This matter involves the Federal Arbitration Act, ("
In March 2019, nearly five months after a related case had been filed in California state court, Plaintiff DePuy Synthes Sales, Inc. ("DePuy") filed two petitions in this Court to compel arbitration against Defendants OrthoLA, Inc. ("OrthoLA") and Bruce A. Cavarno (collectively, "Defendants") and to enjoin them from proceeding with their California state court action under the Anti-Injunction Act. [Filing No. 1; Filing No. 53.] On July 12, 2019, this Court consolidated the two related cases under this cause number after finding that the two cases involve common questions of law and fact. [Filing No. 52.] Prior to consolidation, Defendants had filed three sets of nearly identical Motions in the two cases, each of which is presently pending before the Court, including: two Motions to Dismiss pursuant to the Colorado River Abstention Doctrine, and Sections 12(b)(1) and 12(b)(2) of the Federal Rules of Civil Procedure, [Filing No. 29; Filing No. 54]; two Motions for Judicial Notice, [Filing No. 45; Filing No. 60]; and two Motions to Strike portions of a reply brief, [Filing No. 46; Filing No. 61]. All of the pending Motions are fully briefed and are ready for the Court's review.
The Court will first consider the Motions for Judicial Notice. Next, the Court will take up the Motions to Dismiss. Lastly, the Court will consider the Motions to Strike.
In their unopposed Motions for Judicial Notice, Defendants request that the Court take judicial notice of two categories of documents: (1) "the court docket reflecting the actions in Los Angeles Superior Court, Case No. 18STCV02833," [Filing No. 45 at 2; Filing No. 60 at 2], and (2) documents related to the two separate cases that were then pending before this Court, and have since been consolidated, [Filing No. 45 at 2-3 (originally filed under this cause number, arguing in favor of judicial notice for documents filed under 1:19-cv-1069-JMS-DLP); Filing No. 60 at 2-3 (originally filed under cause number 1:19-cv-1069-JMS-DLP, arguing in favor of judicial notice of documents filed under this cause number)].
As to the first category, Federal Rule of Evidence Rule 201(b) provides that a court may take judicial notice of a fact that is "not subject to reasonable dispute" because it: "(1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." It is well settled that orders entered by a state court "are public records and appropriate subjects of judicial notice." In the Matter of Lisse, 905 F.3d 495, 496 (7th Cir. 2018) (citing Menominee Indian Tribe v. Thompson, 161 F.3d 449, 456 (7th Cir. 1998); Fed. R. Evid. 901(b)(7)). Therefore, Defendants' Motions, [Filing No. 45; Filing No. 60], are
As to the second group of documents, Defendants seek judicial notice of documents that have — for the most part — already been transferred onto the docket for this cause number. To the extent such documents have already been transferred, Defendants' Motions are
In support of their Motions to Dismiss, Defendants raise both jurisdictional and substantive arguments. But "[d]eciding any part of the merits [of a case] . . . is
Under both subsets of Rule 12, courts look beyond the complaint's allegations and view whatever evidence has been submitted on the issue to determine whether subject matter jurisdiction and personal jurisdiction exist. See Ciarpaglini v. Norwood, 817 F.3d 541, 543 (7th Cir. 2016) (discussing subject matter jurisdiction); Purdue Research Found. v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003) (discussing personal jurisdiction). As such, the Court will first set forth the relevant background of the case consistent with the standards set forth below for Federal Rule of Civil Procedure 12(b)(1) and 12(b)(2). Next the Court will consider Defendants' jurisdictional arguments, first those relating to subject matter jurisdiction, then those related to personal jurisdiction.
DePuy manufactures, markets, and sells medical implants and instruments, including joint reconstruction products. [Filing No. 1 at 2.] DePuy's joint reconstruction product line is sold, marketed, and distributed through exclusive distributors who are assigned to specific sales territories in certain geographic areas. [Filing No. 1 at 2.]
In 2008, DePuy entered into a Sales Representative Agreement ("
Most recently, on November 30, 2015, DePuy, OrthoLA, and Mr. Cavarno signed a Sales Agreement appointing OrthoLA as DePuy's "exclusive sales representative" in a territory consisting of several counties in southern California for the "solicitation of orders for Products from hospitals, medical centers, trauma centers, outpatient facilities and orthopaedic (sic) surgeons." [Filing No. 30-2 at 1; Filing No. 30-2 at 22.]
The Sales Agreement contains a clause (the "
[Filing No. 30-2 at 18-19.]
