Filed: May 08, 2013
Latest Update: Feb. 12, 2020
Summary: BIL's Bacardí-owned brands in Puerto Rico. Because, Section 9 of the FAA states that any party to the arbitration may, apply to the court for an order confirming [an] award, and, thereupon the court must grant such an order, 9 U.S.C. § 9, BIL, argues the FAA negates the standards in Rule 19.
United States Court of Appeals
For the First Circuit
No. 12-1032
BACARDÍ INTERNATIONAL LIMITED,
Petitioner, Appellant,
v.
V. SUÁREZ & CO., INC.,
Respondent, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Gustavo A. Gelpí, U.S. District Judge]
Before
Lynch, Chief Judge,
Lipez and Thompson, Circuit Judges.
Ricardo F. Casellas, with whom Rosalie Irizarry-Silvestrini,
Natalia Morales, and Casellas Alcover & Burgos, P.S.C., were on
brief, for appellant.
Francisco G. Bruno, with whom Manuel Moreda-Toledo, Omar
Oquendo-Claudio, Kevin M. Acevedo-Carlson, and McConnell Valdés LLC
were on brief, for appellee.
May 8, 2013
LYNCH, Chief Judge. This federal case seeks confirmation
of an arbitration award made at the first, non-liability stage of
arbitration as to a contract, and was filed approximately one month
after the arbitral opponents had filed a petition in the Puerto
Rico Court of First Instance to vacate the same award.
We have to answer two questions. The first is whether
the federal district court had jurisdiction, despite its conclusion
that it did not. The second is whether the federal court should
stay its hand where the Court of First Instance confirmed the award
on July 23, 2012, and that decision has been pending on appeal in
the Court of Appeals since August 22, 2012. We answer both
questions affirmatively.
As to jurisdiction, the court concluded that an absent
party, Bacardí Corporation ("BC"), was an indispensable party whose
joinder would destroy complete diversity. On this question, we
address whether BC, a party to an arbitration, which became a
successor party to the disputed contract, but which is absent from
this federal case brought to confirm the arbitration panel's
limited award (that certain contract damages provisions are valid
and binding), is a required party under Fed. R. Civ. P. 19. On the
facts presented, we conclude that the district court abused its
discretion; it engaged in an incomplete Rule 19(a) analysis, and
its conclusions under Rule 19 were wrong. As a result, the
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proceeding should not have been dismissed for lack of subject-
matter jurisdiction under Fed. R. Civ. P. 12(b)(1).
Given the existence of a first-filed parallel case now on
appeal in the local Puerto Rico courts involving the same issues,
which includes BC and all of the parties to the arbitration, we
direct the district court to stay these proceedings while the
proceedings in the Commonwealth courts are resolved.
I.
A. Factual Background
The underlying arbitration resulted from the non-renewal
of a sub-distribution agreement between V. Suárez & Co., Inc.
("VSC") and Bacardí Caribbean Corporation ("BCC"). We review the
events leading to the sub-distribution agreement, and explain the
various corporate entities involved and their relationships to each
other.
The petitioner, Bacardí International Limited ("BIL"), is
a Bermuda corporation engaged in the sale, promotion, and
distribution of Bacardí Rum products and other alcoholic beverages.
BIL holds the sole and exclusive rights and authority to exploit
and use commercially the trademarks and related intellectual
property of the Bacardí brands. Its wholly-owned subsidiary,
Bacardí & Company Limited ("BACO"), a Liechtenstein corporation, is
the registered owner and holds legal title to the trademarks and
intellectual property.
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On November 1, 1998, BIL entered into a distribution
agreement with BCC,1 which granted BCC the exclusive right,
privilege, and responsibility to sell and promote the sale of the
products covered by the agreement in Puerto Rico. Even though
Bacardí was the top selling brand of rum in Puerto Rico in 2004,
the distribution arrangement had become unprofitable for BCC.
Around the year 2000, BCC stopped distributing certain other brands
of alcohol, which left it with too high a cost structure. If the
costs of delivery could be shed, BCC would improve its
profitability, and so it contemplated alternative arrangements
whereby profits could be shared with a sub-distributor that would
absorb certain costs of distribution. Eventually, in August 2004,
BCC executed an agreement with VSC, a Puerto Rico corporation with
revenues of more than $600 million in 2004. VSC is one of Puerto
Rico's major corporations, which, at the time of the agreement,
distributed over 140 brands of products, had an inventory of over
1300 stock keeping units, and was known to use its leverage in
contract negotiations. For VSC, adding Bacardí Rum to its line of
products would make it the leading distributor of distilled
products in Puerto Rico.
The sub-distribution agreement between VSC and BCC
provided for VSC to have the exclusive right to sell and sub-
1
The original agreement was actually with Bacardí-Martini
Caribbean Corp., the predecessor of BCC.
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distribute the covered products in Puerto Rico. BIL consented to
the agreement, as did BC, an entity we discuss later. The
agreement included grounds to permit termination for "just cause,"
limitations on damages, and provisions for dispute resolution
requiring arbitration.
