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Stanford
University Law School
- Securities Class Action Clearinghouse
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BORIS FELDMAN, State Bar No. 128838
DOUGLAS J. CLARK, State Bar No. 171499
CHERYL W. FOUNG, State Bar No. 108868
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304-1050
Telephone: (650) 493-9300
Facsimile: (650) 565-5100
Attorneys for Defendants/Counter-Claimants
ELECTRONICS FOR IMAGING, INC., DAN
AVIDA, and ERIC SALTZMAN and Former
Defendants/Proposed Counter-Claimants
JEFFREY LENCHES and FRED ROSENZWEIG
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
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RICHARD A. BADER, RICHARD HUGHES, Plaintiffs, v. ELECTRONICS FOR IMAGING, INC., DAN
Defendants. |
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CASE NO.: C-97-4739-CAL DEFENDANTS' OPPOSITION TO Date: Sept. 24, 1999 |
INTRODUCTION AND SUMMARY OF ARGUMENT
I. Plaintiffs Have Always Insisted This Action Is Necessary
II. Why Do Plaintiffs Want To Dismiss Their Own Case?
III. Plaintiffs' Motions Should Be Denied
ARGUMENT
I. PLAINTIFFS' RULE 41(a)(2) MOTION SHOULD BE DENIED
A. Dismissal Of The Federal Action Will Cause Defendants To Suffer Legal Prejudice
1. The Reform Act Provides Unique Substantive And Procedural Protections
2. Dismissal Will Prejudice Defendants Where They Have Been Forced Unnecessarily To Litigate In Two Simultaneous Proceedings
B. Plaintiffs' Motion Should Be Denied Pursuant To Rule 23
C. The Court Should Deny The Dismissal Based On The Pendency Of Defendants' Counterclaim
1. This Court Must Deny Plaintiffs' Motion If The Counterclaim Cannot Be Independently Adjudicated
2. Plaintiffs' Motion Should Be Denied Even If The Counterclaim Can Be Independently Adjudicated
D. In The Event The Court Dismisses Plaintiffs' Complaint, Dismissal Should Be With Prejudice
E. If The Court Dismisses The Complaint, The Court Should Impose Sanctions On Plaintiffs
II. PLAINTIFFS' MOTION TO DISMISS THE COUNTERCLAIM SHOULD BE DENIED
A. Retaining Jurisdiction Over Defendants' Counterclaim Is The Only Way To Avoid Duplicative Litigation
B. Defendants' Counterclaim Does Not Require This Court To Make Needless Determinations Of State Law
C. The Exercise Of Jurisdiction Over The Counterclaim Will Prevent Forum Shopping By Plaintiffs
CONCLUSION
Baker v. Gold Seal Liquors, Inc., 417 U.S. 467 (1974)
Beaver Assoc. v. Cannon, 59 F.R.D. 508 (S.D.N.Y. 1973)
Bioxy, Inc. v. Birko Corp., 935 F. Supp. 737 (E.D.N.C. 1996)
Bishop v. West American Ins. Co., 95 F.R.D. 494 (N.D. Ga. 1982)
Blue Dane Simmental Corp. v. American Simmental Ass'n, 952 F. Supp. 1399
(D. Neb. 1999)
Bosteve Ltd. v. Marauszwki, 110 F.R.D. 257 (E.D.N.Y. 1986)
Brandt v. Schal Assoc., 854 F.2d 948 (7th Cir. 1988)
Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942)
Burnette v. Godshall, 828 F. Supp. 1439 (N.D. Cal. 1993), aff'd, 72 F.3d 766 (9th
Cir. 1995)
Cauley v. Wilson, 754 F.2d 769 (7th Cir. 1985)
Chamberlain v. Allstate Ins. Co., 931 F.2d 1361 (9th Cir. 1990)
Chamfer Eng'g, Inc. v. Tapco Int'l Inc., 498 F. Supp. 129 (S.D. Tex. 1980)
Champion v. Doe, No. C-88-0833-WHO (N.D. Cal. Oct. 24, 1988)
City of Inglewood v. City of Los Angeles, 451 F.2d 948 (9th Cir. 1971).
Continental Casualty Co. v. Robsac Indus., 947 F.2d 1367 (9th Cir. 1991),
overruled on other grounds by Government Employees Ins. Co. v. Dizol,
133 F.3d 1220 (9th Cir. 1998) (en banc)
Diaz v. Trust Territory, 876 F.2d 1401 (9th Cir. 1989)
Fleming v. Joy Finance Co., No. Civ. A. 95-3464, 1995 WL 739877 (E.D. La. Dec. 11,
1995)
Government Employees Ins. Co. v. Dizol, 133 F.3d 1220 (9th Cir. 1998)
Greater Rockford Energy & Tech. Corp. v. Shell Oil Co., 790 F. Supp. 804 (C.D.
Ill. 1992), aff'd, 998 F.2d 391 (7th Cir. 1993)
Grigsby v. CMI Corp., 590 F. Supp. 826 (N.D. Cal. 1984), aff'd, 765 F.2d 1369
(9th Cir. 1985)
Gross v. Spies, 133 F.3d 914, 1998 WL 8006 (4th Cir. Jan. 13, 1998)
Grover v. Eli Lilly and Co., 33 F.3d 716 (6th Cir. 1994)
Gupta v. Penn Jersey Corp., 582 F. Supp. 1058 (E.D. Pa. 1984)
Gutierrez v. Champion Savings Ass'n, 727 F. Supp. 1088 (S.D. Tex. 1989)
Hoffman-LaRoche, Inc. v. GenPharm, Inc., No. Civ. 98-1124 (WHW), 1999 WL
366737 (D.N.J. June 8, 1999)
Holbrook v. Andersen Corp., 130 F.R.D. 516 (D. Me. 1990)
Hunter v. Surgitek Medical Eng'g Corp., No. S92-56M, 1992 WL 165819 (N.D.
Ind. May 29, 1992)
In re Activision Sec. Litig., 621 F. Supp. 415 (N.D. Cal. 1985)
In re Exxon Valdez, 102 F.3d 429 (9th Cir. 1996)
In re Phillips Petroleum Sec. Litig., 109 F.R.D. 602 (D. Del. 1986)
In re Silicon Graphics Inc. Sec. Litig., No. 97-16204, 1999 WL 446521 (9th Cir.
Jul. 2, 1999), amended, 1999 WL 595194 (9th Cir. Aug. 4, 1999)
In re Victor Tech. Sec. Litig., [1987 Transfer Binder] Fed. Sec. L. Rep. (CCH)
¶93,158 (N.D. Cal. 1987)
Kerrin v. Federated Dep't Stores, Inc., 100 F.R.D. 715 (N.D. Ga. 1983)
Larkin General Hosp. v. American Telephone & Telegraph Co., 93 F.R.D. 497
(E.D. Pa. 1982)
Maryland Casualty Co. v. Knight, 96 F.3d 1284 (9th Cir. 1996)
McCormick v. Fund American Cos., 26 F.3d 869 (9th Cir. 1994)
Moreno v. Lo-Vaca Gathering Co., 80 F.R.D. 282 (W.D. Tex. 1978)
Nagle Indus., Inc. v. Ford Motor Co., 173 F.R.D. 448 (E.D. Mich. 1997) aff'd, No.
97-1449, 1999 WL 447080 (Fed. Cir. June 22, 1999)
Pace v. Southern Express Co., 409 F.2d 331 (7th Cir. 1969)
Planet Ins. Co. v. Griffith, 712 F. Supp. 659 (N.D. Ill. 1989)
Ratkovich v. Smith Kline and French Lab., No. 88 C 3758, 1990 WL 17070 (N.D.
