JUAN R. SÁNCHEZ, J.
Plaintiff SupplyOne, Inc. (SupplyOne), brings this action against Defendants Triad Packaging, Inc. (Triad), Louis Wetmore, and Durham Box Company (Durham), alleging the Defendants breached an Asset Purchase Agreement (APA) by failing to indemnify SupplyOne for attorneys' fees and costs it incurred as a result of Defendants' previous breaches of the same APA. The underlying APA breaches were litigated to final judgment in the United States District Court for the Western District of North Carolina. See Triad Packaging, Inc. and Louis Wetmore v. SupplyOne, Inc., v. Durham Box Co., No. 10-CV-005 (W.D.N.C. Jan. 28, 2010) (North Carolina Action). Defendants in this action have moved to dismiss the Amended Complaint (Complaint). Because this Court finds res judicata applies to bar SupplyOne's breach of contract claim, it will grant Defendants' motion to dismiss.
SupplyOne, Triad, Durham, and Wetmore (the president and majority shareholder of Triad and Durham) entered into the APA on October 8, 2008. In the APA, SupplyOne agreed to purchase the assets of Triad and Durham. In December 2009, Defendants sued SupplyOne in North Carolina state court alleging SupplyOne had breached the APA and asserting various tort-based claims related to the APA. After removing the action to federal court, SupplyOne counterclaimed, alleging Defendants had breached the APA, "damaged SupplyOne in an amount in excess of $500,000—and forced SupplyOne to incur attorneys' fees related to this lawsuit." Defs.' Mot. to Dismiss Ex. 4, at 25 (SupplyOne's counterclaim). The counterclaim also alleged that the APA provides for the payment of attorneys' fees as part of the indemnification for damages stemming from a breach of the agreement, see id. at 28 ¶ 172, an allegation incorporated by reference into SupplyOne's breach of contract claim. See id. at 29 ¶ 169.
The North Carolina Action proceeded to a jury trial, and in May 2013, the federal jury found Defendants had breached Sections 2.7(a) and 2.7(b) of the APA by their actions in May 2009. After the verdict, the parties filed post-trial motions, including competing motions for judgment as a matter of law under Federal Rule of Civil Procedure 50 and corresponding motions for entry of judgment pursuant to Rule 54(b). The district court denied all of the post-trial motions in a memorandum and order dated September 26, 2013. The same day, the court entered a final order and judgment consistent with the jury verdicts and the memorandum and order denying the post-trial motions. Although SupplyOne had requested an award of attorneys' fees pursuant to Section 10 of the APA in its counterclaim, it did not present any evidence regarding attorneys' fees during trial or raise the attorneys' fees and indemnification issue via a post-trial motion. Rather, on July 1, 2013, SupplyOne filed this action in the Eastern District of Pennsylvania, asserting a single claim: that "Defendants breached the APA by failing to indemnify SupplyOne for attorneys' fees related to Defendants' May 2009 breach of contract, as required by the APA's indemnification provision." Compl. ¶ 26.
Section 10.1 of the APA requires Defendants to indemnify SupplyOne for "any and all Damages" that SupplyOne may sustain, suffer, or incur resulting from or relating to a breach of the APA. APA § 10.1. "Damages" is defined in the APA as including "reasonable attorneys', consultants' and other professional fees . . . incurred by a party that is entitled to indemnification under this Agreement." APA § 1. Section 10.3 sets forth certain procedures for seeking indemnification. The party seeking indemnification shall provide a "Claim Notice" to the party alleged to be responsible for indemnification. APA § 10.3(a). If the matter to which the indemnification claim relates has not yet been resolved, the party seeking indemnification is to provide an estimate of the claim, defined as an "Unliquidated Claim." Id. Any party providing a Claim Notice for an Unliquidated Claim must follow up with a second Claim Notice within sixty days after the matter giving rise to the claim is resolved, which specifies the amount of the claim. This second Claim Notice is defined in the APA as a "Liquidated Claim Notice."
On January 29, 2010, shortly before filing its counterclaim in the North Carolina Action, SupplyOne served Defendants with a Claim Notice for an Unliquidated Claim, "informing Defendants of their indemnification obligations under the APA for attorney's fees and costs related to their breach of the APA." Compl. ¶ 18; see also Defs.' Reply Ex. A (Unliquidated Claim Notice stating "[b]y (1) continuing to breach covenants under Section 2.7 and Section 7 of the Agreement and (2) filing the [North Carolina Action], Mr. Wetmore and Triad are damaging SupplyOne by inter alia forcing the company to incur attorneys', consultants', and other professional fees and costs that are anticipated to exceed $150,000. Pursuant to Section 10.3(a) of the Agreement, SupplyOne hereby demands indemnification for these damages."). On July 1, 2013, the same day the instant lawsuit was initiated, SupplyOne served Defendants with a Liquidated Claim Notice for $624,384 in fees and costs it had incurred to that point in connection with the North Carolina Action. On July 16, 2013, Defendants sent SupplyOne a "Claim Response" notifying SupplyOne they would not indemnify it for its claimed damages.