Of particular relevance are the damages provisions
contained in sections 9.4 and 9.5 of the contract. In section 9.4,
VSC agreed that "[u]pon expiration or termination of the Agreement
in accordance with the terms and conditions hereof," it "shall have
no rights or claims to compensation of any kind whatsoever" from
any Bacardí entity, including compensation for expenditures for
advertising, marketing, sales, or promotion activities, certain
capital investments, or for any goodwill VSC might establish. VSC
also agreed, in section 9.5, that any damages it could recover
against BCC (of which BC became the successor) would be offset by
roughly $2.1 million on a per-year basis because the distribution
rights had a value and VSC had not paid for that value.
About two years after the sub-distribution agreement was
executed between BCC and VSC, on April 1, 2006, BCC consummated a
merger with Castleton Holdings, Inc., the surviving corporation,
which then merged with BC, the surviving entity of that merger. BC
is both a Delaware and a Puerto Rico corporation and is the
producer of Bacardí Rum and other alcoholic products in Puerto
Rico. BC and BIL are both members of the Bacardí family of
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companies, as both are wholly-owned subsidiaries of Bacardí
Limited.
The dispute resulting in arbitration began on May 29,
2009, when the president and CEO of BC notified VSC by letter that
BC (as successor to BCC) did not intend to renew the sub-
distribution agreement. The letter stated that BC intended to use
the alternative dispute resolution mechanism in the sub-
distribution agreement to resolve any disputes arising out of or
related to the non-renewal of the agreement.2
On October 8, 2009, BIL, BC, and BCC filed a demand for
arbitration against VSC. The Bacardí entities made two claims in
the demand: (1) a declaration that the $2.1 million offset
provision was valid and binding; and (2) in the alternative, that
the Bacardí entities had just cause to terminate or refuse to renew
the sub-distribution agreement. If the pertinent damages provision
were declared valid, VSC would not be entitled to any monetary
recovery because VSC's net profit from the prior fiscal year did
not exceed the offset amount, or so BC alleged.
2
The provision provides that the parties "shall first consult
and negotiate with each other, in good faith and recognizing their
mutual interests, and attempt to reach a prompt, just and equitable
solution to the Dispute that is satisfactory to both parties." If
direct negotiations do not resolve the dispute within thirty days
after one party provides written notification to the other of the
existence of a dispute, either party can exercise its right to have
the dispute resolved through arbitration.
-6-
On November 3, 2009, VSC, accepting arbitration, filed a
response to the demand and its own counterclaim. VSC asserted that
certain damages provisions in the sub-distribution agreement,
including the offset provision and other provisions that barred
compensation for certain expenses and investments, were null and
void because they violated Law 75, P.R. Law Ann. tit. 10, § 278 et
seq. VSC also denied that BC had just cause not to renew or to
terminate the contract and asserted that it was entitled to receive
damages in excess of $30 million under Law 75.3
The arbitration panel consisted of three neutral
attorneys admitted to practice law in Puerto Rico. Rather than
deal with all the issues before it in one proceeding, the
arbitration panel bifurcated the proceedings to decide first
whether the contested provisions of the contract were valid and
binding. As a result, the panel would not pass on the just cause
defense, VSC's claims for damages, or the Bacardí entities' other
defenses until a later time, and then only if necessary. In other
words, at the first stage, liability was not at issue, only the
validity of certain clauses. It is the first portion of the
bifurcated proceedings that has led to the federal case now before
3
In response to VSC's response, BIL, BC, and BCC asserted
additional claims under Puerto Rico law for wrongful and/or
fraudulent misrepresentations and omissions, breach of the duty to
negotiate in good faith, and fraud.
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us. The parties inform us that there has been no second stage of
the bifurcated proceedings to date.
The panel issued a Final Partial Award (the "Award") on
the bifurcated issue on July 19, 2011. In a seventy-two page
opinion, the panel found the contested provisions, including the
offset and the limitations on compensation for certain expenses and
investments, to be valid and enforceable.4 The majority wrote:
The parties thus agreed on an amicable,
pre-established method to handle a post-
termination scenario in case [VSC] decided to
apply Law 75 against a supplier for the first
time in its history as a distributor. They
settled not on a waiver of Law 75 damages, but
on a on a [sic] way to calculate them with the
statute specifically in mind. Theirs was an
agreement between sophisticated parties, free
(not forced) to do what was in their best
business interest and fully aware (not misled)
as to the advantages and consequences of what
they were doing in pursuit of those business
interests. All within an integrated agreement
that allowed [VSC] to distribute products it
did not distribute before and gain the benefit
of the prior distributor's development of the
market for 30 years or so without any up-front
cost to [VSC].
The panel did not decide if the validity of those provisions meant
that VSC could not recover any monetary damages as the Bacardí
entities alleged, nor did it decide any other issues on liability.
4
One member of the three-member panel dissented and would
have found the provisions barring recovery for certain expenses and
investments, and the offset provision, to be null and void as
contrary to Law 75.
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Since then, the arbitration has not continued while the
parties have been waging pitched battles over the first stage of
the arbitration in both federal and Commonwealth courts.
B. Procedural History
Dissatisfied with the Award, VSC, on August 5, 2011,
initiated a special proceeding against BC, BCC, and BIL before the
Court of First Instance in Puerto Rico seeking to vacate the Award.
VSC argued that the Award should be vacated because: (1) the Award
was untimely under Puerto Rico law;5 (2) the Award was contrary to
law and public policy; and (3) the arbitrators were biased.6 VSC's
memorandum made no explicit federal claims.