DePuy, OrthoLA and Mr. Cavarno also entered into a Continuing Incoming Agreement (the "
The parties attempted to renegotiate the Sales Agreement in late 2017 but were unsuccessful and the Sales Agreement lapsed on January 7, 2018.
Notwithstanding the existence of the Income Agreement, DePuy did not make any continuing income payments to Mr. Cavarno or OrthoLA because DePuy concluded that they had engaged in competitive activities
On October 25, 2018, OrthoLA and Mr. Cavarno filed suit in the Los Angeles Superior Court (the "
On December 5, 2018, DePuy filed a motion in the California suit seeking an order compelling OrthoLA and Mr. Cavarno to arbitrate their claims against DePuy and staying the California Suit. [Filing No. 30-6 at 8.] On February 14, 2019, the Los Angeles County Superior Court denied DePuy's Motion, finding the following:
On March 15, 2019, DePuy appealed the Los Angeles County Superior Court Order Denying Motion to Compel for Order Compelling Arbitration and Staying Action Pending Arbitration. [Filing No. 30-8.] That appeal remains pending.
The same day it filed an appeal in the California suit, DePuy filed a demand for arbitration with the American Arbitration Association in Indianapolis, Indiana listing Mr. Cavarno and OrthoLA as respondents. [Filing No. 30-9 at 4.] In its demand for arbitration, DePuy: (1) sought "a declaration that the actions taken by both DePuy. . . and the GSO Parties, as [DePuy's] designee," in connection with the termination
On March 18, 2019, DePuy filed a Petition to Compel Arbitration against OrthoLA, Inc. and Bruce A. Cavarno and to enjoin them from proceeding with their California state court action under the Anti-Injunction Act. [Filing No. 1.] DePuy's petition referenced the Income Agreement. [Filing No. 1 at 1.] The same day, under cause number 1:19-cv-1069, DePuy filed a Petition to Compel Arbitration against the same Defendants and to enjoin them from proceeding with their California state court action under the Anti-Injunction Act pursuant to the Sales Agreement. [Filing No. 53.]
On July 12, 2019, this Court found that that consolidation was appropriate under Rule 42(a) and consolidated DePuy's two cases before this Court into the instant case, in which the two Motions to Dismiss are now pending. [Filing No. 30; Filing No. 54.]
Federal Rule of Civil Procedure 12(b)(1) "allows a party to move to dismiss a claim for lack of subject matter jurisdiction." Hallinan v. Fraternal Order of Police of Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). The purpose of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) is to test the sufficiency of the complaint, not to decide the merits of the case. Rule 12(b)(1) requires dismissal of claims over which the federal court lacks subject-matter jurisdiction. Jurisdiction is the "power to decide," Boley v. Colvin, 761 F.3d 803, 805 (7th Cir. 2014), and federal courts may only decide claims that fall within both a statutory grant of authority and the Constitution's limits on the judiciary. In re Chicago, R.I. & P.R. Co., 794 F.2d 1182, 1188 (7th Cir. 1986).
While a court deciding a Rule 12(b)(1) motion may accept the truth of the allegations in the complaint, it should look beyond the complaint's jurisdictional allegations and view whatever evidence has been submitted on the issue to determine whether subject matter jurisdiction exists. Ciarpaglini, 817 F.3d at 543. The party asserting the existence of subject matter jurisdiction bears the burden of demonstrating by competent proof that such jurisdiction in fact exists. See Thomson v. Gaskill, 315 U.S. 442, 446, 62 S.Ct. 673, 86 S.Ct. 951 (1942); see also Silha v. ACT, Inc., 807 F.3d 169, 174 (7th Cir. 2015). A Rule 12(b)(1) motion may be raised at any time, by either party or by the Court sua sponte. See Fed. R. Civ. P. 12(h).
Defendants argue that this Court lacks subject matter jurisdiction because the FAA "does not create an independent basis for federal question jurisdiction." [Filing No. 30 at 14.] Instead, Defendants argue that the FAA only grants subject matter jurisdiction to a "United States district court which, save for such agreement,
In response, DePuy contends that the GSO Defendants "are neither necessary nor indispensable to" the Court's determination of "whether to grant the Petition and compel arbitration of Defendants' claims against DePuy Synthes pursuant to the [Income Agreement's] arbitration clause." [Filing No. 39 at 14.] Specifically, DePuy argues that the GSO Defendants are neither signatories to the Income Agreement or the Sales Agreement, nor subject to the arbitration clause at issue, and "have no interest" in the litigation of Defendants' claims against DePuy. [Filing No. 39 at 13; Filing No. 55 at 13.]