Ill. Feb. 2, 1990), aff'd, 951 F.2d 155 (7th Cir. 1991)
Russ v. Standard Ins. Co., 120 F.3d 988 (9th Cir. 1997)
St. Paul Fire & Marine Ins. Co. v. F.H., 117 F.3d 435 (9th Cir. 1997), overruled on
other grounds by Government Employees Ins. Co. v. Dizol, 133 F.3d 1220
(9th Cir. 1998) (en banc)
Schwarzschild v. Tse, [1992-1993 Transfer Binder] Fed. Sec. L. Rep. (CCH)
¶ 97,291 (N.D. Cal. Dec. 9, 1992)
Selas Corp. v. Wilshire Oil Co., 57 F.R.D. 3 (E.D. Pa. 1972)
Shawmut Bank v. Kress Assoc., 33 F.3d 1477 (9th Cir. 1994)
Snodgrass v. Provident Life and Accident Ins. Co., 147 F.3d 1163 (9th Cir. 1998)
Stevedoring Serv. v. Armilla Int'l B.V., 889 F.2d 919 (9th Cir. 1989)
Stevenson v. Missouri Pacific R.R. Co., 53 F.R.D. 184 (E.D. Ark. 1971)
Technimark, Inc. v. Crellin, Inc., 14 F. Supp. 2d 762 (M.D.N.C. 1998)
Terronova v. Kincheloe, 852 F.2d 424 (9th Cir. 1988)
Toombs v. Leone, 777 F.2d 465 (9th Cir. 1985)
Tyco Lab., Inc. v. Koppers Co., 82 F.R.D. 466 (E.D. Wis. 1979), aff'd, 627 F.2d 54
(7th Cir. 1980)
Unioil, Inc. v. E.F. Hutton & Co., 809 F.2d 548 (9th Cir. 1986), overruled in part
on other grounds by In re Keegan Management Co. Sec. Litig., 78 F.3d 431
(9th Cir. 1996)
United States v. Dep't of Envtl. Resources, 923 F.2d 1071 (3rd Cir. 1991) (en banc)
Watson v. Clark, 716 F. Supp. 1354 (D. Nev. 1989), aff'd, 909 F.2d 1490 (9th Cir.
1990)
Webb v. Altec Indus., No. 93 C 5288, 1994 WL 162815 (N.D. Ill. Apr. 25, 1994)
Westlands Water Dist. v. United States, 100 F.3d 94 (9th Cir. 1996)
Schneider v. Vennard, 183 Cal. App. 3d 1340 (1986)
Steele v. Electronics for Imaging, Inc., No. 403099 (San Mateo Sup. Ct. Dec. 15,
1997)
15 U.S.C. § 78aa
15 U.S.C. § 78j(b), Section 10(b) of the Securities Exchange Act of 1934
15 U.S.C. § 78t(a), Section 20 of the Securities Exchange Act of 1934
15 U.S.C. § 78u-4 et seq., Private Securities Litigation Reform Act of 1995
15 U.S.C. § 78u-4(a)(2)
15 U.S.C. § 78u-4(a)(3)(A)
15 U.S.C. § 78u-4(a)(3)(B)
15 U.S.C. § 78u-4(a)(6)
15 U.S.C. § 78u-4(a)(7)
15 U.S.C. § 78u-4(a)(9)
15 U.S.C. § 78u-4(b)(1)
15 U.S.C. § 78u-4(b)(2)
15 U.S.C. § 78u-4(b)(3)
15 U.S.C. § 78u-4(b)(4)
15 U.S.C. § 78u-4(c)
15 U.S.C. § 78u-4(c)(1)
15 U.S.C. § 78u-4(c)(2)
15 U.S.C. § 78u-4(d)
15 U.S.C. § 78u-4(e)
15 U.S.C. § 78u-4(f)
15 U.S.C. § 78u-5(c)
15 U.S.C. § 78u-5(e)
28 U.S.C. § 1367
Fed. R. Civ. P. 11(b)
Fed. R. Civ. P. 12(b)(1)
Fed. R. Civ. P. 12(b)
Fed. R. Civ. P. 13(a)(1)
Fed. R. Civ. P. 23
Fed. R. Civ. P. 23(d)
Fed. R. Civ. P. 23(e)
Fed. R. Civ. P. 41(a)(1)
Fed. R. Civ. P. 41(a)(2)
N.D. Cal. Civ. L.R. 58-1
Cal. Corp. Code § 25400
Cal. Corp. Code § 25500
Conf. Rep. No. 105-803, 105th Cong. 2d Sess. (1998)
Testimony Concerning the Impact of the Private Sec. Litig. Reform Act of 1995
Before the Senate Subcomm. On Securities Comm. on Banking, Housing, &
Urban Affairs, at 15 (July 24, 1997)
James Wm. Moore, et al., Moore's Federal Practice (3d ed. 1999)
Charles Alan Wright, et al., Federal Practice and Procedure (1998 ed.)
Nearly two years ago, the plaintiff class invoked this Court's exclusive jurisdiction when it filed federal securities claims against defendants. Plaintiffs could have asserted state law claims in this proceeding so that only one court would adjudicate the entirety of plaintiffs' claims. Plaintiffs refused to do that, preferring instead to get two bites of the apple by filing a state suit asserting the same facts against the same defendants on behalf of the identical class. It is now plaintiffs' whim--notwithstanding defendants' litigation burdens and substantial defense expenditures--to dismiss this action without prejudice. Plaintiffs' latest litigation tactic is exacerbated by their explicit threat that they may come back here again to assert both their federal claims and state law claims. Plaintiffs' Motion to Dismiss ("Pls.' Motion") at 10:23-25.
From the outset, defendants have decried the wastefulness of plaintiffs' dual-track strategy. Defendants consistently have argued that all claims should be in one proceeding, and that the only forum where all claims can be considered is federal court. Now that plaintiffs finally agree that one forum is preferred to two, the dispute has become which forum is the right one. Notwithstanding the allure of plaintiffs' invitation to eliminate a case from the Court's busy docket, defendants respectfully submit that this Court should deny plaintiffs' motions to dismiss and retain jurisdiction over the dispute between the plaintiff class and defendants.
On December 15, 1997, the Steele plaintiffs filed a class action against defendants in the Superior Court of San Mateo, Steele v. Electronics for Imaging, Inc., No. 403099 (San Mateo Sup. Ct. Dec. 15, 1997) ("Steele"). Shortly thereafter, on December 31, 1997, plaintiffs Smith and Rivera filed this federal action on behalf of the same class ("Smith group"). Weiss & Yourman represented the federal plaintiffs, and published notice of the federal action on the Internet. On March 2, 1998, a different group of plaintiffs, including Messrs. Bader, Hughes, Kadec, Scislow and Toms, moved to be appointed as lead plaintiffs of the federal class ("Bader group"). The law firms of Milberg Weiss, Barrack Rodos and Kaufman Malchman sought to be appointed as lead counsel. Their motion was uncontested. See Order Appointing Lead Plaintiffs dated April 9, 1998. Thus began plaintiffs' dual-track strategy. Over the past 18 months, the two cases progressed to the same procedural stage, contrary to plaintiffs' assertion. Pls.' Motion at 1:23. Defendants have answered both complaints, discovery is available for use in both proceedings, and class certification motions are pending in both actions.
Plaintiffs repeatedly have argued that this federal proceeding is necessary. Just a few months ago, plaintiffs insisted that their federal complaint "is more than sufficient to state claims against defendants." February 12, 1999 Plaintiffs' Memorandum in Opposition to Defendants' Motion to Preserve Mandatory Discovery Stay at 1:5-6. Plaintiffs further insisted that "[t]o protect the interests of the class" the Bader group and their counsel sought to become lead plaintiffs and counsel. Id. at 7:16-18. Plaintiffs further argued that the discovery they obtained in state court "will assist them in ultimately proving their case against defendants in this action." Id. at 8:16-18. In opposing Defendants' Motion to Preserve the Mandatory Stay, plaintiffs argued that "there is nothing sinister or improper about prosecuting parallel actions in state and federal court." Id. at 9:4-5. When this Court questioned plaintiffs at the hearing on the mandatory stay motion why they did not dismiss the federal case, Mr. Gergosian stated: "Because we can't -- first of all, we didn't bring the first case in federal court." March 5, 1999 Transcript at 5:20-21. He added: "And there is nothing improper with those parallel proceedings." Id. at 6:5-6.