On September 1, 2011, BIL, BC, and BCC filed a notice of
removal in the federal district court in Puerto Rico. The Bacardí
entities asserted that diversity subject-matter jurisdiction
existed under 28 U.S.C. § 1332(a)(2), on the grounds that BIL was
the only real party-in-interest since the Award "validates certain
contractual provisions recognizing BIL's exclusive ownership rights
of the distribution value and goodwill generated from the sale of
BIL's Bacardí-owned brands in Puerto Rico."
5
Although the parties have briefed the merits of confirming
and vacating the Award on appeal, the timeliness issue was not
raised in their appellate briefs.
6
In the motion filed in the Court of First Instance, VSC
argued for vacatur under standards of review of arbitral awards
under Puerto Rico law.
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The next day, BIL filed a separate action, this case, in
federal court, in its name only, moving to confirm the Award under
the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. The
removed matter and BIL's FAA confirmation proceeding were
consolidated on September 20, 2011.
On September 29, 2011, VSC sought to remand the removed
action. VSC also sought to dismiss BIL's federal action under Fed.
R. Civ. P. 12(b)(1). The heart of VSC's argument was that BC, a
Puerto Rico corporation, was a required and indispensable party
under Fed. R. Civ. P. 19, and since it was non-diverse with VSC,
diversity jurisdiction was lacking in both matters.7
On December 5, 2011, the district court issued an opinion
and order addressing the removal of VSC's case and the
jurisdictional questions raised by BIL's case. The district court
remanded the removed VSC case.8 The court held that VSC's
7
BIL and VSC also both provided memoranda of law to the
district court on the merits of the motions to confirm and vacate
the Award. The district court had denied a motion by VSC to stay
the proceedings until the court made a jurisdictional
determination. In its memorandum opposing BIL's motion to confirm
the Award, VSC briefed the alleged grounds for vacatur under the
FAA for argument purposes, while claiming that Puerto Rico law
should apply.
8
The remand order of VSC's action to the Commonwealth courts
is not subject to appeal, 28 U.S.C. § 1447(d), and is not before
us. VSC argues that the remand order precludes the issues BIL
raises on appeal because of issue preclusion. Not so. The remand
decision only determined that BC's interest in the litigation is
real, not whether BC is a required party under Rule 19, the issue
before us. See Faigin v. Kelly, 184 F.3d 67, 78 (1st Cir. 1999)
(under federal common law identity of issues required for issue
-10-
inclusion of BC in the case removed from state court was proper
because BC's interest in the litigation was real. BC was not just
a nominal party named to destroy jurisdiction. The court had to
consider BC's citizenship in the jurisdictional analysis and that
divested the federal court of jurisdiction because BC and VSC are
both citizens of Puerto Rico.9
The court dismissed BIL's federal case. The district
court found that BC was an indispensable party under Fed. R. Civ.
P. 19(b), that BC's presence would destroy diversity, and that
VSC's Rule 12(b)(1) motion should be granted.10
On December 9, 2011, BIL filed a timely appeal from the
court's order of dismissal. Before arguments were heard in ths
matter, the Commonwealth Court of First Instance decided the
remanded case on July 23, 2012. The Court of First Instance denied
preclusion); see also García-Monagas v. De Arellano, 674 F.3d 45,
54-55 (1st Cir. 2012) (same under Puerto Rico law).
9
The district court determined that BCC was not a proper
party because it was effectively dissolved on April 1, 2006 by its
merger into Castleton Holdings. Under Puerto Rico law, P.R. Law
Ann. tit. 14, § 3708, BCC remained open to suit only until April 1,
2009. So, BCC could not destroy complete diversity.
10
The court found that all four Rule 19(b) factors favored a
finding of indispensability, stating that: (1) BC's interests are
implicated in the confirmation proceeding and an adverse decision
would expose BC to significant financial loss; (2) it could think
of no measure to alleviate any prejudice to BC due to BC's absence;
(3) judicial resources would be conserved if the local court, which
had the remanded action, decided the issues; and (4) BIL had an
alternative adequate remedy by proceeding in the local Puerto Rico
court.
-11-
VSC's request to vacate the Award and confirmed the Award. It
ruled that: the FAA, not Puerto Rico law, provided the proper
standards of judicial review; the arbitration panel acted with
integrity and impartiality; manifest disregard of the law and
violation of public policy are not proper grounds for vacatur under
the FAA; and that even if they were valid grounds, the Award was
still valid and in accord with Law 75.
On this appeal of the district court's dismissal of BIL's
federal case, BIL makes sweeping arguments that Rule 19 is
inapplicable11 because it is preempted by the FAA, and also argues
11
More specifically, the parties engage in a lively debate
about whether there is federal jurisdiction over petitions to
review arbitral decisions regardless of whether a party which is
required and indispensable under Rule 19 is absent and that party's
presence would destroy diversity jurisdiction.
