi Arabia.

            The district court dismissed the lawsuit without a hearing under Rule 12(b)(3), holding the forum selection clause enforceable.  The district court also denied leave to amend the complaint, although plaintiff submitted additional information indicating that he would not even be eligible for a visa to Saudi Arabia.

            The Ninth Circuit reversed and remanded for an evidentiary hearing.  Under M/S Bremen v. Zapata Off-Shores Co. and Carnival Cruise Lines, Inc. v. Shute, a forum selection clause may be unenforceable if, for example, “the inclusion of the clause in the agreement was the product of fraud or overreaching,” or “the party wishing to repudiate the clause would effectively be deprived of his day in court were the clause enforced.”  The court held that the complaint and other materials raised an issue of fact as to whether the forum selection clause was enforceable under Bremen, thus requiring an evidentiary hearing, and that the district court abused its discretion by denying leave to amend the complaint. Petersen v. Boeing Co.,, No. 11-18075 (9^th Cir. April 26, 2013).

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Is today's cert grant in Daimler v. Bauman a follow-up to Kiobel, or a follow-up to Goodyear?

Some early blog and twitter chatter casts the Supreme Court’s cert grant in DaimlerChrysler AG v. Bauman as a sequel to last week’s Kiobel decision on the Alien Tort Statute (ATS). Although Daimler is an ATS case, the Court does not seem poised to revisit its test (such as it is) for extraterritorial application of the ATS. The question presented in Daimler is about personal jurisdiction in general—actually, it’s about general personal jurisdiction in general. According to the defendant’s petition for certiorari, “[t]he question presented is whether it violates due process for a court to exercise general personal jurisdiction over a foreign corporation based solely on the fact that an indirect corporate subsidiary performs services on behalf of the defendant in the forum State.”

This question calls to mind an issue from the Court’s 2011 Goodyear decision—one that Justice Ginsburg’s unanimous opinion acknowledged but did not address. The petitioners in Goodyear were foreign subsidiaries of an American parent company, and they objected to personal jurisdiction in North Carolina state court. Here’s an excerpt from the end of the Court’s opinion [131 S. Ct. at 2857]:

Respondents belatedly assert a “single enterprise” theory, asking us to consolidate petitioners' ties to North Carolina with those of Goodyear USA and other Goodyear entities. See Brief for Respondents 44–50. In effect, respondents would have us pierce Goodyear corporate veils, at least for jurisdictional purposes. See Brilmayer & Paisley, Personal Jurisdiction and Substantive Legal Relations: Corporations, Conspiracies, and Agency, 74 Cal. L. Rev. 1, 14, 29–30 (1986) (merging parent and subsidiary for jurisdictional purposes requires an inquiry “comparable to the corporate law question of piercing the corporate veil”). But see 199 N.C.App., at 64, 681 S.E.2d, at 392 (North Carolina Court of Appeals understood that petitioners are “separate corporate entities ... not directly responsible for the presence in North Carolina of tires that they had manufactured”). Neither below nor in their brief in opposition to the petition for certiorari did respondents urge disregard of petitioners' discrete status as subsidiaries and treatment of all Goodyear entities as a “unitary business,” so that jurisdiction over the parent would draw in the subsidiaries as well. 

One caveat, of course, is that the Supreme Court’s ultimate decisions do not always hew closely to the precise questions for which it has granted certiorari. But if the Court’s concern in Daimler is the extraterritorial application of the ATS, I suspect it would have GVR’d the case for reconsideration in light of Kiobel—as it did today with another Ninth Circuit ATS case (Rio Tinto v. Sarei).