In their reply brief, Defendants argue that "DePuy misleadingly states that the `only issue' before this Court is DePuy's claims, even though the arbitration which DePuy initiated explicitly seeks damages and declaratory relief on behalf of . . . the `GSO [Defendants].'" [Filing No. 44 at 2.]
Helpful to any consideration of the FAA and jurisdiction is Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., in which the Supreme Court stated that
460 U.S. 1, 26 n.32, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (citations omitted). Therefore, the Court's starting point is to determine the basis of jurisdiction.
DePuy does not argue that the FAA creates an independent basis for federal question jurisdiction, and instead argues that diversity jurisdiction exists. On this point, both parties cite Rule 19 of the Federal Rules of Civil Procedure
Davis also instructs that to answer the first question, the Court must consider "(1) whether complete relief can be accorded without joinder, (2) whether [the GSO Defendants'] ability to protect [their] interest will be impaired, and (3) whether the existing parties will be subjected to a substantial risk of multiple or inconsistent obligations unless [they are] joined." Id. at 481.
In support of their respective positions, both parties point to the opposing party's actions. For example, Mr. Cavarno and OrthoLA point out that DePuy "cannot seriously contend that the GSO Defendants are not indispensable" given that DePuy previously urged the Los Angeles County Superior Court to stay the claims against the GSO Defendants because the claims were "so inextricably connected." [Filing No. 30 at 16.] DePuy, on the other hand, argues that Mr. Cavarno and Ortho-LA conceded that the GSO Defendants are not necessary and indispensable parties in their consolidated opposition to DePuy's Petition in this Court by urging the Court to limit its order to parties subject to the arbitration clauses. [Filing No. 39 at 15.]
The Court's finding on this point is based, not upon any concession made by the parties, but rather on an application of Rule 19 and upon case law interpreting the FAA, which supports a finding that the GSO Defendants are not necessary parties such that diversity jurisdiction is destroyed.
"Under 9 U.S.C § 4, a district court may compel arbitration if that court `would have jurisdiction ... of the subject matter of a suit arising out of the controversy between the parties.'" We Care Hair Dev., Inc. v. Engen, 180 F.3d 838, 842 (7th Cir. 1999). Several courts have examined the issue of just who "the parties" are under this provision, because that determination impacts diversity jurisdiction. The Seventh Circuit Court has tackled this question and determined that "the parties" referenced in 9 U.S.C. § 4 of the FAA "include[s] the parties to the petition to compel arbitration and not the parties named in the parallel state court proceeding." Id. at 842; see also Hughes Masonry Co. v. Greater Clark Cty. Sch. Bldg. Corp., 659 F.2d 836, 839 n.4 (7th Cir. 1981) (holding that a contract assignee is only a necessary party to a contractual arbitration if the assignee's improper acts were integrally related to the contract, such as torts committed outside of the assignee's authority). However, the Court must go a step further to determine whether the GSO Defendants should be added to this action as "parties" on the theory that they are indispensable parties. For this determination, the Court looks to the elements of Rule 19(a).
The first element of Rule 19(a) that the Court must consider is whether, in the absence of the GSO Defendants, the court can accord complete relief among existing parties. Based upon the Seventh Circuit's reasoning in We Care, in order to determine whether "complete relief" can be accorded to the parties in this matter, the Court looks to the parties named in this suit to compel arbitration, and not the parties named in the California Suit. Therefore, the Court must consider whether complete relief can be accorded to DePuy without the joinder of the GSO Defendants. Fed. Rule Civ. P. 19(a)(1); see Perrian v. O'Grady, 958 F.2d 192, 196 (7th Cir. 1992) ("[T]he term `complete relief' refers only to `relief between the persons already parties, and not as between a party