BIL argues that Rule 19 does not apply to confirmation
proceedings because Fed. R. Civ. P. 81(a)(6)(B) states that the
Rules of Civil Procedure do not apply to arbitration-related
proceedings where the FAA provides other procedures. Because
Section 9 of the FAA states that "any party to the arbitration may
apply to the court" for "an order confirming [an] award, and
thereupon the court must grant such an order," 9 U.S.C. § 9, BIL
argues the FAA negates the standards in Rule 19. BIL argues that
its reading would not expand federal court jurisdiction, because
Rule 19 is an equitable and not a jurisdictional rule. BIL also
argues that if Rule 19 is not preempted by the language of section
9 of the FAA, Rule 19 would effectively, and improperly, expand the
grounds for a court to refuse to confirm an award under section 10
of the FAA. BIL also makes a less developed argument that section
6 of the FAA, which states that any application under the FAA
"shall be made and heard in the manner provided by law for the
making and hearing of motions," id. § 6, preempts Rule 12 defenses,
including Fed. R. Civ. P. 12(b)(7) (failure to join an
indispensable party). We have no reason to reach these issues.
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that, in any event, the district court erred in its Rule 19
analysis.
We agree with BIL's narrower argument that the district
court erred in its Rule 19 analysis. As a result, we do not reach
BIL's arguments about whether the FAA preempts Rule 19, nor need we
discuss the relationship between diversity subject-matter
jurisdiction and Rule 19. See Picciotto v. Cont'l Cas. Co., 512
F.3d 9, 22 n.19 (1st Cir. 2008) (stating Rule 19 inquiry is
equitable, but conclusion that non-diverse party is indispensable
destroys diversity).
II.
We review a district court's conclusion regarding the
lack of subject-matter jurisdiction de novo, and its findings of
fact for clear error. Valentin v. Hosp. Bella Vista, 254 F.3d 358,
365 (1st Cir. 2001). The court's Rule 19 determination is reviewed
for abuse of discretion.
Picciotto, 512 F.3d at 14-15. An error
of law is an abuse of discretion. Aronov v. Napolitano,
562 F.3d
84, 88 (1st Cir. 2009) (en banc). An abuse also "occurs when a
court, in making a discretionary decision, relies upon an improper
factor, neglects a factor entitled to substantial weight, or
considers the correct mix of factors but makes a clear error of
judgment in weighing them." Matamoros v. Starbucks Corp.,
699 F.3d
129, 138 (1st Cir. 2012).
-13-
Rule 19 addresses situations where a lawsuit is
proceeding without a party whose interests are central to the suit.
Picciotto, 512 F.3d at 15. The Rule provides for joinder of
required parties when feasible, Fed. R. Civ. P. 19(a), and for
dismissal of suits when joinder of a required party is not feasible
and that party is indispensable, Fed. R. Civ. P. 19(b). The Rule
calls for courts to make pragmatic, practical judgments that are
heavily influenced by the facts of each case. See
Picciotto, 512
F.3d at 14-15; Travelers Indem. Co. v. Dingwell,
884 F.2d 629, 635
(1st Cir. 1989);; see also 7 C. Wright & A. Miller, Federal
Practice & Procedure § 1604 ("By its very nature Rule 19(a) calls
for determinations that are heavily influenced by the facts and
circumstances of individual cases . . . .").
We start with the problem that the district court failed
to do a required party analysis, and if it did so without labeling
its analysis as such, it failed to articulate why BC is a required
party to this particular proceeding. If the court was wrong on its
assumption that BC is a required party, then it was wrong to make
an indispensability determination under Rule 19(b). Fed. R. Civ.
P. 19; Picciotto, 512 F.3d at 15-16; Pujol v. Shearson/Am. Express,
Inc.,
877 F.2d 132, 134 (1st Cir. 1989).
It was an abuse of discretion for the court not to
provide reasoned analysis on this required party point. Further,
to the extent reasoning was provided, it is incomplete and
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inadequate. That alone would warrant reversal. See, e.g., Bakia
v. Los Angeles Cnty., 687 F.2d 299, 301-02 (9th Cir. 1982)
(vacating and remanding where district court offered insufficient
reasoning on Rule 19 analysis for appeals court to review).
We see no point in remanding this issue. The undisputed
record before us is adequate to decide it, and the policies of the
FAA encourage speedy and efficient resolution of judicial review of
arbitral awards. Cf. Moses H. Cone Mem'l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 29 (1983) (FAA calls for "speedy disposition" of
motions to enforce arbitration clauses); T.Co Metals, LLC v.
Dempsey Pipe & Supply, Inc.,
592 F.3d 329, 342 (2d Cir. 2010)
(grounds for vacatur strictly limited to provide parties with
"efficient dispute resolution"); Positive Software Solutions, Inc.
v. New Century Mortg. Corp.,
476 F.3d 278, 280 (5th Cir. 2007) (FAA
narrowly restricts judicial review "[t]o assure that arbitration
serves as an efficient and cost-effective alternative to
litigation").
It is clear to us that BC is not a required party under
Rule 19(a)(1) in the petition to confirm the first-stage arbitral
award. We stress that this is not a question of whether BC would
have been a required party if the contract dispute were being
adjudicated in the district court and not in arbitration, nor is it
an issue of the parties who were proper in the arbitration. VSC
confuses the issues. Ours is the different issue of whether BC is
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a required party in the petition to confirm given the limited
nature of the arbitration award in the bifurcated arbitration and
the very limited nature of judicial review.
Questions under Rule 19(a) are fact-bound and driven by
the nature of the issues before the court. We reject any notion
that the analysis required by Rule 19(a) may be displaced by a flat
rule that whoever is a party to an arbitration, no matter how
limited the award, is automatically a required party in a petition
to confirm an award.