What has changed? Two things. First, until this Court recently granted plaintiffs' ex parte motion to continue the hearing on defendants' motion to compel class certification until September 24, the class certification hearing had been scheduled here for August 13, whereas the Steele court scheduled the hearing on the state class certification motion for September 3. Plaintiffs' concern that the state court would decline to certify a state class in favor of certification of a federal class no doubt prompted the precipitous filing of their Rule 41(a)(2) motion. See Schneider v. Vennard, 183 Cal. App. 3d 1340 (1986) (affirming order staying state securities class action in favor of a parallel federal class action where defendants answered and class certification was pending).
Second, on July 2, the Ninth Circuit issued its landmark decision in In re Silicon Graphics Inc. Sec. Litig., No. 97-16204, 1999 WL 446521 (9th Cir. Jul. 2, 1999), amended, 1999 WL 595194 (9th Cir. Aug. 4, 1999) a decision for which plaintiffs' counsel here seeks en banc review. Silicon Graphics is a strong addition to defendants' Reform Act defenses and affirmative legal rights.
Plaintiffs have moved to dismiss their own complaint pursuant to Fed. R. Civ. P. 41(a)(2) and have moved to dismiss defendants' declaratory judgment counterclaim pursuant to Fed. R. Civ. P. 12(b)(1). Plaintiffs' motions should be denied for several reasons.
First, motions to dismiss under Fed. R. Civ. P. 41(a)(2) are routinely denied when defendants demonstrate they will suffer legal prejudice, i.e., loss of a legal claim or argument. If plaintiffs' motion were granted, defendants would be prejudiced by the loss of the substantial legal protections of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. Section 78u-4 et seq. ("Reform Act").
Second, dismissal will prejudice defendants where they have been forced to defend themselves in the duplicative actions. This prejudice, coupled with the legal prejudice that would vest upon dismissal, warrants denial of plaintiffs' motion.
Third, the Court should exercise its discretion under Fed. R. Civ. P. 23 to deny plaintiffs' motion in order to protect the plaintiff class from the loss of their federal claims. Moreover, the Court should issue an order staying the state court litigation, as the entire dispute--state and federal--can be litigated in this Court.
Fourth, the existence of defendants' counterclaim for declaratory relief also makes Rule 41(a)(2) dismissal untenable. The counterclaim cannot be independently adjudicated, thus the Court, pursuant to Rule 41(a)(2), may not dismiss the complaint. In the alternative, the motion to dismiss should be denied because defendants' counterclaim is compulsory and is inextricably linked to the claims sought to be dismissed.
Fifth, if the Court does grant plaintiffs' motion to dismiss, the dismissal should be with prejudice and conditioned upon plaintiffs' providing notice to a certified plaintiff class and reimbursing defendants for legal fees and costs incurred in defense of this action.
Finally, as to plaintiffs' motion to dismiss defendants' counterclaim, the Court should retain jurisdiction over the counterclaim as a means of resolving the entire dispute among the parties in one action.
In ruling on a motion under Fed. R. Civ. P. 41(a)(2), the Court must make three separate determinations: "(1) whether to allow the dismissal at all; (2) whether the dismissal should be with or without prejudice; and (3) what terms and conditions, if any, should be imposed." Burnette v. Godshall, 828 F. Supp. 1439, 1443 (N.D. Cal. 1993) (citation omitted), aff'd, 72 F.3d 766 (9th Cir. 1995). In deciding whether to allow dismissal, the "court is to consider whether doing so will unfairly affect the other side." Id.
Plaintiffs' motion presents a new issue; defendants have not found any reported decisions discussing an attempt to dismiss a Reform Act class action under Rule 41(a)(2). Accordingly, the Court must decide whether the plaintiffs, having invoked the Court's exclusive jurisdiction and the unique requirements of the Reform Act, unilaterally may jettison this forum before the class is certified and deprive the defendants of a ruling under that Act. Defendants respectfully submit that the consistent pattern of analogous cases that the Ninth Circuit has decided leaves little doubt that this motion should be denied.
The Ninth Circuit recently reiterated in Westlands Water Dist. v. United States, 100 F.3d 94, 96 (9th Cir. 1996), that a district court must determine whether the defendant will suffer some plain legal prejudice if the Court grants a motion to dismiss without prejudice under Rule 41(a)(2).1 In determining whether there is "legal prejudice," the Ninth Circuit observed that "courts have examined whether a dismissal without prejudice would result in the loss of a federal forum, or the right to a jury trial, or a statute-of-limitations defense." Id. at 97 (citations omitted). When presented with these and similar significant substantive and procedural rights which would be lost to the non-moving defendants if such motion to dismiss were granted, the Ninth Circuit has repeatedly refused to condone such dismissal.
Specifically, in In re Exxon Valdez, 102 F.3d 429, 431-32 (9th Cir. 1996), 339 plaintiffs sought to dismiss their actions to pursue their claims as class members in pending state actions. They filed their motion to dismiss without prejudice after repeatedly failing to comply with defendants' discovery requests. The Ninth Circuit affirmed the denial of the dismissal motion. The Court of Appeals agreed with the basis for the denial when, among other things, plaintiffs' motion was a "'thinly veiled attempt[] to avoid discovery'" and the expenditure of two and one-half years and substantial sums to obtain discovery "would prejudice the defendants." Id. at 432 (citation omitted). See 8 James Wm. Moore, et al., Moore's Federal Practice § 41.40[7][d] (3d ed. 1999) (advocating similar result).
Similarly, the Ninth Circuit has ruled that a Rule 41(a)(2) motion should be denied where a plaintiff's purpose is to avoid an adverse determination on the merits of the action. Terronova v. Kincheloe, 852 F.2d 424, 429 (9th Cir. 1988) (denying Rule 41(a)(2) motion when summary judgment had been pending for three months and magistrate had already issued report and recommendation); see Moore's Federal Practice, supra, § 41.40[7][b][v] (advocating similar result). The Ninth Circuit also has ruled that a Rule 41(a)(2) motion should be denied where plaintiff seeks to remedy his failure to demand a jury trial. Russ v. Standard Ins. Co., 120 F.3d 988, 990 (9th Cir. 1997) (holding district court abused its discretion when it permitted plaintiff to dismiss action for express purpose of re-filing and making demand for jury trial); see Moore's Federal Practice, supra, § 41.40[7][b][vi] (advocating similar result).
In light of these holdings, it is only logical that the Ninth Circuit "should deny a motion for a voluntary dismissal that will prejudice the defendant by subjecting it to the less favorable law of a different forum." Moore's Federal Practice, supra, § 41.40[7][b][vii]. Contrary to plaintiffs' suggestions, the state court action is not duplicative of this one, nor can it be because this Court has exclusive jurisdiction over the claim under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). See 15 U.S.C. § 78aa. This Court, and only this Court, can litigate the entirety of plaintiffs' claims. See 28 U.S.C. § 1367. An important corollary is that there can be no race to judgment as between this Court and the Steele court: that court lacks the power to adjudicate the federal securities claims.
A significant part of this reality, which plaintiffs ignore, is that the Reform Act governs this proceeding. The Reform Act provides specific protections for the benefit of defendants and to ensure the integrity of the proceedings. Primary among those protections is the Reform Act's Safe Harbor for forward-looking statements, which provides immunity from liability for projections accompanied by meaningful cautionary statements. See 15 U.S.C. § 78u-5(c), 15 U.S.C. § 78u-5 (e). The Reform Act also effected a number of changes to the elements, procedures, and structure of securities claims and class actions. See, e.g., 15 U.S.C. § 78u-4(a)(2) (requiring the representative plaintiff to provide a sworn certificate with the filing of the complaint attesting to his independence and prior history as an investor); 15 U.S.C. § 78u-4(a)(3)(B) (requiring court to select lead plaintiff who is most capable of adequately representing the interests of the class, who has the largest financial interest, and prohibiting appointment of a professional plaintiff); 15 U.S.C. § 78u-4(a)(6) (restricting payment of attorneys' fees); 15 U.S.C. § 78u-4(a)(7) (requiring explanations to the class concerning detailed aspects of any settlement); 15 U.S.C. § 78u-4(a)(9) (requiring compulsory examination of plaintiff's counsel's potential conflict of interest); 15 U.S.C. § 78u-4(b)(1) and (2) (requiring particularized pleading of the allegedly false statement, the reasons why the statement was false, strong inference of scienter, and all supporting facts); 15 U.S.C. § 78u-4(b)(3) (requiring mandatory stay of discovery pending motion to dismiss); 15 U.S.C. § 78u-4(b)(4) (requiring plaintiff to prove loss causation); 15 U.S.C. § 78u-4(c) (requiring mandatory judicial review of each party's compliance with Fed. R. Civ. P. 11(b)); 15 U.S.C. § 78u-4(d) (requiring mandatory written polling of jurors regarding each defendant's scienter); 15 U.S.C. § 78u-4(e) (limiting the measure of damages); 15 U.S.C. § 78u-4(f) (applying proportionate, rather than joint and several, liability and extinguishing liability for settling defendants).