Defendants have now moved to dismiss the Complaint, arguing SupplyOne's claim for breach of the indemnification provision and the $624,384 in damages it seeks should be dismissed as barred by the doctrine of res judicata, also known as claim preclusion.
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citations and quotation marks omitted). "In deciding a Rule 12(b)(6) motion, a court must consider only the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon [those] documents." Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010). Affirmative defenses that are apparent from the face of the complaint, including claim preclusion, may be raised in a 12(b)(6) motion. See Rycoline Prods., Inc. v. C & W Unlimited, 109 F.3d 883, 886 (3d Cir. 1997); see also Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425-26 (2d Cir. 2008) (district court may dismiss a complaint based on an affirmative defense established by the complaint and judicially noticeable information).
Defendants and SupplyOne agree that the preclusive effect of a prior judgment should be decided pursuant to the law of the court that issued the judgment, and if the judgment was issued by a federal court, the applicable federal law of the issuing jurisdiction should control. See Paramount Aviation Corp. v. Agusta, 178 F.3d 132, 135 (3d Cir. 1999) ("[T]he preclusive effect of a judgment is determined by the preclusion law of the issuing court—in this case, a federal court."). The choice of law question, however, is not as clear cut as the parties contend. After the Third Circuit decided the Paramount case, the United States Supreme Court held that while federal common law controls the preclusive effects of a federal diversity judgment, the federal common law directs application of the law that would be applied by the courts of the state in which the federal court rendered judgment, unless the state law is incompatible with federal interests. See Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001); see also Taylor v. Sturgell, 553 U.S. 880, 891 n.4 (2008) ("For judgments in diversity cases, federal law incorporates the rules of preclusion applied by the State in which the rendering court sits." (citing Semtek, 531 U.S. at 508)). Semtek involved the preclusive effect of a judgment by a federal court sitting in diversity on a subsequent state court action, but many courts of appeals have interpreted Semtek's rule as applying in successive diversity cases. See, e.g., Hatch v. Trail King Indus., Inc., 699 F.3d 38, 44 (1st Cir. 2012) (collecting cases). As applied in this case, Semtek directs the application of North Carolina preclusion rules unless the state rules are incompatible with federal interests.
Under both North Carolina state law and federal law as applied in the Fourth Circuit, claim preclusion will bar claims that were or could have been raised in a prior action if three elements are satisfied. Pueschel v. United States, 369 F.3d 345, 354 (4th Cir. 2004); Gaither Corp. v. Skinner, 85 S.E.2d 909, 911 (N.C. 1955). There must be "(1) a final judgment on the merits in a prior suit; (2) an identity of the cause of action in both the earlier and the later suit; and (3) an identity of parties or their privies in the two suits." Pueschel, 369 F.3d at 354-55; Moody v. Able Outdoor, Inc., 609 S.E.2d 259, 262 (N.C. Ct. App. 2005). When considering the second element, however, the federal and state rules slightly diverge. The North Carolina Supreme Court has adopted a narrower version of the "transactional test" used in federal courts to determine whether there is an identity of the earlier and later causes of action for claim preclusion purposes. See Davis v. Durham Mental Health Developmental Disabilities Substance Abuse Area Auth., 320 F.Supp.2d 378, 391 (M.D.N.C. 2004) ("North Carolina courts have employed a `cautious and flexible adoption' of the `transactional' test and construe the res judicata bar more narrowly than most federal and state courts." (citing Davenport v. N.C. Dep't. of Transp., 3 F.3d 89, 95 (4th Cir. 1993))). As discussed below, despite this difference, the application of either test would produce the same result in the circumstances presented by this case. The Court will therefore apply North Carolina state law without deciding whether its preclusion principles are incompatible with any federal interest.