In a Rule 19 analysis, a court must first determine if an
absent party is a "required party"12 under Rule 19(a). Picciotto,
512 F.3d at 16. Rule 19(a) provides the standard, stating in
relevant part:
(1) Required Party. A person who is subject
to service of process and whose joinder will
not deprive the court of subject-matter
jurisdiction must be joined as a party if:
(A) in that person's absence, the court
cannot accord complete relief among existing
parties; or
(B) that person claims an interest
relating to the subject of the action and is
so situated that disposing of the action in
the person's absence may:
(i) as a practical matter impair
or impede the person's ability to protect the
interest; or
(ii) leave an existing party
subject to a substantial risk of incurring
12
The Rule used to refer to a required party as a "necessary
party." See Pujol v. Shearson/Am. Express, Inc., 877 F.3d 132, 134
(1st Cir. 1989). To be consistent with the term now used in the
Rule, we use the phrase "required party."
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double, multiple, or otherwise inconsistent
obligations because of the interest.
Fed. R. Civ. P. 19(a)(1).
A. Rule 19(a)(1)(A): Whether in BC's Absence,
Complete Relief Cannot be Afforded Among Existing Parties
Complete relief can be afforded among those already
parties in BC's absence under Rule 19(a)(1)(A). The district court
can easily confirm or vacate the Award with respect to BIL and VSC
without BC being a party to this petition. See, e.g., Mastercard
Int'l Inc. v. Visa Int'l Serv. Ass'n, Inc., 471 F.2d 377, 385 (2d
Cir. 2006) (explaining that existing parties can resolve their
dispute and obtain complete relief as to each other without absent
party's presence although a dispute with absent party may be left
unresolved); Northrop Corp. v. McDonnell Douglas Corp.,
705 F.2d
1030, 1043 (9th Cir. 1983) ("McDonnell does not directly contend
that the Government's absence would preclude the district court
from being able to fashion meaningful relief as between the
parties, and we discern no reason for so concluding." (emphasis
added)). VSC argues that any relief would only be partial because
it would not apply to BC and a different result could be reached in
a local Puerto Rico court. But, we view those concerns as more
relevant to the issues of prejudice and risk of inconsistent
obligations, which, as we detail later, are not practical concerns
on these facts.
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VSC, then, must turn to the provisions of Rule
19(a)(1)(B) and its two subparts.
B. Rule 19(a)(1)(B)(i): BC's Ability to Protect Its
Interests Is Not Impaired
This subsection is concerned with protecting the
interests of the absent party. In the first place, BC does not
claim it has an interest which will be impaired. Rather, it is
BC's opponent, VSC, which makes the claim. Resolution of this
petition in BC's absence will not impair or impede BC's ability to
protect its interest. Fed. R. Civ. P. 19(b)(1)(B)(i).
In this confirmation proceeding, BIL and BC have
virtually identical interests -- the confirmation of the bifurcated
award.13 In Pujol v. Shearson/Am. Express, Inc., 877 F.2d 132,
then-Judge Breyer held that a subsidiary was not a required party
under Rule 19(a) because the parent and subsidiary had "virtually
identical" interests because they would each wish to show the same
thing.
Id. at 135. Here, BIL will argue that the Award should not
be vacated because there is no bias, manifest disregard of the law,
or violation of Puerto Rico's public policy. That is exactly what
BC would wish to show if it were present.
We do not read Shearson, as the district court did, as
standing for the proposition that the absent party has to be a
wholly-owned subsidiary of a present party for there to be
13
VSC has never claimed, including in its state court
petition, that the bifurcation order should be set aside.
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virtually identical interests in order to avoid the impairment of
an absent party's interests. Moreover, Shearson makes clear that
an absent party's interests cannot be harmed or impaired if they
are identical to those of a present party. Id. ("[W]e fail to see
how proceeding without [the absent party] would 'as a practical
matter impair or impede' the [absent party's] interests, interests
that [the present party's] counsel can adequately protect."
(quoting Fed. R. Civ. P. 19(a)(1)(B)(i)). We do not suggest that
the test requires "virtually identical" interests, only that such
is the situation here. There is no divergence in interests between
BC and BIL at this stage of the arbitration.
As an example, the facts in this case differ sharply from
those in Picciotto where an attorney (Casher) was sued by former
clients for malpractice in state court, 512 F.3d at 13-14, and
those same clients also sued insurance companies, including
Casher's malpractice insurer, for tortious interference with
contractual relations in federal court,
id. at 14. Casher's state
settlement position could have been impaired by an adverse judgment
in the federal case, and such an outcome also could have deprived
Casher of insurance coverage in the state case against her.
Id. at
17. Plainly, neither the plaintiffs nor the insurance company
defendants, in defending themselves against the tortious
interference claims, represented Casher's interests. The shared
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interests of BIL and BC more closely resemble the situation in
Shearson.
VSC argues that there is no virtual identity of interests
as BIL only has, at best, a "fleeting interest" in the confirmation
proceeding because BC is the successor to BCC and BCC negotiated
the contract.