Plaintiffs do not cite a single authority for the proposition that the loss of this federal forum and the Reform Act, with its unique substantive and procedural protections, does not prejudice defendants. Indeed, plaintiffs cannot make this argument in light of the Ninth Circuit's ruling in Westlands: "We conclude that legal prejudice is just that--prejudice to some legal interest, some legal claim, some legal argument." 100 F.3d at 97 (emphasis added).
Plaintiffs' attempt at defining legal prejudice supports defendants' argument. Plaintiffs state that "[p]lain legal prejudice requires more than a showing that defendant faces the prospect of defending a second lawsuit, that defendant has incurred legal expenses in preparing for trial, or that plaintiff has gained some tactical advantage. . . . [D]efendants must show that actual rights are threatened." Pls.' Motion at 4:11-13. Defendants have met plaintiffs' standard for demonstrating legal prejudice. If this action is dismissed, defendants will lose the actual rights afforded by the Reform Act. Defendants will lose their right to argue, on summary judgment or to a jury, that they are entitled to immunity from liability as a result of the Reform Act's Safe Harbor for forward-looking statements. Defendants Avida and Saltzman will lose their right to a finding of proportionate liability and will be subjected to joint and several liability. Defendants will also be subjected to liability based on a scienter standard lower than the standard recently enunciated in the Ninth Circuit's Silicon Graphics decision. The prejudice defendants would suffer on dismissal thus extends beyond "tactical" considerations, wasted expense or the prospect of defending a second action.
Plaintiffs' smug argument that this Court should grant dismissal to avoid the specter of duplicative actions and a waste of judicial resources should fall on deaf ears. Courts have denied dismissal motions, notwithstanding pending parallel state actions, where defendants have been forced to litigate as a result of plaintiffs' manipulations. For example, in Planet Ins. Co. v. Griffith, 712 F. Supp. 659, 661 (N.D. Ill. 1989), the court denied dismissal of an insurance coverage declaratory action even though there were four pending state court actions. The federal action had been pending for two years, the parties had filed numerous pleadings including one party's counterclaim, substantial discovery had been involved, and defendants expended substantial fees and costs. The court found dismissal would prejudice the defendants: "If Planet wished to defer this insurance dispute until resolution of the underlying actions, it should have delayed filing this action or at least not waited two years to dismiss it." Id. at 661.
Similarly, in Holbrook v. Andersen Corp., 130 F.R.D. 516, 521 (D. Me. 1990), the court denied dismissal where plaintiff sought to pursue a pending state court action. The court rejected plaintiff's argument that the federal action was pending only ten months and that there would be a waste of judicial resources by virtue of the parallel suits. The court found defendant would be prejudiced because, among other things, it had spent over $50,000 in fees conducting discovery and pretrial preparation. The court observed that plaintiff's intent to join non-diverse defendants in state court proceedings was a "make-weight in an attempt to evade, for tactical purposes, the jurisdiction of this Court, which was, after all, originally invoked by Plaintiffs."2 Id. at 521.
Plaintiffs complain that "[d]efendants' refusal to dismiss this action is hypocritical. These very defendants, and this same counsel, have complained ad nauseam -- albeit without basis -- that they are improperly being burdened by having to defend two actions simultaneously." Pls.' Motion at 4:17-19. Plaintiffs ignore that defendants have never objected to the federal forum; rather, defendants' objection is that plaintiffs needlessly invoked the jurisdiction and resources of the federal and state courts when federal court could have decided the entirety of the action. Plaintiffs, in contrast, have burdened the federal and state court system with two parallel class actions when this Court alone could have heard all claims in one proceeding.3
As a result of plaintiffs' invocation and maintenance of this "second" action, defendants have been forced to engage in litigation and legal analysis that they would not have had to endure had plaintiffs never filed a federal securities claim in this Court. This action has been pending nearly two years. During this time, defendants have moved to dismiss on behalf of defendants Lenches and Rosenzweig; moved to compel class certification; moved to preserve the mandatory discovery stay; filed an answer and counterclaim; and engaged in costly factual analysis of the uniquely federal issues, such as the alleged entanglement with analysts, application of the Reform Act's safe harbor, and others.
Plaintiffs have stated that their unseemly jockeying between the state and federal systems may continue and that they would like to have the option of reasserting their federal claims. See Pls.' Motion at 10:23-25 ("If plaintiffs later amend the federal complaint to include claims under California securities laws (which they have no present intention of doing) defendants can move to dismiss those claims at that time.") The observation in Kerrin v. Federated Dep't Stores, Inc., 100 F.R.D. 715 (N.D. Ga. 1983), in which the court denied a motion to dismiss without prejudice, is particularly noteworthy:
A federal forum for federal claims is certainly a defendant's right. If a state forum is more important to the plaintiff than his federal claims, he should have to make that assessment before the case is jockeyed from state court to federal court and back to state court. The jockeying is a drain on the resources of the state judiciary, the federal judiciary, and the parties involved; tactical manipulation such as plaintiff has employed cannot be condoned.
Id. at 717 (citation omitted).4 In sum, the fact that defendants have been forced to litigate the federal issues, together with the loss of the federal forum, will inflict substantial prejudice on defendants if the motion is granted.
Federal Rule of Civil Procedure 23 gives trial courts the discretion to make appropriate orders for the protection of a plaintiff class and mandates that notice be given of dismissal of a class action. Fed. R. Civ. P. 23(d), 23(e). Defendants believe that the Court should avail itself of both opportunities to protect the plaintiff class.
Defendants respectfully request that the Court issue an order denying plaintiffs' motion to dismiss and staying the state court class action. While plaintiffs contend that "there is no conceivable prejudice to the class as a result of the dismissal [because] [t]he Steele action protects the class," Pls.' Motion at 7:6-7, the prejudice to the class is acute. The Steele action does not and cannot raise plaintiffs' Section 10(b) and 20 claims because only a federal court has jurisdiction over those claims. See 15 U.S.C. § 78aa. Thus, plaintiffs seek to dismiss the action where all claims can be asserted and they abandon absent class members, forcing the latter to file individual actions in order to assert and protect their full array of claims. Plaintiffs mistakenly rely on Larkin General Hosp. v. American Telephone & Telegraph Co., 93 F.R.D. 497, 499 (E.D. Pa. 1982), to support their argument that existence of another, parallel, class action protects the class. Pls.' Motion at 6-7. In Larkin, the second class action, like the first, was a federal antitrust action. In contrast, there is no other federal class action here in which federal claims have been raised and preserved.
The court in In re Phillips Petroleum Sec. Litig., 109 F.R.D. 602, 608-09 (D. Del. 1986) addressed similar issues. In Phillips, a number of securities class actions arising out of a hostile takeover attempt were pending in the District of Delaware. In one of the class actions, plaintiff sought to voluntarily dismiss his case under Rule 41(a)(1) and file a class action in state court. The Phillips court, effecting its obligations under Rule 23, viewed plaintiff's request in light of his fiduciary duties to the class. The Phillips court stated:
The [] plaintiff has represented . . . he intends to rely solely on state-law claims in a subsequently filed class action. The possible federal claims of any class members within the [] class could thus be raised only in individual actions in federal court. The class members represented by the Delaware plaintiffs, on the other hand, may have all their possible claims -- state as well as federal -- raised here. The [] plaintiff thus could not adequately fulfill his fiduciary duty to represent the best interest of the class by filing state-law claims only.