The second element the Court must consider under Rule 19(a) is whether the GSO Defendants claim "an interest relating to the subject of the action.," and if so, will the absence of the GSO Defendants "impair or impede [their] ability to protect the interest" or "leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest." Fed. R. Civ. P. 19(a)(1)(B). As noted above, when analyzing the addition of a party under Rule 19(a) in the context of a lawsuit to compel arbitration, the Court looks to the petition to compel arbitration and not the parallel state court proceeding. We Care Hair Dev., Inc. v. Engen, 180 F.3d 838, 842 (7th Cir. 1999). Therefore, the Court must consider whether the GSO Defendants claim an interest relating to the petition to compel. It is undisputed that the GSO Defendants are not parties to the Income Agreement nor the Sales Agreement, and they are therefore not bound by the arbitration clauses contained in those agreements. Consequently, they do not claim an interest relating to the subject matter of this action. See Estate of Eiteljorg ex rel. Eiteljorg v. Eiteljorg, 813 F.Supp.2d 1069, 1082 (S.D. Ind. 2011) ("[T]he Seventh Circuit recognizes that being bound by or interested in result of pending litigation does not make a party one that is `required' to be joined under Rule 19(a)(1)."). The GSO Defendants' interests can and will be litigated in the California Suit. At issue before this Court is only a determination as to whether to compel arbitration between DePuy, Ortho-LA, and Mr. Cavarno, and the GSO Defendants are not necessary to this determination. As such, Defendants' Motions to Dismiss based on Federal Rule of Civil Procedure 12(b)(1) are
When a defendant moves to dismiss a complaint under Federal Rule of Civil Procedure 12(b)(2), "[t]he plaintiff bears the burden of showing that personal jurisdiction over the defendant exists." Claus v. Mize, 317 F.3d 725, 727 (7th Cir. 2003). When, as here, the Court "rules on a defendant's motion to dismiss based on the submission of written materials, without the benefit of an evidentiary hearing... the plaintiff `need only make out a prima facie case of personal jurisdiction.'" Purdue Research, 338 F.3d at 782 (quoting Hyatt Int'l. Corp. v. Coco, 302 F.3d 707, 713 (7th Cir. 2002)). Accordingly, "[o]nce the defendant has submitted affidavits or other evidence in opposition to the exercise of jurisdiction, the plaintiff must go beyond the pleadings and submit affirmative evidence supporting the exercise of jurisdiction." Id. at 782-83. Factual disputes, however, are resolved in the plaintiff's favor. Id.
"The federal constitutional limits of a court's personal jurisdiction in a diversity case are found in the Fourteenth Amendment's due-process clause." Id. "[F]ederal constitutional law draws a sharp and vital distinction between two types of personal jurisdiction: specific or case-linked jurisdiction, and general or all-purpose jurisdiction." Abelesz v. OTP Bank, 692 F.3d 638, 654 (7th Cir. 2012). "If the defendant's contacts are so extensive that it is subject to general personal jurisdiction, then it can be sued in the forum state for any cause of action arising in any place. More limited contacts may subject the defendant only to specific personal jurisdiction, in which case the plaintiff must show that its claims against the defendant arise out of the defendant's constitutionally sufficient contacts with the state." uBID, Inc. v. GoDaddy Group, Inc., 623 F.3d 421, 425 (7th Cir. 2010).
Defendants argue that neither general nor specific personal jurisdiction applies to them. [Filing No. 30 at 18.] First, Defendants contend that "[g]eneral jurisdiction does not exist here" because "[o]ther than their dealings with DePuy, neither Defendant has any meaningful contacts with the state of Indiana." [Filing No. 30 at 18.] Second, Defendants argue that specific jurisdiction is lacking because "there was no reason for Defendants to contemplate being hauled into an Indiana court" and the existence of the choice of law provision and the arbitration clause are insufficient to establish minimum contacts. [Filing No. 30 at 19.]
In response, DePuy concedes that general jurisdiction does not exist over Defendants. [Filing No. 39 at 22.] However, DePuy contends that "courts within the Seventh Circuit, including this very District, have held that, in an action to compel arbitration, a party's agreement to arbitrate in a particular jurisdiction constitutes consent to personal jurisdiction for the purpose of enforcing an arbitration agreement." [Filing No. 39 at 22.] In addition, DePuy argues that the cases upon which Defendants rely are inapplicable to this case because they were not actions seeking to compel arbitration. [Filing No. 39 at 25.]
In their reply brief, Defendants contend that "the arbitration clauses explicitly provide that only a court `with jurisdiction' can enforce the arbitration clause" and that "Defendants cannot be said to have impliedly consented to the jurisdiction of this Court where the arbitration clauses explicitly provide that only a court `with jurisdiction' can enforce the arbitration clauses." [Filing No. 44 at 10.]