It is not true that BIL has no interest in the
confirmation proceeding. Section 9.4(d) of the contract, which was
one of the contested damages provisions, both affects BIL's rights,
and provides more than a fleeting interest. The section states
"[VSC] shall have no rights or claims to compensation of any kind
whatsoever from any of the BCC Parties," and "BCC Parties" is
defined in the contract as "BCC and any of its affiliates, and/or
their respective directors, officers, employees, agents, or other
representatives." BIL and BC are wholly-owned subsidiaries of the
same entity, and are affiliates. Black's Law Dictionary 67 (9th
ed. 2009) (defining affiliate as "[a] corporation related to
another corporation by shareholdings or other means of control; a
subsidiary, parent, or sibling corporation" (emphasis added)).
Hence, BIL has an interest in the validity of that provision.
In addition, BIL's actions throughout the confirmation
proceedings evidence a vigorous representation of BIL's interest in
confirmation of the Award, which it holds in common with BC. In
the district court BIL provided substantial briefing in an effort
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to refute VSC's arguments for vacatur. Similarly on appeal, BIL
has extensively briefed the merits of the confirmation request,
seeking complete confirmation of the Award.14 Where an existing
party has "vigorously addressed" the interests of absent parties,
we have no need to protect a possible required party from a threat
of serious injury. See Nat'l Ass'n of Chain Stores v. New Eng.
Carpenters Health Benefits Fund, 582 F.3d 30, 43-44 (1st Cir.
2009).
Further, BC has not taken any action to indicate that BIL
cannot adequately represent its interests at this stage. In
Picciotto, our circuit held an absent party was a required party
where the absent party opposed litigation of a federal case without
her. 512 F.3d at 16-17. The absent party filed an affidavit with
the district court in that case.
Id. BC could similarly have
filed an affidavit with the district court or provided some notice
that its interests would be impaired, but did not do so.
Nevertheless, VSC argues that BC has to be a party to the
confirmation proceeding because BC's predecessor selected VSC as
the sub-distributor, drafted the letter of intent, negotiated the
contract, executed the contract, and terminated the contract. That
argument is unavailing. To the extent VSC is arguing BC, through
its predecessor, must be a party because it somehow acted
14
The district court did not address the merits, nor do we
here. But the record shows BIL's vigorous efforts to confirm the
Award.
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improperly, this court rejected that notion in Shearson. There,
the court stated, "[t]he mere fact, however, that Party A, in a
suit against Party B, intends to introduce evidence that will
indicate that a non-party, C, behaved improperly does not, by
itself, make C a necessary party." 877 F.2d at 136.
VSC falls back to Rule 19(a)(1)(B)(ii), arguing that it
is at risk of facing inconsistent obligations unless BC is joined.
C. Rule 19(a)(1)(B)(ii): Risk of Inconsistent Obligations
Disposition of this petition in BC's absence will not
leave BIL or VSC subject to a substantial risk of double, multiple,
or otherwise inconsistent obligations because of BC's absence.
Fed. R. Civ. P. 19(a)(1)(B)(ii).
Misinterpreting "inconsistent obligations," VSC argues
that it faces a substantial risk of incurring conflicting judgments
because of the earlier-filed petition in Commonwealth court. VSC
ignores the distinction this circuit has drawn in the Rule 19
context between inconsistent obligations and inconsistent
adjudications or results. In Delgado v. Plaza Las Americas, Inc.,
139 F.3d 1 (1st Cir. 1998) (per curiam), this court explained that
"'[i]nconsistent obligations' are not . . . the same as
inconsistent adjudications or results," because "[i]nconsistent
obligations occur when a party is unable to comply with one court's
order without breaching another court's order concerning the same
incident."
Id. at 3. In contrast, inconsistent adjudications or
-22-
results occur when a party wins on a claim in one forum and loses
on another claim from the same incident in another forum. Id.; see
Am. Ins. Co. v. St. Jude Med., Inc., 597 F. Supp. 2d 973, 978 (D.
Minn. 2009). The risk of inconsistent adjudications results from
the fact that there are two proceedings, not from BC not being a
party in the federal case.
Even if the federal proceeding and the Commonwealth
proceeding produced different results, VSC would not be subject to
different obligations because of BC's absence from this case. The
confirmation of an arbitration award finalizes the award and makes
the award a judgment of the court. 6 J. Bourdeau & E. Mayer,
C.J.S. Arbitration § 178; see Irving R. Boody & Co. v. Win Holdings
Int'l, Inc., 213 F. Supp. 2d 378, 380 (S.D.N.Y. 2002) ("The
confirmation of an arbitration award converts the final arbitration
award into the judgment of the court.").15
Even so, the risk that there would be inconsistent
results is low because of the deferential manner in which the FAA
requires arbitral awards to be reviewed.16 "[R]eview of the
15
The parties do not present arguments concerning the
preclusive effect that the first proceeding to reach judgment would
have on the other proceeding.