Id. at 609 (footnote omitted). In Phillips, the court granted plaintiff's motion to voluntarily dismiss, due to the pendency of other, similar federal actions, but ordered as a condition to dismissal that plaintiff not file a duplicative state court class action arising out of the same facts. Id.
Judge Orrick raised similar concerns in Champion v. Doe (Continental Savings of America), No. C-88-0833-WHO (N.D. Cal. Oct. 24, 1988). In Champion, plaintiff sought dismissal of a class action under Fed. R. Civ. P. 41(a)(1) to pursue a later-filed state court class action. At the hearing on the motion, Judge Orrick expressed his concern that dismissal of the federal complaint, and the resulting loss of claims for violation of federal laws, including the securities laws, was not in the best interests of the class. September 21, 1988 Transcript at 3, 6. Consistent with that concern, Judge Orrick denied plaintiffs' motion for voluntary dismissal and issued an order staying the state court class action. See Ex. 1, 2 to Declaration of Cheryl Foung in Opposition to Plaintiffs' Motion to Dismiss (Order dated October 24, 1988; Sept. 21 Transcript).
Phillips and Champion provide clear guidance on the appropriate course of action in this case. Because the plaintiff class would be prejudiced by dismissal in that they would lose the ability to assert their federal claims with their state claims, plaintiffs' motion should be denied. Moreover, because the plaintiff class would be prejudiced by the maintenance of two identical class actions, the Court should issue an order staying the state court class action. See Champion, Phillips, 109 F.R.D. at 608 (noting the obvious prejudice arising from pursuit of duplicative class actions).
Plaintiffs also contend that the absent class members need not receive notice of the dismissal of this action. None of the authorities plaintiffs rely on for that position support their argument under the circumstances of this case. Pls.' Motion at 6. Rule 23(e)'s plain language provides:
Dismissal or Compromise. A class action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to all members of the class in such manner as the court directs.
The Ninth Circuit has observed that "[v]ery few cases involving a voluntary pre-certification dismissal have actually held notice not required." Diaz v. Trust Territory, 876 F.2d 1401, 1411 (9th Cir. 1989).
Indeed, in Diaz, the Ninth Circuit reversed the lower court's dismissal of a portion of the class action where the court failed to give notice or inquire into possible prejudice. The Court held that "notice of dismissal protects the class from prejudice it would otherwise suffer if class members have refrained from filing suit because of knowledge of the pending class action." Id. at 1409. Since Diaz was decided, Congress enacted the Reform Act, which requires that plaintiffs give early notice to class members (20 days after filing the complaint). 15 U.S.C. § 78u-4(a)(3)(A). The Diaz Court also held that "[l]ack of time from dismissal until expiration of the statute of limitations makes it likely the class will learn of the dismissal too late." Diaz, 876 F.2d at 1411. Thus, the two factors that the Ninth Circuit found present in Diaz compelling reversal for failure to give notice are present here: "The likelihood of prejudice, resulting from reliance on the filing of the class action, compounded by the impending expiration of the statute of limitations at the time the class allegations are dismissed. . . ." Id. at 1409-10.5
Accordingly, defendants request that the Court deny plaintiffs' motion to dismiss and issue an order staying the state court action. In the event that the Court does grant plaintiffs' motion, defendants request that the Court require plaintiffs to issue notice to a certified class and afford an opportunity to object to such dismissal.
Defendants filed their counterclaim on July 2, 1999. The counterclaim asserts in relevant part that "the facts as alleged in the Complaint are not sufficient to plead violations of California Corporations Code §§ 25400 and 25500." Counterclaim ¶ 5. Plaintiffs assume without discussion or citation to authority that the existence of defendants' counterclaim is "irrelevant to plaintiffs' motion for voluntary dismissal." Pls.' Motion at 5:20-21. It is abundantly clear that the existence of the counterclaim is anything but "irrelevant" to the disposition of plaintiffs' motion.
Rule 41(a)(2) provides in relevant part: "If a counterclaim has been pleaded by a defendant prior to the service upon the defendant of the plaintiff's motion to dismiss, the action shall not be dismissed against the defendant's objection unless the counterclaim can remain pending for independent adjudication by the court." Thus, the Court may not dismiss the action if the counterclaim cannot otherwise remain pending for independent adjudication. See Gross v. Spies, 133 F.3d 914, 1998 WL 8006, at *5 (4th Cir. Jan. 13, 1998) (per curiam) (unpublished) ("if a counterclaim is pending at the time the plaintiff files its motion, the district court may not grant the plaintiff's motion unless the counterclaim can remain pending for independent adjudication.") (Emphasis added).
While the matter is by no means unanimous, see discussion infra, some courts have suggested that the existence of supplementary jurisdiction over a counterclaim based on state law does not provide a basis for independent adjudication. In Gross, plaintiff moved to dismiss both his federal securities claim and state claims in his federal case and instead prosecute his claims in a pending state case filed in another state. The Fourth Circuit held that if a counterclaim based on supplemental jurisdiction "was properly filed," dismissal by the district court "was error." Gross, 1998 WL 8006, at *8. Under the particular facts of that case, defendant's counterclaim for indemnity was not properly filed because under the receivership orders at issue, the counterclaim had to be filed with the receivership commission, and not in federal court. Id. at *8-9. In that unusual circumstance, the district court properly dismissed the action.
In Chamfer Eng'g, Inc. v. Tapco Int'l Inc., 498 F. Supp. 129 (S.D. Tex. 1980), the court denied plaintiff's motion to dismiss where defendant had asserted a counterclaim. Plaintiff's complaint had sought a declaratory judgment that certain patents were invalid and not infringed; defendants counterclaimed that plaintiffs infringed certain patents. Thereafter, and following one and one-half years of litigation, plaintiff sought to dismiss the entire action. Although the plaintiff made its motion under Fed. R. Civ. P. 12(b) on the basis that there did not exist a justifiable controversy, which motion the court denied, the court considered the defendant's initial argument that dismissal was improper under Fed. R. Civ. P 41(a)(2). The court agreed with defendant:
[P]laintiff's motion would have to be denied since Rule 41(a)(2) provides that no voluntary dismissal may be had against the objections of a defendant asserting a counterclaim 'unless the counterclaim can remain pending for independent adjudication by the court.' Since it is uncontested that this Court would not have independent jurisdiction over the plaintiff if its complaint were dismissed, the plaintiff cannot voluntarily dismiss this action without the consent of the defendants.
Id. at 131 (citation omitted).
Even if this Court decides that defendants' counterclaim can remain pending for independent adjudication, the Court should not dismiss plaintiffs' case. Instead, the Court should follow those courts which have refused to grant dismissal motions notwithstanding that the compulsory counterclaims could be independently adjudicated. For example, in Bosteve Ltd. v. Marauszwki, 110 F.R.D. 257 (E.D.N.Y. 1986), the court refused to dismiss a plaintiff's complaint for violation of RICO and breach of contract where defendant had counterclaimed for the same causes of action. Although a state court action was already pending, to which plaintiffs were parties, the court found it would be inefficient to litigate only the counterclaim, particularly where the defendant had expended substantial attorney's fees preparing for trial.6 Id. at 259.
As leading commentators have noted, "[a] voluntary dismissal should be denied if the defendant has asserted a compulsory counterclaim that is inextricably linked to the claims sought to be dismissed." Moore's Federal Practice, supra, § 41.40[7][f]. Defendants' counterclaim requests this Court to rule that the very facts alleged in the Complaint do not violate California securities law. There can hardly be a more "inextricable link."7 Indeed, the counterclaim at bar is a compulsory counterclaim, but one which need not be stated under Fed. R. Civ. P. 13(a)(1) because the claim is the subject of another pending (state) action. Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 469 n.1 (1974).