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SCOTUS Grants Cert in Another Personal Jurisdiction Case: DaimlerChrysler v. Bauman

Today the Supreme Court granted certiorari in DaimlerChrysler AG v. Bauman (No. 11-965). Here is the question presented (from the defendant’s cert petition):

Daimler AG is a German public stock company that does not manufacture or sell products, own property, or employ workers in the United States. The Ninth Circuit nevertheless held that Daimler AG is subject to general personal jurisdiction in California—and can therefore be sued in the State for alleged human-rights violations committed in Argentina by an Argentine subsidiary against Argentine residents—because it has a different, indirect subsidiary that distributes Daimler AG-manufactured vehicles in California. It is undisputed that Daimler AG and its U.S. subsidiary adhere to all the legal requirements necessary to maintain their separate corporate identities.

The question presented is whether it violates due process for a court to exercise general personal jurisdiction over a foreign corporation based solely on the fact that an indirect corporate subsidiary performs services on behalf of the defendant in the forum State.

You can find a link to the Ninth Circuit’s decision below and other information about the case at SCOTUSblog’s casefile.

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Decision of Interest: Erie and Donald Trump in the Ninth Circuit

Yesterday the U.S. Court of Appeals for the Ninth Circuit decided Makaeff v. Trump University, __ F.3d __, 2013 WL 1633097, No. 11-55016. As the opinion explains, “California law provides for the pre-trial dismissal of certain actions, known as Strategic Lawsuits Against Public Participation, or SLAPPs, that ‘masquerade as ordinary lawsuits’ but are intended to deter ordinary people ‘from exercising their political or legal rights or to punish them for doing so.’” [Slip Op. 10] Ms. Makaeff invoked California's anti-SLAPP statute and moved to strike Trump University’s defamation counterclaim against her. The district court denied her motion, but the Ninth Circuit reverses and remands for the district court to apply California’s anti-SLAPP law and to consider whether Trump had shown “a reasonable probability of proving, by clear and convincing evidence, that Makaeff made her critical statements with actual malice.” [Slip Op. 32-33]

Two judges on the three-judge panel—Judge Kozinski and Judge Paez—author concurring opinions questioning whether California’s anti-SLAPP statute properly applies in federal court under the Erie doctrine. Here are some excerpts from Judge Kozinski’s concurrence [Slip Op. 32-37]:

I join Judge Wardlaw’s fine opinion because it faithfully applies our law, as announced in United States ex rel. Newsham v. Lockheed Missiles & Space Co., 190 F.3d 963, 973 (9th Cir. 1999), and its progeny. But I believe Newsham is wrong and should be reconsidered.

Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), divided the law applicable to diversity cases into two broad categories. Overruling Swift v. Tyson, 41 U.S. 1 (1842), it held that state law, rather than federal common law, applies to matters of substance. Erie, 304 U.S. at 78–79. But when it comes to procedure, federal law governs. See Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427 & n.7 (1996); see also Hanna v. Plumer, 380 U.S. 460, 473 (1965) (“Erie and its offspring cast no doubt on the long-recognized power of Congress to prescribe housekeeping rules for federal courts . . . .”).

In most cases, it’s easy enough to tell whether a rule is substantive or procedural. Whether a defendant is liable in tort for a slip-and-fall, or has a Statute of Frauds defense to a contract claim, is controlled by state law. Just as clearly, the time to answer a complaint, the manner in which process is served, the methods and time limits for discovery, and whether the jury must be unanimous are controlled by the Federal Rules of Civil Procedure. The latter is true, even though such procedural rules can affect outcomes and, hence, substantive rights. See Hanna, 380 U.S. at 471.

But the distinction between substance and procedure is not always clear-cut. While many rules are easily recognized as falling on one side or the other of the substance/procedure line, there are some close cases that call for a more nuanced analysis. See, e.g., Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 130 S. Ct. 1431, 1437 (2010); Gasperini, 518 U.S. at 428.…

Most of Newsham’s analysis was devoted to showing that there’s no “conflict” between California’s anti-SLAPP statute and the Federal Rules of Civil Procedure and, therefore, the two regimes can operate side-by-side in the same lawsuit. But the question of a conflict only arises if the state rule is substantive; state procedural rules have no application in federal court, no matter how little they interfere with the Federal Rules. Newsham’s mistake was that it engaged in conflict analysis without first determining whether the state rule is, in fact, substantive.