Defendants rely upon two cases in support of their argument that the arbitration clause is insufficient to establish personal jurisdiction, each of which is easily distinguishable from this case. First, Defendants point to United Fin. Mortg. Corp. v. Bayshores Funding Corp., in which a group of removing defendants argued that personal
Similarly, Eclipse Aerospace, Inc. v. Star 7, LLC involved a suit for "breach of contract and tortious interference with prospective economic advantage under Illinois state law." 2016 WL 901297, at *1 (N.D. Ill. Mar. 3, 2016). Although a contract existed between the parties in which they agreed that any arbitration would take place in Illinois, "[f]or reasons that they have not revealed, the parties ... agreed to waive the arbitration provision." Id. at *2 n.2. Here again, the United States District Court for the Northern District of Illinois rejected the argument that "a defendant who agrees to arbitrate in a particular forum also consents to litigate in that forum." Id. at *8. The ruling makes complete sense given the parties' waiver of their arbitration agreement.
As DePuy correctly points out, the matter before the Court is distinguishable from both United Financial and Eclipse in that it is not an action seeking, for example, to litigate claims for breach of contract with mutual waiver of an arbitration provision. Rather, DePuy brought this action seeking to compel arbitration in the forum set forth in the Agreements. Defendants do not address this issue in their reply brief and indeed, Defendants "concede that many federal courts have held that where a party agrees to arbitrate in a particular jurisdiction, courts of that jurisdiction may exercise personal jurisdiction for the limited purpose of compelling arbitration." [Filing No. 44 at 14.] Instead, Defendants point to the language of the Arbitration Clauses in the Agreements, which they contend "explicitly states that a court `with jurisdiction' shall enforce the arbitration clause[s]." [Filing No. 44 at 14.] The Court is not persuaded by Defendants' circular argument on this point. Instead, the Court finds that the because the parties agreed to arbitrate any claims or controversies in Indianapolis, Indiana, [Filing No. 30-2 at 18-19], this Court has personal jurisdiction over the action to compel said arbitration. Accord Sterling Const. Corp. v. SOS Const. & Roofing, Inc., 2015 WL 2189588, at *2 (N.D. Ind. May 11, 2015) (finding that where a "forum selection clause addresses the forum for arbitration and [plaintiff] has moved to compel arbitration in that forum," arbitration "in accordance with the forum selection clause" was proper, notwithstanding a challenge to personal jurisdiction); see also St. Paul Fire & Marine Ins. Co. v. Courtney Enters., 270 F.3d 621, 624 (8th Cir. 2001) ("if the court in the selected forum [of an arbitration agreement] did not have personal jurisdiction to compel arbitration, the agreement to arbitrate would be effectively unenforceable").
Accordingly, Defendants' Motions to Dismiss based on Federal Rule of Civil Procedure 12(b)(2) are
"Federal courts have a `virtually unflagging obligation' to exercise the
To determine whether a stay or dismissal under Colorado River is appropriate, "a district court must first evaluate whether the federal and state cases are parallel." Huon, 657 F.3d at 646 (citing Adkins v. VIM Recycling, Inc., 644 F.3d 483, 498 (7th Cir. 2011)). Two suits are parallel when there is a "substantial likelihood that the state litigation will dispose of all claims presented in the federal case." Adkins, 644 F.3d at 499 (citation omitted). If there is any doubt that cases are parallel, a district court should not abstain. Huon, 657 F.3d at 646.
If, however, "it is established that the suits are parallel, the court must consider a number of non-exclusive factors that might demonstrate the existence of `exceptional circumstances.'" Clark v. Lacy, 376 F.3d 682, 685 (7th Cir. 2004). These factors are
Id. at 685.
