Conning the IADC Newsletters.

Recognizing that a wide range of practical and helpful material appears in the newsletters prepared by committees of the International Association of Defense Counsel, this department highlights interesting topics covered in recent newsletters and presents excerpts from them.

Judicial Comity and Resolving Business Disputes

Writing in the February issue of the Business Litigation Committee newsletter, James T. Marnen of Knox McLaughlin Gornall & Sennett, Erie, Pennsylvania, discussed different ways courts sort out cases of "equal dignity":

The resolution of business disputes without resort to litigation is to the obvious benefit of the parties involved. While working toward that goal, however, counsel should not lose sight of the fact that if suit is first initiated by a party to that dispute other than their client, the consequences can be significantly adverse.

"Home field" advantages

Modern business transactions frequently involve parties whose business locations are remote from one another. Liberal state venue rules often allow litigation to be commenced in a county distant from the defendant's "home," and liberal long-arm statutes can result in litigation in another state or country. The result can be not only expense and inconvenience, but also unfavorable precedent and a "home field" advantage to the other party.

Regardless of the types of jurisdictions involved, if the action is in rem, the court first assuming jurisdiction over the property in dispute may exercise that jurisdiction to the exclusion of other courts. Colorado River Water Conservation District v. United States, 424 U.S. 800, 818 (1976). However if the action is in personam and is first filed in a foreign country, that court and the American court in which a second action is filed involving the same cause of action may proceed with the litigation until judgment is obtained in one of them, which may be set up as res judicata in the other. The same is true of concurrent in personam litigation in a U.S. federal court and a state court. Princess Lida v. Thompson, 305 U.S. 456, 466 (1939); Compagnie des Bauxites de Guinea v. Insurance Co. of North America, 651 F.2d 877, 887 (3d Cir. 1981).

But where two actions are pending in courts of equal dignity within the judicial system of a single sovereignty, such as two federal district courts, or two courts of the same state, the general rule is that the court first having the case before it is to decide it. Smith v. Mclver, 22 U.S. (9 Wheat.) 532, 535 (1824).

Precedence of suit has been defined in terms of the time of filing, not the time of service of process. Pacesetter Systems Inc. v. Medtronic Inc., 678 F.2d 93 (9th Cir. 1982); Hospah Coal Co. v. Chaco Energy Co., 673 F.2d 1161 (10th Cir. 1982); Peregrin Corp. v. Peregrine Industries Inc., 769 F.Supp. 169 (E.D. Pa. 1991); American Modern Home Insurance v. Insured Accounts Co. Inc., 704 F.Supp. 128 (S.D. Ohio 1988).

An exercise of discretion

The federal courts have considered whether the general rule should be applied in similar fashion, and they have viewed the issue as one for an exercise of discretion in light of a number of factors. It has been held that while the general rule favors the forum of the first-filed action, exceptions are not rare, and are made when "justice or expediency" requires. Factors to be considered are (1) the convenience and availability of witnesses, (2) the absence of jurisdiction over all necessary or desirable parties, (3) the possibility of consolidation with related litigation, (4) considerations relating to the real party in interest, (5) whether a compulsory counterclaim should have been asserted in the first action, and (6) whether forum shopping was the only motive for that action. Genentech Inc. v. Eli Lilly & Co., 998 F.2d 931, 937-38 (Fed. Cir. 1993).

Columbia Plaza Corp. v. Security National Bank, 525 F.2d 620, 627-28 (D.C. Cir. 1975), characterized the processes as requiring the balancing of "equitable considerations. "The factors therein taken into account were (1) the location of the witnesses, (2) the necessity for the plaintiff in the first action to retain other counsel to litigate the second action, and (3) the extent to which the first action had progressed at the time of the motion to enjoin the first action was filed.

Courts in the Second Circuit give "priority" to the first suit in the absence of a "balance of convenience" in favor of the second, or unless there are "special circumstances" that justify giving priority to the second. Factors Etc. Inc. v. Pro Arts Inc., 579 F.2d 215,218 (2d Cir. 1978). The Factors court allowed the second case to proceed where two other cases involving the same issues were pending in the jurisdiction in which the second suit was pending, and where the first lawsuit was a declaratory judgment action filed in contemplation of the second.