It’s not. The anti-SLAPP statute creates no substantive rights; it merely provides a procedural mechanism for vindicating existing rights. The language of the statute is procedural: Its mainspring is a “special motion to strike”; it contains provisions limiting discovery; it provides for sanctions for parties who bring a non-meritorious suit or motion; the court’s ruling on the potential success of plaintiff’s claim is not “admissible in evidence at any later stage of the case”; and an order granting or denying the special motion is immediately appealable. See Cal. Civ. Proc. Code § 425.16. The statute deals only with the conduct of the lawsuit; it creates no rights independent of existing litigation; and its only purpose is the swift termination of certain lawsuits the legislators believed to be unduly burdensome. It is codified in the state code of civil procedure and the California Supreme Court has characterized it as a “procedural device to screen out meritless claims.” See Kibler v. N. Inyo Cnty. Local Hosp. Dist., 138 P.3d 193, 198 (Cal. 2006).

Federal courts must ignore state rules of procedure because it is Congress that has plenary authority over the procedures employed in federal court, and this power cannot be trenched upon by the states. See Erie, 304 U.S. at 78 (“[T]he law to be applied in any [diversity] case is the law of the State” except for “matters governed by the Federal Constitution or acts of Congress . . . .” (emphasis added)); see also 28 U.S.C. § 2072. To me, this is the beginning and the end of the analysis. Having determined that the state rule is quintessentially procedural, I would conclude it has no application in federal court.

Judge Kozinski concludes [Slip Op. 40]:

Newsham was a big mistake. Two other circuits have foolishly followed it. See Godin v. Schencks, 629 F.3d 79, 81, 85–91 (1st Cir. 2010); Henry v. Lake Charles Am. Press, L.L.C., 566 F.3d 164, 168–69 (5th Cir. 2009). I’ve read their opinions and find them no more persuasive than Newsham itself. It’s time we led the way back out of the wilderness. Federal courts have no business applying exotic state procedural rules which, of necessity, disrupt the comprehensive scheme embodied in the Federal Rules, our jurisdictional statutes and Supreme Court interpretations thereof.… [I]f this or another case were taken en banc, we could take a fresh look at the question. I believe we should.

 --A

SCOTUS Decision in Kiobel v. Royal Dutch Petroleum

Today the Supreme Court decided Kiobel v. Royal Dutch Petroleum Co. (No. 10-1491), a long-pending case involving the Alien Tort Statute (ATS). Although the Court is unanimous that the ATS does not provide jurisdiction in this particular case, there is a 5-4 split on the reasoning.

Chief Justice Roberts authors the majority opinion, joined by Scalia, Kennedy, Thomas, and Alito. In addition, Justice Kennedy files a concurring opinion, and Justice Alito files a concurring opinion that Thomas joins.

Justice Breyer authors an opinion concurring in judgment, joined by Ginsburg, Sotomayor, and Kagan.

--A

SCOTUS decision in Genesis Healthcare Corp. v. Symczyk: Article III, mootness, and Rule 68 (or not)

Today the Supreme Court decided Genesis Healthcare Corp. v. Symczyk (No. 11-1059), which addresses whether collective action claims under the Fair Labor Standard Act (FLSA) are “justiciable when the lone plaintiff’s individual claim becomes moot.” [Slip Op. 1]. The Court splits 5-4, with Justice Thomas writing the majority opinion (joined by Roberts, Scalia, Kennedy, and Alito) and Justice Kagan writing the dissent (joined by Ginsburg, Breyer, and Sotomayor).