16
Although it appears as if VSC may have argued unsuccessfully
to the Commonwealth court that the FAA does not apply under the
terms of the contract, it has not advanced any such argument in its
briefing before this court even though BIL advances a number of
arguments that depend on the FAA's applicability. We assume the
FAA would apply, and also note that our own case law requires that
to use local arbitration rules instead of the FAA, the contract
-23-
arbitration award itself is 'extremely narrow and exceedingly
deferential.'" Bangor Gas Co., LLC v. H.Q. Energy Servs. (U.S.),
Inc., 695 F.3d 181, 186 (1st Cir. 2012)(quoting Bull HN Info. Sys.,
Inc. v. Hutson,
229 F.3d 321, 330 (1st Cir. 2000)).
The Rule 19 inquiry may require "some preliminary
assessment of the merits of certain claims." Republic of
Philippines v. Pimentel, 553 U.S. 851, 869 (2008); see
Picciotto,
512 F.3d at 14-15 (stating Rule 19 "requires the trial court to
make pragmatic judgments and to 'decide whether considerations of
efficiency and fairness, growing out of the particular
circumstances of the case, require that a particular person be
joined as a party'" (footnote omitted) (quoting
Shearson, 877 F.2d
at 134)); 7 C. Wright & A. Miller, Federal Practice & Procedure
§ 1608 ("[C]ourts must look to the practical likelihood of
prejudice . . . ."). Taking into account that consideration, the
risk of inconsistency may be theoretically possible, but is not a
practical concern.
VSC's real argument is that at the second stage of the
arbitration BC will be needed to give VSC monetary relief, if any
is ordered. That may or may not be, but that argument is
premature. There is and has been no second stage to the
arbitration, nor any petition to review such a second stage.
must say so unequivocally. See, e.g., PaineWebber Inc. v. Elahi,
87 F.3d 589, 593-94 (1st Cir. 1996).
-24-
Review of this stage of the arbitration does not require that BC be
a party. There is diversity jurisdiction.
III.
Having found dismissal for want of jurisdiction to be in
error, we would ordinarily reverse the district court's dismissal
and remand for further proceedings. However, in this unusual case,
we remand and order the court to stay further proceedings pending
the outcome of the Commonwealth court proceedings. Considerations,
including those of wise and sound judicial administration and
comity, persuade us that a stay is warranted until the parallel
case in the Commonwealth courts is concluded. See Cruz v. Melecio,
204 F.3d 14, 22 (1st Cir. 2000). Although neither party raised the
possibility of deferring the exercise of federal jurisdiction, we
may do so sua sponte. Rivera-Feliciano v. Acevedo-Vilá,
438 F.3d
50, 59 (1st Cir. 2006); see Jiménez v. Rodríguez-Pagán,
597 F.3d
18, 27 n.4 (1st Cir. 2010);
Cruz, 204 F.3d at 22 n.7.
Parallel litigation is not uncommon in our federal system
and "[i]t has long been established that the presence of parallel
litigation in state court will not in and of itself merit [a stay]
in federal court." Jiménez, 597 F.3d at 27 (citing McClellan v.
Carland,
217 U.S. 268, 282 (1910)). However, federal courts
appropriately consider "a complex of considerations designed to
soften the tensions inherent in a system that contemplates parallel
judicial processes." Pennzoil Co. v. Texaco, Inc.,
481 U.S. 1, 11
-25-
n.9 (1987). In some circumstances, the doctrine of comity, which
is designed to avoid "unseemly conflict between two sovereignties,"
warrants a stay. Cruz, 204 F.3d at 23 (quoting Glen Oaks Utils.,
Inc. v. City of Houston,
280 F.3d 330, 334 (5th Cir. 1960))
(internal quotation marks omitted); see Quackenbush v. Allstate
Ins. Co.,
517 U.S. 706, 733 (1996) (Kennedy, J., concurring)
(stating that "obligations of comity" are "an important part of the
justification and authority" to defer the exercise of federal
jurisdiction). In other circumstances, "considerations of 'wise
judicial administration'" may warrant a stay as well.
Cruz, 204
F.3d at 23 (quoting Colo. River Water Conservation Dist. v. United
States,
424 U.S. 800, 818 (1976)). Here there is more than simple
parallel litigation. Rather, the two considerations of comity and
wise judicial administration together counsel a stay. The
Commonwealth proceeding involves the same legal issues as the
federal one, includes all parties to the arbitration, has already
been decided by the initial reviewing court, and is now on appeal.
In addition, the Commonwealth proceeding was filed first, this
federal proceeding was filed about a month later, and we have some
concern that BIL has engaged in forum-shopping.
Whether or not this case fits within the formal
strictures of Colorado River or other formal categories of staying
-26-
the exercise of federal jurisdiction,17 a stay is appropriate. See
Cruz, 204 F.3d at 23 (stay appropriate even where case "arguably
does not fit into any of the established doctrinal boxes"); see
also
Pennzoil, 481 U.S. at 12 n.9 (explaining that doctrines of
withholding the exercise of federal jurisdiction "are not rigid
pigeonholes into which federal courts must try to fit cases"). A
line of cases in our circuit involving parallel state and federal
actions, which includes Currie v. Group Insurance Commission,
290
F.3d 1 (1st Cir. 2002), Rivera-Feliciano v. Acevedo-Vilá,
438 F.3d
50, and Jiménez v. Rodríguez-Pagán,
597 F.3d 18, support the result
we reach.