Denying dismissal would permit this Court to decide in one proceeding the alleged violations of federal and state law. Because this Court alone has exclusive jurisdiction over the federal claims, a similar result is not even a possibility in state court.8 Denying dismissal would simultaneously prevent prejudice to defendants arising from loss of the Reform Act and the federal forum; afford plaintiffs an adequate forum to adjudge the alleged securities violations; promote efficiency; and avoid both piecemeal litigation and the wasteful expenditure of two parallel class action proceedings. The effect of such a ruling would hardly create a novelty for the Court. On the contrary, federal courts routinely adjudicated federal and state securities allegations, until the plaintiffs' bar sought to evade the requirements of the Reform Act by filing duplicative state court proceedings.9
The purpose of imposing conditions to a Rule 41(a)(2) dismissal, such as requiring dismissal with prejudice, is to protect the non-moving party. Ratkovich v. Smith Kline and French Lab., No. 88 C 3758, 1990 WL 17070, at *4 ( N.D. Ill. Feb. 2, 1990), aff'd, 951 F.2d 155 (7th Cir. 1991); Moore's Federal Practice, supra, § 41-40[10][a] (collecting authority). If this Court dismisses the Complaint, the dismissal should be with prejudice. Such "terms and conditions are 'the quid for the quo' of allowing a plaintiff to dismiss his suit." Ratkovich, 1990 WL 17070, at *4 (citing Brandt v. Schal Assoc., 854 F.2d 948, 955 (7th Cir. 1988).) Numerous courts, including those in the Ninth Circuit, have granted plaintiffs' dismissal motions but only with prejudice.
For example, in Burnette, 828 F. Supp. 1439, plaintiff had filed in state court, added a RICO claim, and upon defendant's removal to federal court, plaintiff moved to dismiss without prejudice and remand the action to state court on the ground that plaintiff had not properly evaluated the soundness of the RICO claim. Although Judge Williams found that defendant would not be prejudiced by the dismissal of plaintiff's RICO claim, the court ordered dismissal with prejudice, finding among other things that "[d]efendants should not have incurred significant expense in responding to the frivolous civil RICO claim." Id. at 1444. The Court imposed sanctions against plaintiff for the cost and legal fees in defending the RICO claim. Id. at 1444, 1449. The Ninth Circuit affirmed the dismissal with prejudice and the award of sanctions. 72 F.3d 766. Many other courts have either required dismissal with prejudice,10 or granted motions only where plaintiffs agreed to dismiss with prejudice.11
The Reform Act requires mandatory judicial review of each party's and counsel's compliance with Fed. R. Civ. P. 11(b). 15 U.S.C. § 78u-4(c)(1) & 15 U.S.C. § 78u-4(c)(2); N.D. Cal. Civ. L.R. 58-1 (providing that judgment shall not be entered in securities class action until separate order is entered reflecting judicial review of Rule 11(b) compliance). If this Court dismisses any portion of this case, defendants request that the Court conduct this mandatory review, and impose sanctions against plaintiffs for the unnecessary jockeying between state and federal court, tactics which have forced defendants to incur substantial legal fees and costs. See Burnette, 828 F. Supp. at 1444, 1449 (court ordered dismissal with prejudice and imposed sanctions against plaintiff for the cost and legal fees in defending RICO claim).
Apart from mandatory sanctions under the Reform Act and Rule 11, a district court may condition dismissal on the plaintiffs' payment of costs and attorneys' fees. Westlands, 100 F.3d at 94, 97. While an award of costs and attorneys' fees is not required, they "are often imposed upon a plaintiff who is granted a voluntary dismissal" under Rule 41(a)(2). Stevedoring Serv. v. Armilla Int'l B.V., 889 F.2d 919, 921 (9th Cir. 1989); Moore's Federal Practice, supra, § 41.40[10][d][i] (advocating award of costs as condition of dismissal without prejudice).12 Attorneys' fees, if awarded, should be limited to work "which cannot be used in any future litigation of these claims." Westlands, 100 F.3d at 94, 97.
In Hunter v. Surgitek Medical Eng'g Corp, No. S92-56M, 1992 WL 165819 (N.D. Ind. May 28, 1992), the court granted dismissal without prejudice so that plaintiffs could litigate the claims in a pending court proceeding, but ordered plaintiffs to pay the costs and attorneys' fees incurred by the defendants in removing the action, opposing the motion for remand, and in opposing the dismissal motion, as well as any costs of duplicative discovery. In so doing the court ordered defendants to submit their itemized costs and fees. Other courts have followed suit.13
Accordingly, defendants request that any dismissal be conditioned on plaintiffs' payment of fees and costs for services performed solely as a result of the federal suit. Defendants would present evidence of their expenses on a motion to determine the proper amount of these fees and costs.
By asserting their counterclaim seeking a judicial declaration that defendants did not violate the state securities laws, defendants, notwithstanding plaintiffs' unreasonable resistance, have made it possible for this Court to resolve the entire dispute between the plaintiff class and defendants. Now, plaintiffs seek to dismiss the counterclaim by becoming sponsors of judicial economy and opponents of forum shopping. The irony.
Defendants agree with plaintiffs that the Court should look to Brillhart v. Excess Ins. Co., 316 U.S. 491, 494 (1942), for guidance in determining whether to exercise jurisdiction over defendants' counterclaim for declaratory relief. See Pls.' Motion at 8. In Brillhart, the trial court had dismissed a reinsurer's federal declaratory action so as not to delay further litigation that had been pending in a parallel state court garnishment proceeding. The court of appeals reversed but failed to remand for the trial court to determine in the first instance whether the declaratory judgment action was foreclosed under state law or could be fully adjudicated in the state garnishment proceeding. Because the court of appeals precluded the trial court from making this determination, the Supreme Court reversed and remanded. 316 U.S. at 495.
Although plaintiffs correctly argue that the Supreme Court was wary of duplicative state and federal court litigation, Pls.' Motion at 8, "[t]he pendency of a state court action [ ] does not of itself require a district court to refuse declaratory relief in federal court." Chamberlain v. Allstate Ins. Co., 931 F.2d 1361, 1367 (9th Cir. 1990) (applying Brillhart). Indeed, the Brillhart Court was concerned with whether all matters could be fully adjudicated in one proceeding, 316 U.S. at 495, an outcome that was theoretically possible in that state court proceeding but which is not a possibility here.
Brillhart and its progeny have established an analytical framework for courts to apply in deciding whether to exercise their jurisdiction over declaratory judgment claims asserted in a multiple-litigation context.14 The Brillhart factors are (1) whether exercising jurisdiction will result in avoiding duplicative litigation; (2) whether deciding the counterclaim will result in this Court needlessly determining complex issues of state law; and (3) whether exercising jurisdiction over the counterclaim will aid a party in forum shopping. See Brillhart, 316 U.S. at 495-97; Chamberlain, 931 F.2d at 1367. These factors preclude dismissal of the counterclaim.
By adjudicating both the federal and state securities issues, this Court will preclude rather than facilitate duplicative litigation. In such circumstances, the Ninth Circuit favors retaining jurisdiction over the counterclaim. In Chamberlain, 931 F.2d 1361, the defendant filed a declaratory relief counterclaim in federal court that "essentially mirrored" an action pending in state court. Although the Court found that while the "pending state court action clearly could have resolved the issues presented by the counterclaim," an examination of the Brillhart factors confirmed that the district court had appropriately exercised jurisdiction over the declaratory counterclaim. 931 F.2d at 1367. If the district court had dismissed the counterclaim, the original action still would have been pending in federal court simultaneously with the pending state action. By not dismissing the counterclaim, the district court effectively resolved the entire dispute:
By adjudicating the declaratory relief counterclaim, the district court avoided piecemeal litigation. As it now stands, the district court's grant of summary judgment is res judicata in the state action. The entire controversy has been resolved in one courtroom, albeit a federal one, and the Brillhart strictures have been accommodated.
Id. at 1368; see also Maryland Casualty Co. v. Knight, 96 F.3d 1284, 1289-90 (9th Cir. 1996) (exercise of jurisdiction held appropriate where "the result of dismissing the declaratory relief complaint would have been 'piecemeal litigation' . . . . The Declaratory Judgment Act was intended to avoid, not promote, such a result.") (citation omitted).