In support of their Motions, Defendants argue that "the Court should conclude that the California Action is completely parallel to this action" because "[w]hether or not the dispute between DePuy and Defendants is arbitrable was already litigated before the trial court [in] California and will be addressed by the California Court of Appeal." [Filing No. 30 at 9.] Further, Defendants argue that under the second step in a Colorado River analysis, "seven out of the ten Colorado River factors weigh in favor of abstention." [Filing No. 30 at 9.] Specifically, Defendants contend that the inconvenience to them is "dramatic" as they are located in California, [Filing No. 30 at 10], the risk of piecemeal litigation is high as DePuy is forcing them to litigate in five different forums, [Filing No. 30 at 10], the California Suit was filed prior to DePuy's Complaints in this Court, [Filing No. 30 at 10-11], California law applies to the dispute, [Filing No. 30 at 11], several motions have already been filed and heard in the California Suit and discovery has already commenced, whereas "nothing has happened before this Court other than the instant petition," [Filing No. 30 at 11], "[s]tate courts are required to apply the FAA where it is applicable," [Filing No. 30 at 12], and DePuy
In response, DePuy contends that a "balancing of the ten Colorado River factors mandates the exercise of federal jurisdiction in this matter." [Filing No. 39 at 27.] DePuy first argues that neutral factors "militate against abstention." [Filing No. 39 at 28 (citation omitted).] DePuy further argues that the Arbitration Clauses constitute a waiver of Defendants' argument that Indiana is an inconvenient forum. [Filing No. 39 at 29.] Third, DePuy argues that "there is no risk of piecemeal litigation here" and that any "piecemeal litigation is a direct result of Defendants' efforts to avoid the arbitration clause and sue non-parties to the contract." [Filing No. 39 at 30.] In addition, DePuy argues that "in the arbitration context, the order in which jurisdiction was obtained is virtually meaningless because a party seeking to compel arbitration of claims brought by the opposing party in state court simply does not know of the opposing party's refusal to arbitrate until the opposing party files its state court action." [Filing No. 39 at 31.] Further, DePuy contends that "the governing law the Court must apply in enforcing the [Income Agreement's] arbitration clause is the FAA, a federal statute," and that under the Income Agreement's "choice-of-law clause, Indiana is the substantive law that governs the contract, which further favors the exercise of jurisdiction by an Indiana federal court." [Filing No. 39 at 31-32.] In addition, DePuy argues that "the California state court's refusal to compel arbitration favors exercising jurisdiction." [Filing No. 39 at 32.] DePuy contends that the progress of the California Suit also weighs in favor of an exercise of jurisdiction because the state court's ruling on arbitration is not a final order. [Filing No. 39 at 33-34.] Further, DePuy argues that the FAA "provides the governing law and expresses a preference for federal litigation" in this matter. [Filing No. 39 at 34.] Regarding the ninth factor, DePuy argues that the presence of the GSO Defendants makes removal of the California Suit impossible. [Filing No. 39 at 34.] Lastly, DePuy argues that bringing this petition "is neither vexatious nor contrived." [Filing No. 39 at 34-35.]
In their reply brief, Defendants argue that "Federal courts, including this Court, have been unflinching in abstaining from exercising jurisdiction where the complainant files a federal action because it is dissatisfied with the state court action." [Filing No. 44 at 3.] Defendants argue that they have not waived arguments about inconvenience to the parties by entering into the Agreements and, in any case, "the California Superior Court has already held that the arbitration clauses are unconscionable and unenforceable." [Filing No. 44 at 6.] Defendants reiterate their argument that there is the risk of piecemeal litigation, arguing that "exactly the same issue" that is "currently being litigated in California" is at issue in the arbitration that DePuy seeks. [Filing No. 44 at 6.] Defendants further argue that "[f]or DePuy to suggest that the Federal Actions and the California Action are on equal tracks is not genuine" and that the California Suit continues to be litigated despite this action. [Filing No. 44 at 8.] And lastly, Defendants reiterate that DePuy waited until after it lost its motion to compel in the California Suit. [Filing No. 44 at 9.]
Prior to engaging in the two-step Colorado River analysis, the Court acknowledges something that the parties do not — as the Seventh Circuit recently explained in Adkins, "[w]hen abstention is appropriate under Colorado River, our circuit
Adkins, 644 F.3d at 503 n.9.
Despite prolific briefing, the parties do not engage in any meaningful discussion as to whether this Court should consider Colorado River abstention to stay or dismiss this case. Defendants styled each of their Motions as a "Motion to Dismiss For Lack of Jurisdiction," [Filing No. 29; Filing No. 54], but argue throughout their brief in support thereof that "[t]his Court should... dismiss or stay the Federal Petitions under the Colorado River Abstention Doctrine," [Filing No. 30 at 9]. DePuy, on the other hand, merely argues that abstention would be improper, but draws no distinction between dismissal and stay for Colorado River purposes. [Filing No. 39 at 25.]
Given the Seventh Circuit's strong preference for stay rather than dismissal, the Court conducts its Colorado River analysis in order to consider whether to stay this action, not to dismiss it.
Turning to the first step in the Colorado River analysis, the Court finds that the California Suit and this case are parallel. See Huon, 657 F.3d at 646 (The critical question is whether there is a substantial likelihood that the state litigation will dispose of all claims presented in the federal case) (citations and quotation omitted). DePuy argues that there is no state proceeding addressing the Sales Agreement, [Filing No. 39 at 27], but "the suits involve the same parties, arise out of the same facts and raise similar factual and legal issues," Tyrer v. City of S. Beloit, Ill., 456 F.3d 744, 752 (7th Cir. 2006), and therefore the Court finds that the two are parallel for the purposes of a Colorado River analysis.