The first and third elements that must be satisfied for res judicata to apply are not in dispute. Although this action was filed shortly before the district court entered final judgment closing the North Carolina Action, no finality issue remains because the district court has since entered final judgment. See Pure Distribs., Inc. v. Baker, 285 F.3d 150, 157 (1st Cir. 2002) ("[I]f final judgment is entered in the [first] action during the course of this case, nothing in our opinion should be construed to prevent [the defendant] from renewing his res judicata arguments."). Moreover, although the North Carolina Action is currently on appeal, "it has become clear in the federal courts that res judicata ordinarily attaches to a final lower-court judgment even though an appeal has been taken and remains undecided." 18A Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure: Jurisdiction § 4427 (2d ed. 2002) (hereinafter Wright & Miller).
In its opposition to Defendants' motion to dismiss, SupplyOne argued only that because its breach of contract claim could not have been raised in the North Carolina Action, claim preclusion should not apply. See Mem. in Opp'n to Defs.' Mot. to Dismiss 7 (arguing res judicata applies only to issues that "were or could have been raised" in the prior action (citing Pueschel, 369 F.3d at 354)). SupplyOne advanced this argument as a stand-alone basis for rejecting the claim preclusion defense, but the Court understands it to be grounded in the second element of the res judicata analysis, i.e., that the causes of action in the first and second suits are not identical because SupplyOne could not have brought its indemnification claim in the first. See, e.g., Laurel Sand & Gravel, Inc. v. Wilson, 519 F.3d 156, 162 (4th Cir. 2008) ("Newly articulated claims based on the same [transactional] nucleus of facts may still be subject to a res judicata finding if the claims could have been brought in the earlier action."). Before addressing whether SupplyOne could have brought the indemnification claim in the North Carolina Action, however, the Court must determine whether "the claim presented in the new litigation arises out of the same transaction or series of transactions as the claim resolved by the prior judgment." Id. (citation and internal quotation marks omitted).
SupplyOne's instant breach of contract claim is based on the same contract (the APA) that the parties accused each other of breaching in the North Carolina Action. Even under the North Carolina Supreme Court's narrower view of the transactional test applied by the federal courts, if two causes of action are premised on the same underlying contract, the second element is satisfied and claim preclusion will apply. See Gaither, 85 S.E.2d at 912 (holding an identity of causes of action exists when the second action is for damages resulting from a separate breach of the same contract at issue in the first action).
Defendants maintain that SupplyOne not only could have brought this claim in the North Carolina Action, it did. While it is true that the instant indemnification claim was in fact raised in SupplyOne's counterclaim, and also formed a part of SupplyOne's prayer for relief, the jury verdict and the final judgment entered in the case do not reflect direct resolution of the attorneys' fees/indemnification claim. SupplyOne does not appear to have pursued its indemnification claim to resolution in North Carolina, and instead abandoned the claim before it was litigated to a final judgment on the merits. SupplyOne's later abandonment of the claim, however, has no effect on whether res judicata should apply. Claim preclusion is not limited to those claims that were actually litigated in the prior action; it also extends to "other matters which in the exercise of due diligence could have been presented for determination in the prior action." Gaither, 85 S.E.2d at 911; see also Bockweg, 428 S.E.2d at 161 ("[T]he prior judgment serves as a bar to the relitigation of all matters that were or should have been adjudicated in the prior action."); Orca Yachts, L.L.C. v. Mollicam, Inc., 287 F.3d 316, 319 (4th Cir. 2002) ("[T]he fact that Orca's counterclaim was not actually litigated in Florida does not affect our decision to grant Mollicam's motion to dismiss [the appeal on res judicata grounds.]").
SupplyOne primarily argues its claim should not be precluded because the claim was not ripe and therefore could not have been pursued during the pendency of the North Carolina Action. SupplyOne maintains the instant breach of contract claim only ripened when SupplyOne served Defendants with the Liquidated Claim Notice on July 1, 2013, triggering Defendants' obligation to indemnify SupplyOne for the attorneys' fees it had incurred in the North Carolina Action.
If a claim is dismissed for lack of subject matter jurisdiction on the basis that it is not ripe, the dismissal does not serve as an adjudication on the merits and res judicata will generally not bar reassertion of the claim in a second action. See St. Pierre v. Dyer, 208 F.3d 394, 400 (2d Cir. 2000) (holding claims for indemnification and contribution that were dismissed as unripe in a prior action were not precluded by that judgment in a second action); Wright & Miller § 4437 ("In ordinary circumstances a second action on the same claim is not precluded by dismissal of a first action for prematurity or failure to satisfy a precondition to suit."). Where "formal barriers" to presenting a claim, such as a lack of subject matter jurisdiction, "in fact existed and were operative . . . in the first action," it would be unfair to preclude the claim in a second action. Restatement (Second) of Judgments § 26, cmt. c.; id. § 20 (stating exceptions to the general rule of bar).