By retaining jurisdiction over defendants' counterclaim, the entire controversy between the parties will be before this Court. Moreover, plaintiffs erroneously suggest that such jurisdiction will duplicate work already done by the state court. Pls.' Motion at 10. Although the state court has overruled defendants' demurrers to the state complaint, defendants do not intend to relitigate the pleading motions. Instead, the defendants will seek to prove through summary judgment or at trial that their conduct did not violate the state or federal securities laws. Defendants' counterclaim has yet to be decided. It should be decided here.
This Court's determinations of plaintiffs' federal and state allegations will not run afoul of any principle in Brillhart. Indeed, the Brillhart Court remanded the case so that the district court could, "in the first instance" make determinations under state law. 316 U.S. at 495-96.15 Federal courts have routinely ruled on alleged violations of sections 25400 and 25500 of the California Corporations Code, the issues raised in the counterclaim. See, e.g., Shawmut Bank v. Kress Assoc., 33 F.3d 1477, 1489 (9th Cir. 1994).16 Adjudicating these claims is straightforward for federal courts, because "California's relevant securities fraud statute is substantially equivalent in wording and scope to Rule 10b-5." Grigsby v. CMI Corp., 590 F. Supp. 826, 833 (N.D. Cal. 1984), aff'd, 765 F.2d 1369 (9th Cir. 1985). Accordingly, there is no danger that the district court would "lose its way" through a "maze of local statutes and decisions."
Moreover, because the federal and state securities laws are similar, rulings as to one may effectively resolve issues pertinent to the other. For example, both the federal and state securities laws require plaintiffs to prove that defendants made material misrepresentations of fact; a ruling as to one will resolve the other. See Shawmut Bank, 33 F.3d at 1489 ("Our conclusion that Bear Stearns did not make any misrepresentation of material fact also disposes of Eaton Vance's . . . fourth and fifth claims [for violation of California Corporate Securities Law §§ 25400, 25401, 25500, and 25501]"); McCormick v. Fund American Cos., 26 F.3d 869, 884 (9th Cir. 1994) (materiality determination under federal securities laws also disposes of state securities claims). Such judicial economy justifies the exercise of jurisdiction over defendants' counterclaim.17
It is remarkable that plaintiffs accuse defendants of forum shopping, despite the fact that it is they who instituted this action in federal court while a parallel action was pending in state court. It is plaintiffs who, after more than one and one-half years and considerable expense, now attempt to dismiss this action and litigate their claims in state court. It is plaintiffs who raise the possibility of one day returning to this Court to assert their federal and state claims. See Pls.' Motion at 10. On the other hand, defendants have repeatedly objected to the burden of being forced to defend two parallel actions simultaneously and have consistently maintained that this Court is the appropriate forum to resolve all issues.
Trying to bring all claims into one courtroom is not forum shopping. The judicial concern in this regard is that "parties could attempt to avoid state court proceedings by filing declaratory relief actions in federal court. This kind of forum shopping could be avoided by requiring district courts to inquire into the availability of state court proceedings to resolve all issues without federal intervention." Chamberlain, 931 F.2d at 1367. See Brillhart, 316 U.S. at 495 ("The federal court may have to consider whether the claims of all parties in interest can satisfactorily be adjudicated in [the state] proceeding . . .") Defendants are not trying to avoid liability under state law -- this Court can impose such liability, if appropriate. Plaintiffs, however, are trying to avoid application of the Reform Act. That is forum shopping.
In sum, "[i]f a case can be settled most expeditiously in the federal court, that court should exercise its jurisdiction." 10B Charles Alan Wright, et al., Federal Practice and Procedure § 2759 at 556-57 (1998 ed.). The question for the district court is which action "will most fully serve the needs and convenience of the parties and provide a comprehensive solution of the general conflict. If the declaratory action will provide the more comprehensive solution, the federal court should proceed regardless of the pendency of a state action." Id. at § 2758, 530-33 (citations omitted); United States v. Dep't of Envtl. Resources, 923 F.2d 1071, 1075 (3rd Cir. 1991) (en banc).
For the foregoing reasons, defendants respectfully request that this Court deny plaintiffs' motion to dismiss the complaint and counterclaim. If the Court grants the motion to dismiss, it should order that the dismissal be with prejudice, that plaintiffs pay defendants for their fees and costs in defending this action, and that plaintiffs provide a certified class with notice of the Court's rulings and an opportunity to object.
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Dated: September __, 1999 |
WILSON SONSINI GOODRICH & ROSATI By: _______________________________ Attorneys for Defendants/Counter-Claimants |
1 Rule 41(a)(2) provides:
Except as provided in paragraph (1) of this subdivision of this rule, an action shall not be dismissed at the plaintiff's instance save upon order of the court and upon such terms and conditions as the court deems proper. If a counterclaim has been pleaded by a defendant prior to the service upon the defendant of the plaintiff's motion to dismiss, the action shall not be dismissed against the defendant's objection unless the counterclaim can remain pending for independent adjudication by the court. Unless otherwise specified in the order, a dismissal under this paragraph is without prejudice.
2 See Pace v. Southern Express Co., 409 F.2d 331, 334 (7th Cir. 1969) (denying dismissal where parallel state actions were pending, federal case had been pending one and one-half years, substantial discovery had been undertaken, and defendant successfully briefed a motion for summary judgment; Court agreed that the federal litigation should be "'disposed of in a manner that will protect the defendant against future litigation'" and "'Defendants should not be harassed by multiple suits.'") (citation omitted).
3 Plaintiffs' reliance on Stevenson v. Missouri Pacific R.R. Co., 53 F.R.D. 184, 186 (E.D. Ark. 1971), Pls.' Motion at 5, is misplaced. In granting dismissal of the diversity case with costs, the court noted that there was "no danger of the Circuit Court applying to the case a different body of law than would be applied by this Court". The facts at bar, however, make clear that no state court proceeding could hear the alleged violations of federal securities laws that plaintiffs have asserted in their Complaint. Similarly misplaced is plaintiffs' reliance on Watson v. Clark, 716 F. Supp. 1354, 1356 (D. Nev. 1989), aff'd, 909 F.2d 1490 (9th Cir. 1990). Pls.' Motion at 5. In contrast to that case, defendants have incurred substantial legal fees and costs in defending this federal action, a factor that the Watson court noted would have been an unreasonable burden on defendants. Id.
4 In Kerrin, the plaintiff filed a motion to dismiss so that he could re-file in state court. The defendant objected to plaintiff's forum shopping. The court noted that had principles of removal not been controlling, the court would have granted dismissal only on the conditions that the federal claim be dismissed with prejudice and that plaintiff pay the costs that defendants incurred "since the filing of their petition for removal as a result of plaintiff's manipulation of his pleadings." 100 F.R.D. at 717.
5 See Moreno v. Lo-Vaca Gathering Co., 80 F.R.D. 282 (W.D. Tex. 1978). In Moreno, plaintiffs sought dismissal without prejudice in a purported class action before they sought class certification. The court held that "before a class action can voluntarily be dismissed, it must be treated as a class action even without certification so that unknown members of the class, if it exists, are not prejudiced." Id. at 283 (citing City of Inglewood v. City of Los Angeles, 451 F.2d 948 (9th Cir. 1971).) The court also found that "[a] dismissal at this stage, without certification, may prejudice someone whether the dismissal is with or without prejudice." Id. at 284. The court then ruled, sua sponte, that the representative parties would not fairly and adequately protect the interests of the class; denied class certification; and then dismissed the case with prejudice. See also Beaver Assoc. v. Cannon, 59 F.R.D. 508 (S.D.N.Y. 1973); Gupta v. Penn Jersey Corp., 582 F. Supp. 1058 (E.D. Pa. 1984) (court required notice to class where parties agree to dismissal of class claims at the pre-certification stage.)