The Seventh Circuit has also explained that "[o]ne important factor [in determining whether the cases are parallel] is whether both cases would be resolved by examining largely the same evidence." Baek, 886 F.3d at 666 (citation and quotation omitted). The similarity of evidence in resolving disputes involving the Sales Agreement and the Income Agreement is dramatically illustrated in this case by the two nearly identical petitions DePuy filed in the two cases that were consolidated into this one. [Compare Filing No. 1 with Filing No. 53; see also Filing No. 52 at 4 (in which the Court noted that "[e]ven a cursory glance at the nearly-identical Petitions, Motions to Dismiss, and Responses thereto reveals the extent to which the two matters involve common questions of law and fact")].
Moving then to the second step, the Colorado River factors provide the Court with discretion and flexibility; "there is no mechanical formula by which to determine when a stay is appropriate." Clark, 376 F.3d at 687 (quoting Schneider Nat'l Carriers, Inc. v. Carr, 903 F.2d 1154, 1157 (7th Cir. 1990)).
The Seventh Circuit has stated that "because of the presumption against
There is one neutral factor which insubstantially weighs in favor of exercising jurisdiction, as it is undisputed that the first factor is not at issue because this case does not involve jurisdiction over property.
"The ninth factor intends to prevent a federal court from hearing claims that are closely related to state proceedings that cannot be removed." Freed v. J.P. Morgan Chase Bank, N.A., 756 F.3d 1013, 1023 (7th Cir. 2014). The Court agrees with DePuy that the California Suit could not be removed to Federal court due to a lack of diversity. However, the Seventh Circuit has also recognized that where, as here, the state court case contains diverse and non-diverse parties "diverse parties are less likely to be prejudiced by the bias of an out-of-state court when their interests are closely aligned with non-diverse parties." Day v. Union Mines Inc., 862 F.2d 652, 660 (7th Cir. 1988). In other words, under the logic set forth in Day, because Defendants' claims against DePuy and the GSO Defendants in the California Suit are closely related, the likelihood of DePuy being prejudiced by any bias the California Court may have against it should be mitigated by the presence of the GSO Defendants. Accordingly, although the ninth factor weighs against dismissal, the Court does not give great weight to this factor.
The second Colorado River factor — the inconvenience of the federal forum — is a close call, but the Court gives a slight edge to Defendants' argument that the factor weighs in favor of a stay. The parties argue about whether inconvenience is overcome by the presence of a forum selection clause where the validity of the clause itself is in dispute. Neither party points to any mandatory authority on this point and the Court's independent research has revealed none. In AAR, the Seventh Circuit rejected a party's argument that a forum selection clause barred an abstention claim altogether, noting that "an abstention motion is not the same as an objection to venue on grounds of inconvenience, and inconvenience to the parties is only one of the many factors that a district court weighs in deciding whether to abstain" but found that the district court should have weighed the clause in its convenience analysis. 250 F.3d at 523. Here, the Court cannot ignore the existence of the arbitration clause, but nor can the Court ignore the parties' underlying arguments about the clause's validity. Accordingly, the Court assigns little weight to this factor. Ultimately, the Court finds persuasive Defendants' argument, unacknowledged by DePuy, that the relevant witnesses, including the GSO Defendants and sales representatives, are located in California. As such the Court finds that this factor favors abstention, albeit insignificantly.
In addition, the risk of piecemeal litigation in this matter is great. The Seventh Circuit has stated that "the danger of piecemeal litigation does not turn on formal
In addition, the court finds that the fourth Colorado River factor — the order in which jurisdiction was obtained by the concurrent forums — also favors abstention. Despite the undisputed fact that the California
The governing law factor also weighs in favor of abstention. DePuy cites out-of-circuit authority for the proposition that the under the FAA, federal law governs this Court's decision in this matter. [Filing No. 39 at 31.] DePuy's argument, however, ignores the fact that the validity of the Arbitration Clauses themselves are at issue and, indeed, have been invalidated in the California Suit. Contrary to DePuy's argument, state law regarding contract formation governs this issue. See PCH Lab Servs., LLC v. Newman Mem'l Hosp. Inc., 2018 WL 1378181, at *5 (N.D. Ill. Mar. 16, 2018) (citing First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995) for the proposition "that when deciding whether parties agreed to arbitrate a claim, courts generally should apply state law regarding contract formation"); see also Moses H. Cone, 460 U.S. at 25, 103 S.Ct. 927 ("To be sure, the source-of-law factor has less significance here ... since the federal courts' jurisdiction to enforce the Arbitration Act is concurrent with that of the state courts"). It is true that the parties dispute whether Indiana or California law governs the determination of whether the Arbitration Clauses are valid. But this distinction does not ultimately affect the Court's finding under this factor. If California law applies, this factor clearly weighs in favor of abstention. Freed, 756 F.3d at 1022 ("a state court's expertise in applying its own law favors a Colorado River stay"). But even if Indiana law governs, the fact remains that state law will govern this suit and, as such, this factor weighs in favor of abstention. See Bci Acrylic Bath Sys., Inc. v. Chameleon Power, Inc., 2016 WL 2987006, at *4 (N.D. Ill. May 24, 2016) ("The court need not resolve the choice-of-law issue because this factor weighs against abstention regardless of which side is right, as state law rather than federal law will govern this suit").