No such barriers in fact existed or were operative in the North Carolina Action. The district court did not dismiss the instant indemnification claim as unripe; rather, SupplyOne chose not to pursue its indemnification claim in the North Carolina Action. Where a party fails to pursue a particular claim it may have had in a prior action, res judicata still applies. See Ballance v. Dunn, 385 S.E.2d 522, 525 (N.C. Ct. App. 1989) ("The procedural history of the case below demonstrates that plaintiff [chose] not to have all [his] claims adjudicated in the prior lawsuit. The doctrine of res judicata estops [him] from litigating any of those claims in a second lawsuit."); Hatch, 699 F.3d at 45 ("It is axiomatic that claim preclusion doctrine requires [a party] to live with [its strategic] choices." (citation and internal quotation marks omitted)); Taylor, 116 F. App'x at 117 (barring second suit for attorneys' fees pursuant to a contract provision and noting plaintiff "brought his claim for attorneys' fees in the first suit, but for strategic purposes chose not to pursue it").
SupplyOne has not cited to, and this Court has not found, any language in the APA's text supporting the argument that the contractual obligation to indemnify SupplyOne for attorneys' fees only ripened when SupplyOne served Defendants with a Liquidated Claim Notice. To be sure, Section 10.3(a) does set forth certain procedural requirements to be followed by a party seeking indemnification, but it does not state or otherwise suggest that an indemnification right does not materialize until those requirements are fulfilled.
On January 29, 2010, SupplyOne served Defendants with a Claim Notice for an Unliquidated Claim, notifying Defendants that SupplyOne intended to pursue indemnification for the attorneys' fees it was forced to incur as a result of Defendants' breach of Section 2.7 of the APA. See Defs.' Reply Ex. A (Unliquidated Claim Notice). As early as January 2010, SupplyOne was cognizant of its indemnification rights to attorneys' fees under the APA and had manifested its intent to pursue those rights. Later, in its counterclaim, SupplyOne did in fact assert those indemnification rights, seeking from the North Carolina court an "award [of] damages in an amount to be determined at trial, [and an] award [of] attorneys['] fees, costs, and other professional expenses . . . pursuant to Section 10 of the APA." Defs.' Mot. to Dismiss Ex. 4, at 30. SupplyOne's decision to seek this relief in its counterclaim indicates that SupplyOne "clearly recognized the propriety of asserting claims for attorneys' fees in the [prior action] even if the amount of fees could not be determined (at least entirely) at the time of the filing." United States Indus., Inc. v. Blake Constr. Co., Inc., 765 F.2d 195, 208 (D.C. Cir. 1985) (applying res judicata to bar successive action for attorneys' fees under a contract of indemnity). The mere fact that SupplyOne had not yet liquidated its claim or could not determine with specificity the amount of damages it believed it was owed does not defeat justiciability. Cf. Riehl v. Travelers Ins. Co., 772 F.2d 19, 22-23 (3d Cir. 1985) ("[N]either immediate liability for damages, nor a liquidation to the extent of an insurer's indemnification obligation, is necessary in this Circuit to establish a justiciable controversy."); Diaz v. Indian Head, Inc., 686 F.2d 558, 563 (7th Cir. 1982) (holding res judicata barred second suit where claim could have been raised in first action, even where amount allegedly owing was not certain at the time of the first action).
Second, even if the indemnification claim was not ripe when originally pleaded, by requesting indemnification in its counterclaim in the North Carolina Action, SupplyOne preserved the issue for later resolution in the same action. Assuming arguendo that SupplyOne's claim did not ripen until July 2013, SupplyOne still could have sought attorneys' fees in the North Carolina Action via a post-trial motion because final judgment had not yet been entered at that time. A second action based on a previously asserted but unripe claim is only permissible if "the change in circumstances that cures the jurisdictional defect . . . occur[s] subsequent to the prior litigation." Park Lake Res. Ltd. v. U.S. Dep't of Agric., 378 F.3d 1132, 1137 (10th Cir. 2004). Here, the district court in North Carolina did not enter final judgment until September 26, 2013, and because the indemnification claim now before this Court was a component of the relief sought in SupplyOne's counterclaim in the North Carolina Action, SupplyOne could have, and was obligated to, petition the North Carolina court for a fee award prior to the entry of final judgment in that case.