6 See also Nagle Indus., Inc. v. Ford Motor Co., 173 F.R.D. 448, 450 (E.D. Mich. 1997), aff'd, No. 97-1449, 1999 WL 447080 (Fed. Cir. June 22, 1999) (refusing to dismiss claims of patent infringement where there was pending a federal counterclaim asserting the patent was invalid, a federal preemption issue was pending, the action had been pending for one and one-half years, defendant had been required to expend time, effort, and expense in defending and a motion for summary judgment was then pending); Planet Ins., 712 F. Supp. at 662 (refusing to dismiss insurance coverage claim without prejudice because counterclaim for bad faith denial of coverage was dependent on coverage issue).
7 Plaintiffs' reliance on Blue Dane Simmental Corp. v. American Simmental Ass'n, 952 F. Supp. 1399, 1408 (D. Neb. 1999), Pls.' Motion at 7, is misplaced for that court declined to exercise supplemental jurisdiction over counterclaims whose "factual issues . . . [were] entirely unrelated to the . . . main claim."
8 In light of this salient fact, plaintiffs' citations to Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942) and Continental Casualty Co. v. Robsac Indus., 947 F.2d 1367 (9th Cir. 1991), overruled on other grounds by Government Employees Ins. Co. v. Dizol, 133 F.3d 1220 (9th Cir. 1998) (en banc), Pls.' Motion at 8, for the proposition that this Court should dismiss the declaratory judgment counterclaim, are mystifying. Continental was a diversity case in which "California law provides the rule of decision for all of the substantive questions." 947 F.2d at 1371. In contrast, Plaintiffs' claims here are federal and arise under this Court's exclusive jurisdiction. 15 U.S.C. § 78aa. Unlike Continental, where "the federal interest [under diversity jurisdiction] is at its nadir," 947 F.2d at 1371, the federal interest in this exclusive jurisdiction case is at its peak.
9 See Conf. Rep. No. 105-803, 105th Cong. 2d Sess. (1998) ("There has also been an increase in parallel litigation between state and federal courts in an apparent effort to avoid the federal discovery stay or other provisions of the Act") (citation omitted); Testimony Concerning the Impact of the Private Sec. Litig. Reform Act of 1995 Before the Senate Subcomm. On Securities Comm. on Banking, Housing, & Urban Affairs, at 15 (July 24, 1997) (testimony of Arthur Levitt, Chairman).
10 See, e.g., Greater Rockford Energy & Tech. Corp. v. Shell Oil Co., 790 F. Supp. 804, 820-21 (C.D. Ill. 1992) (construing plaintiffs' attempt to withdraw their monopolization claims in the wake of defendants' motions for summary judgment as a Rule 41(a)(2) motion and dismissing claims with prejudice), aff'd, 998 F.2d 391 (7th Cir. 1993); Grover v. Eli Lilly and Co., 33 F.3d 716, 718-19 (6th Cir. 1994) (holding dismissal of plaintiff's case should have been with prejudice where defendant litigated for five years and law appeared to dictate a result for the defendant); Hoffman-LaRoche, Inc. v. GenPharm, Inc., No. Civ. 98-1124 (WHW), 1999 WL 366767, at *15 (D.N.J. June 8, 1999) (dismissing plaintiff's claims for patent infringement with prejudice while retaining supplementary jurisdiction over defendant's counterclaims); Selas Corp. v. Wilshire Oil Co., 57 F.R.D. 3, 6 (E.D. Pa. 1972) (dismissing complaint with prejudice where dismissal without prejudice would effectively deprive defendant of counterclaim for malicious prosecution); Technimark, Inc. v. Crellin, Inc., 14 F. Supp. 2d 762, 767 (M.D.N.C. 1998) (dismissing plaintiff's claim of patent infringement with prejudice and counterclaim for patent invalidity without prejudice); Moreno, 80 F.R.D. 282, 284 (where plaintiffs sought dismissal without prejudice and before seeking certification of class, court held that class representatives were inadequate, denied class certification sua sponte and dismissed case with prejudice); Beaver, 59 F.R.D. 508 (same; alleged violations of Section 10(b).)
11 See Bioxy, Inc. v. Birko Corp., 935 F. Supp. 737, 740 (E.D.N.C. 1996) (dismissing plaintiff's infringement claim notwithstanding counterclaim where plaintiff agreed dismissal would be with prejudice; "[A] voluntary dismissal with prejudice acts as an adjudication on the merits with full preclusive effect. Winning a judgment on the merits usually precludes any legal prejudice"); Gutierrez v. Champion Savings Ass'n, 727 F. Supp. 1088, 1089-90 (S.D. Tex. 1989) (dismissing complaint and counterclaim where plaintiff agreed to dismiss federal claims with prejudice; "A dismissal with prejudice is essentially a complete adjudication of the issues presented and is a bar to any further actions between the parties on those issues. It is tantamount to judgment on the merits.")
12 See Webb v. Altec Indus., No. 93 C 5288, 1994 WL 162815, at *2 (N.D. Ill. Apr. 25, 1994) (if a dismissal is without prejudice, "a common condition" is the payment of the other party's fees or costs).
13 See Fleming v. Joy Finance Co., No. Civ. A. 95-3464, 1995 WL 739877, at *2 (E.D. La. Dec. 11, 1995) (ordering plaintiff to pay costs, expenses and attorneys' fees incurred in opposing motion to dismiss); Bishop v. West American Ins. Co., 95 F.R.D. 494, 496 (N.D. Ga. 1982) (ordering plaintiff to pay costs and fees incurred by defendant in removing the action); Cauley v. Wilson, 754 F.2d 769, 772 (7th Cir. 1985) (remanding fee award so that the lower court could obtain more complete documentary evidence in determining reasonable attorneys' fees); Moreno, 80 F.R.D. 282, 284-85 (dismissing with prejudice and awarding all costs); Tyco Lab., Inc. v. Koppers Co., 82 F.R.D. 466, 469 (E.D. Wis. 1979) (ordering plaintiffs' to pay attorneys' fees), aff'd, 627 F.2d 54 (7th Cir. 1980).
See also Unioil, Inc. v. E.F. Hutton & Co., 809 F.2d 548, 554 (9th Cir. 1986), overruled in part on other grounds by In re Keegan Management Co. Sec. Litig., 78 F.3d 431 (9th Cir. 1996). That case involved a motion pursuant to Rule 41(a)(2) for voluntary dismissal of a class action alleging violation of federal anti-trust and securities laws, RICO, and various other California laws. The Ninth Circuit left standing, for lack of jurisdiction, the district court's dismissal without prejudice on condition that defendants be reimbursed $165,774 in costs and expenses, including attorney's fees, that were reasonably incurred in defending the action.
14 The Ninth Circuit has recognized that in determining whether to exercise jurisdiction over a claim for declaratory relief, the "Brillhart factors remain the philosophic touchstone for the district court." Government Employees, 133 F.3d 1220, 1225.
15 Because the district court in Brillhart never addressed certain issues under state law, the Supreme Court found itself forced "to find [its] way through a maze of local statutes and decisions. . . . For one thing, it is too easy to lose our way." The Court found this task inappropriate given "the limitations inherent in [its] appellate jurisdiction." 316 U.S. at 497. Retaining jurisdiction here imposes no such risk.
16 See also Toombs v. Leone, 777 F.2d 465, 470 (9th Cir. 1985); Schwarzschild v. Tse, [1992-1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,291 (N.D. Cal. Dec. 9, 1992); In re Victor Tech. Sec. Litig., [1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 93,158, at 93,158-59 (N.D. Cal. 1987); In re Activision Sec. Litig., 621 F. Supp. 415, 422 (N.D. Cal. 1985).
17 See Snodgrass v. Provident Life and Accident Ins. Co., 147 F.3d 1163, 1167 (9th Cir. 1998) ("On several occasions, we have affirmed the district court's decision to exercise jurisdiction under the Declaratory Judgment Act where the dismissal of claims for declaratory relief 'would not have saved the district court from having to adjudicate the controversy and deal with state law issues'") (citing St. Paul Fire & Marine Ins. Co. v. F.H., 117 F.3d 435, 438 (9th Cir. 1997), overruled on other grounds by Government Employees, 133 F.3d 1220); Government Employees, 133 F.3d at 1225 ("If a federal court is required to determine major issues of state law because of the existence of non-discretionary claims, the declaratory action should be retained to avoid piecemeal litigation").