The Third Circuit had held that the Symczyk’s claim was moot because the defendant had made a Rule 68 offer of judgment that would have “fully satisfied” her claim, even though the plaintiff did not accept the offer. Although there is a circuit split on “whether an un­accepted offer that fully satisfies a plaintiff ’s claim is sufficient to render the claim moot,” Justice Thomas and the majority decline to resolve it--finding that Symczyk had conceded the issue. [Slip Op. at 5.] They therefore “assume, without deciding, that petitioners’ Rule 68 offer mooted respond­ent’s individual claim” [Slip Op. 5], and they ultimately conclude [Slip Op. 6]:

In the absence of any claimant’s opting in, respondent’s suit became moot when her individual claim became moot, because she lacked any personal interest in representing others in this action. While the FLSA authorizes an aggrieved employee to bring an action on behalf of himself and “other employees similarly situated,” 29 U.S C. § 216(b), the mere presence of collective-action allegations in the complaint cannot save the suit from mootness once the individual claim is satisfied.

In dissent, Justice Kagan rejects the idea that Symczyk’s individual claim was moot, noting that “an unaccepted offer of judgment cannot moot a case.” [Dissenting Op. 3] She adds: “So a friendly suggestion to the Third Circuit: Rethink your mootness-by-unaccepted-offer theory. And a note to all other courts of appeals: Don’t try this at home.” [Dissenting Op. 4]

Given the majority’s failure to address whether an unaccepted Rule 68 offer renders a claim moot--and Justice Kagan's forceful critique of that notion--the broader implications of Genesis are unclear. If lower federal courts accept Justice Kagan’s “friendly suggestion,” then she would be correct that Genesis is “the most one-off of one-offs, explaining only what (the majority thinks) should happen to a proposed collective FLSA action when something that in fact never happens to an individual FLSA claim is errantly thought to have done so.” [Dissenting Op. 1]. But if any circuits continue to follow the mootness-by-unaccepted-offer theory, Genesis ratifies a strategy that allows “defendants to ‘pick off’ named plaintiffs with strategic Rule 68 offers before certification." [Slip Op. 3] Even on that point, the majority’s reasoning is confined to the FLSA scenario--rather than, say, Rule 23 class actions. Justice Thomas notes that “Rule 23 actions are fundamentally different from collective actions under the FLSA.” [Slip Op. 6].

--A

Another Semtek in the Making? Delaware Supreme Court Holds Collateral Estoppel Bars Shareholder Derivative Suit

            Allergan, the pharmaceutical company, agreed to pay $600 million in civil and criminal fines after a Department of Justice investigation into the company's allegedly improper marketing of BOTOX for off-label uses.  Several Allergan shareholders then filed shareholder derivative suits, some in federal district court in California (which were consolidated) and one in Delaware Chancery Court.  Allergan moved to dismiss both actions for failure to plead demand futility under Rule 23.1 (the Delaware rule is "substantially the same" as Federal Rule 23.1).

            The federal court dismissed the California action with prejudice (the dismissal is currently on appeal).  The Delaware Chancery Court held that the California judgment did not bar the Delaware action and denied Allergan's motion to dismiss.

            On interlocutory appeal, the Delaware Supreme Court reversed.  Pyott v. Louisiana Municipal Police Employees' Retirement System, No. 380, 2012 (Del. April 4, 2013).  Citing Semtek, the court first held that the preclusive effect of the California judgment would be determined by California state law.  The California federal court held, as a matter of Delaware law, that demand was not futile and dismissed the derivative complaint "on the merits of demand futility."

            Applying California preclusion law, the Delaware Supreme Court held that the issue of "whether, under Rule 23.1, the failure to make demand on the Allergan board is excused because such a demand would have been futile" was precluded.  The court held that "because the real plaintiff in a derivative suit is the corporation, 'differing groups of shareholders who can potentially stand in the corporation's stead are in privity for the purposes of issue preclusion.'"     

            In addition, the court addressed and rejected plaintiffs' argument that the California plaintiffs' representation was inadequate.  The Delaware Chancery Court had applied an irrebutable presumption that derivative plaintiffs who file their complaints without seeking books and records, very shortly after the announcement of a "corporate trauma," are inadequate representatives.  The Delaware Supreme Court rejected such an irrebutable presumption.

--PM