SupplyOne maintains it could not have raised its indemnification claim post-trial because Federal Rule of Civil Procedure 54(d)(2) requires attorneys' fees to be sought by motion unless "the substantive law requires those fees to be proved at trial as an element of damages." Fed. R. Civ. P. 54(d)(2). SupplyOne contends that by operation of the contract, its sought-after fees are an element of damages that must be proved at trial, and because its indemnification claim only ripened after trial, SupplyOne could not have proved the claim during the trial in North Carolina. Even if SupplyOne could not have presented evidence of attorney fee-related damages during the merits trial,
Notwithstanding SupplyOne's arguments that it was jurisdictionally or procedurally foreclosed from asserting its indemnification claim in North Carolina, it appears SupplyOne had alternative reasons for choosing not to pursue the claim there—reasons entirely unrelated to ripeness or Rule 54(d)(2). In the North Carolina Action, both parties relied on and cited to North Carolina law as governing the interpretation of the APA, despite a choice of law provision stating interpretation of the agreement shall be governed by Delaware law. In part because the parties did not contest the issue, the district court, when resolving motions for summary judgment in the North Carolina Action, "determine[d] that the substantive law of North Carolina is properly applied." Triad Packaging, Inc. v. SupplyOne, Inc., 925 F.Supp.2d 774, 786 (W.D.N.C. 2013). In Defendants' pretrial brief in the North Carolina Action, they argued that attorneys' fees pursuant to the indemnification provision are unavailable under North Carolina law. See, e.g., Lee Cycle Ctr., Inc. v. Wilson Cycle Ctr., Inc., 545 S.E.2d 745, 752 (N.C. 2001) ("Even in the face of a carefully drafted contractual provision indemnifying a party for such attorney's fees as may be necessitated by a successful action on the contract itself, our courts have consistently refused to sustain such an award absent statutory authority therefor."). Instead of responding to and litigating this issue, SupplyOne sought attorneys' fees in the Eastern District of Pennsylvania—asking this Court apply Delaware, not North Carolina, law to the contract.
Facing the prospect of an adverse judgment on the merits and decamping to another court to avoid that result is precisely the kind of forum shopping and claim-splitting that a doctrine like res judicata is designed to prevent.
An appropriate order follows.
Although this Court has not found a North Carolina case addressing a factually similar situation, at least one federal appellate court has determined that a claim for attorneys' fees sought pursuant to an indemnification provision triggered by a breach of the same contract "cannot be enforced apart from the claim for breach . . . and to this extent we have only a single claim here." Aetna Cas. & Sur. Co. v. Giesow, 412 F.2d 468, 470 (2d Cir. 1969). In addition, claims for attorneys' fees, whether triggered by contract or statute, are generally considered a part of the same cause of action as the underlying liability question. See, e.g., Rooney v. United States, 694 F.2d 582, 583-84 & n.4 (9th Cir. 1982) (barring a subsequent action for attorneys' fees on res judicata grounds and finding "[a] claim against an adverse party for attorney's fees incurred in the prosecution of a substantive claim is part of the same cause of action as that underlying the substantive claim"). In Rooney, a claim for attorneys' fees had been made and rejected in the original proceeding, but the court found that even if the claim had not been advanced then, it would be merged in the judgment and foreclosed. Id.; see also Dryvit Sys., Inc. v. Great Lakes Exteriors, Inc., 96 F. App'x 310, 312 (6th Cir. 2004) (finding a separate action for attorneys' fees pursuant to a contract barred by res judicata); Taylor v. Ill. Tool Works, Inc., 116 F. App'x 115, 117 (9th Cir. 2004) (same).
Neither Section 10.1 nor 10.3 includes a proviso like the one in Section 10.4 stating that an indemnification claim will be invalid for failure to follow procedural requirements. Nor does Section 10.3 state that an indemnification claim will only become valid after a Liquidated Claim Notice has been served. SupplyOne is a sophisticated party asserting a right under a complex and highly negotiated Asset Purchase Agreement it (now) claims is governed by Delaware law. Thus, in accordance with the contract interpretation principles SupplyOne argues govern this contract, this Court will not read terms into the APA that the parties did not supply. Cf. Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, No. 8431-VCN, 2014 WL 2457515, at *4 (Del. Ch. May 30, 2014) ("Defendants also urge the Court to dismiss the Complaint because it does not explicitly state that Eurofins provided notice which complied with the [asset purchase agreement's] notice requirements. Again, no provision in the [agreement] requires this result and the Court will not re-write the contract to impose such a requirement."); Ehrenstrom v. Phillips, 77 A. 81, 84 (Del. Ch. 1910) ("[T]his court will not make a new contract, or supply terms not theretofore agreed upon by the parties.").