The first-filed rule was not applied in Rayco Manufacturing Co. v. Chicopee Manufacturing Corp., 148 F.Supp. 588, 589-90 (S.D.N.Y. 1957), because the parties' business activities were more closely connected with the second jurisdiction, and the court concluded that the plaintiff in the first suit was merely forum-shopping for favorable precedent. The predominance of the business interests of the defendant in the first suit was the basis for the court's following the general rule in Mattel Inc. v. Louis Marx & Co., 353 F.2d 421,424 (2d Cir. 1965).

Rare and extraordinary

The Third Circuit will apply the general rule in the absence of "rare or extraordinary circumstances, inequitable conduct, bad faith, or forum shopping." Equal Employment Opportunity Commission v. University of Pennsylvania, 850 F.2d 969, 972 (1988). While at first blush such a test may appear to be a difficult one to meet, the courts have balanced traditional forum non conveniens factors, such as availability of witnesses and other evidence, along with the relationship of the jurisdiction to the facts of the case, the presence of any deceit on the part of the first-filing party in regard to a willingness to negotiate, and the effect of the first-filing party's conduct on other policies in the jurisdiction where the second action was filed. See also Berkshire International Corp. v. Marquez, 69 F.R.D. 583 (E.D. Pa. 1976); Bowers v. Fenton, 488 F.Supp. 570 (M.D. Pa. 1979); Consolidated Rail Corp. v. Grand Trunk & Western Railroad Co., 592 F.Supp. 562 (E.D. Pa. 1984); Fischer & Porter Co. v. Moorco International Inc., 869 F.Supp. 323 (E.D.Pa. 1994).

Yoder v. Heinhold Commodities Inc., 630 F.Supp. 756 (E.D. Va. 1986), refused to stay the second action where the first was filed in Illinois pursuant to a contractual forum selection clause seeking declaratory relief immediately following receipt of a complaint from the other party, where both cases were in their early stages and all of the parties' business dealings were in Virginia, and where the second action was filed, as were the parties themselves.

However, in American Home Insurance v. Insured Accounts Co., supra, an Ohio district court refused to enjoin the first action, filed in a district court in Missouri, where the witnesses resided in both states, one party conducted business in Missouri and the other in Ohio, and the transaction between the parties touched upon both states.

When it's declaratory judgment

The courts have given closer scrutiny to the circumstances where the first-filed action is a declaratory judgment action. Tempco Electric Heater Corp. v. Omega Engineering Inc., 819 F.2d 746, 749 (7th Cir. 1987), dismissed the first-filed declaratory judgment action because it was filed days before the second action for non-declaratory relief, concluding that the purpose of declaratory judgment actions would not be otherwise served--the prevention of continuous accusations by the other party.

On the other hand, Northwest Airlines Inc. v. American Airlines Inc., 989 F.2d 1002, 1007 (8th Cir. 1993), enjoined a second, non-declaratory judgment action, because there was no indication that litigation by the plaintiff in the second action was imminent when the declaratory judgment action was filed, the plaintiff in the first action had a reasonable basis to conclude that declaratory relief was necessary, and most of the witnesses were located in the jurisdiction where the first action was filed.

Similarly, the court in Supreme International Corp. v. Anheuser-Busch Inc., 972 F.Supp. 604, 607 (S.D. Fla. 1997), stayed the second action, concluding that "compelling circumstances" did not exist so as to allow the court not to follow the first-filed rule. The plaintiff in the first-filed declaratory judgment action did not file immediately on receiving notice of a dispute, it had a genuine need to resolve the situation expeditiously and, while the situs of the second suit was more convenient to the plaintiff there, that of the first suit was more convenient to the plaintiff in that action.

First party probably wins

If a business dispute has interjurisdictional transactional origins and the relief sought is not declaratory in nature, the likelihood is that the first party to file will have the choice of the forum, provided that the two jurisdictions are not state courts in different states, or a state court and a federal court, or courts in different countries. As long as the other party is not deceived into not filing, the relationship of the jurisdiction in which suit is filed to the transaction should be sufficient to allow the application of the general rule.

If federal jurisdiction is available, filing the first action in federal court and removing the second action to the federal court in the appropriate district will prevent the application of the "equal sovereign" rule. In any case, sensitivity to the ramifications of not filing first should be a part of all business dispute resolution processes.

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