The sixth factor, the adequacy of state court action to protect the federal plaintiff's rights, also weighs in favor of abstention. DePuy has offered no evidence other than the California court ruling in favor of Defendants to suggest that the California court is prejudiced against it. This, however, is not enough to show bias. AXA Corp. Sols. v. Underwriters Reinsurance Corp., 347 F.3d 272, 280 (7th Cir. 2003) (disavowing an insinuation that a state court will
The Court need not belabor seventh or eighth Colorado River factors. The seventh factor weighs easily in favor of abstention, as the California Suit is significantly further along than this case. This was true when DePuy filed this case, and it remains true today.
Further, the eighth Colorado River factor also favors abstention as the FAA "provides concurrent jurisdiction to states to enforce arbitration agreements." Zurich Am. Ins. Co. v. Superior Court for State of California, 326 F.3d 816, 826 (7th Cir. 2003).
The tenth Colorado River factor — the vexatious or contrived nature of the federal claim — weighs most heavily in favor of abstention. DePuy vehemently denies that by filing this case, it seeks a second opportunity to pursue the validity of the arbitration clause. But the timeline of events in this matter cannot be denied. On October 25, 2018, OrthoLA and Mr. Cavarno filed the California Suit, on December 5, 2018, DePuy filed a motion to compel arbitration in the California Suit, on March 15, 2019, DePuy appealed the California court's denial of its Motion, and on March 18, 2019, DePuy filed this suit. This timeline supports a conclusion that this suit was an effort by DePuy to circumvent the California court's denial of its motion to compel arbitration and to get a second bite at the apple. See Baek, 886 F.3d at 667 (finding that "the vexatious nature of the federal claim supports abstention" where a party attempted to file a untimely claim in state court and one month later filed an identical action in federal court, and stating that "[c]learly, this was an effort to try to circumvent the [state court's] long-past deadline and get a second bite at the apple"). DePuy attempts to distinguish this case from others on factual grounds and notes that "[f]ar from seeking a second bite at the apple," it "simply seeks to vindicate its federally-protected right to arbitration." [Filing No. 39 at 35.] This argument may have had merit if DePuy had not chosen to seek to compel arbitration in the California Suit. By doing so, and filing this case only when that effort had been frustrated, DePuy negated its argument that "it is imperative for this Court to act" without delay, as well as its argument that this suit is not vexatious or contrived. The Court finds that the tenth Colorado River factor strongly favors abstention.
In sum, having determined that numerous factors favor abstention under Colorado River, the Court
In its Motions to Strike, Defendants argue that "DePuy's Reply argues, for the first time, that the parties' agreements incorporate the American Arbitration Association Rules (the "AAA Rules") and that Rule 7(a) of the AAA Rules empowers the arbitrator to rule on his or her own jurisdiction," and that since Defendants never had the opportunity to address this issue, ... DePuy's argument should be stricken." [Filing No. 46 at 2; Filing No. 61 at 2.]
Given the Court's stay of this case, Defendants' Motions to Strike are
Writing for a unanimous Court in Ruhrgas AG v. Marathon Oil Company, Justice Ginsburg wrote that, "[m]ost essentially, federal and state courts are complementary systems for administering justice in our Nation. Cooperation and comity, not competition and conflict, are essential to the federal design." 526 U.S. 574, 586, 119 S.Ct. 1563, 143 L.Ed.2d 760 (1999). In this case, competition and conflict will not carry the day, as this case presents exceptional circumstances under which the Colorado River factors favor abstention.
For the reasons set forth herein, Defendants' Motions to Dismiss [29] [54] are
Defendants' Motions for Judicial Notice [45] [60] are
Defendants' Motions to Strike [46] [61] are
Fed. R. Civ. P. 19.