In Jiménez, this court recognized that when non-diverse
parties are absent from the federal litigation, but are part of the
advanced state litigation, as BC is in this case, the desirability
of avoiding piecemeal litigation favors staying the federal
17
The stay here would most comfortably fit into the Colorado
River doctrine, where the Supreme Court held that when state and
federal courts are exercising concurrent jurisdiction
contemporaneously it may be appropriate in some instances for the
federal court to defer to the state court. See Colo. River Water
Conservation Dist. v. United States, 424 U.S. 800, 817 (1976);
Currie v. Grp. Ins. Comm'n,
290 F.3d 1, 9 (1st Cir. 2002). We have
previously found at least eight non-exhaustive factors that are
considered under that doctrine: (1) whether any court has
jurisdiction over a res; (2) the geographical inconvenience of the
federal forum; (3) the desirability of avoiding piecemeal
litigation; (4) the order in which the forums obtained
jurisdiction; (5) whether federal or state law controls; (6) the
adequacy of the state forum to protect the parties' interests; (7)
the vexatious nature of the federal claim; and (8) respect for the
principles underlying removal jurisdiction. Jiménez v. Rodríguez-
Pagán,
597 F.3d 18, 27-28 (1st Cir. 2010);
Currie, 290 F.3d at 10.
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proceeding. 597 F.3d at 29-30; see also
Rivera-Feliciano, 438 F.3d
at 62 (better to avoid piecemeal litigation and allow Puerto Rico
courts to decide controlling issues of Puerto Rico law). There, we
stated that "[t]his disparity in inclusiveness thus creates a
greater practical risk of piecemeal litigation than the baseline
inefficiencies of the average exercise of concurrent federal-state
jurisdiction," because the state court action could comprehensively
adjudicate the claims.
Jiménez, 597 F.3d at 30. In this matter,
the claims before both courts are the same and arise from the exact
same arbitration. In the Puerto Rico matter, BC is a party and in
the federal case it is not. As in Jiménez, the state court
proceeding can completely dispose of the matter. In Jiménez, we
favored a stay where the federal case "foundered on jurisdictional
questions" and the Commonwealth action was "already well into the
discovery stage."
Id. at 31.
"Here the doctrine of sound judicial administration" that
underlies decisions to defer to state courts "has even more force
because the state proceeding is already on appeal on a fully
developed record."18
Currie, 290 F.3d at 11 n.8; cf. In re
President & Fellows of Harvard Coll.,
149 F.2d 69, 72-73 (1st Cir.
18
We were informed at oral argument that technically VSC has
only petitioned the appeals court for review because there is no
appeal as of right from the lower court confirmation of the Award.
For simplicity, and because the distinction makes no difference in
this case, we have referred to the appellate proceedings as an
appeal.
-28-
1945) (holding stay improper absent a state court judgment, but
suggesting that an opposite decision would result if a state court
judgment had been rendered and was pending on appeal in the state
system). Indeed, the Seventh Circuit has also held that in some
instances it is appropriate to stay a federal proceeding pending
the outcome of the appeal in a parallel state court proceeding.
See Hearne v. Bd. of Educ., 185 F.3d 770, 778 (7th Cir. 1999)
(finding a stay appropriate where fired teacher appealed an
administrative decision to terminate the teacher to a state appeals
court and also filed a federal action); Rogers v. Desiderio,
58
F.3d 299, 302 (7th Cir. 1995). In a case involving claim
splitting, the Seventh Circuit decided that when plaintiffs'
earlier-filed state court action was already on appeal, "[i]t is
sensible to stay [federal] proceedings until [the state case] has
reached a conclusion" on appeal, and that under these circumstances
a federal judge "need not barge ahead on the off-chance of beating
the state court to a conclusion."
Rogers, 58 F.3d at 302; accord
Glen
Oaks, 280 F.2d at 334 (reasoning that doctrine of comity
required a stay and stating that "[s]ince an appeal was pending
from the state court judgment . . . it was proper that the
proceedings in the federal court be stayed until the final
termination of the proceedings in the state court," and that "it
would have been error if the district court had not stayed its
hand").
-29-
Another consideration, discouragement of forum-shopping,
also favors a stay. In Cruz v. Melecio, 204 F.3d 14, we stated
that we could consider "the discomforting specter of forum-
shopping" in the "decisional calculus" to enter a stay order.
Id.
at 24. For obvious reasons, that is a concern here.
At oral argument BIL argued that a stay should not be
granted because the Puerto Rico courts are not adequate: they are
slow and BIL may not receive a prompt decision in VSC's appeal from
the order entered in BIL's favor. BIL also asserted that there is
a risk that the Puerto Rico courts will incorrectly apply Puerto
Rico law, rather than the FAA, in reviewing the Award, which,
according to BIL, offers less deferential review than the FAA.
In other contexts this circuit has rejected the notion
that Puerto Rico courts offer an inadequate forum. See Coors
Brewing Co. v. Méndez-Torres, 678 F.3d 15, 28-30 (1st Cir. 2012);
see generally Pleasures of San Patricio, Inc. v. Méndez-Torres,
596
F.3d 1 (1st Cir. 2010).
As to the risk that the Puerto Rico courts would apply
what BIL argues is the incorrect substantive law, the Court of
First Instance in fact found the FAA to govern, which is BIL's
position, so we do not see what the prejudice is. Further, if
Puerto Rico's Supreme Court were to find the FAA inapplicable, BIL
could seek further review in the U.S. Supreme Court. See Coors
-30-
Brewing, 678 F.3d at 29-30. Additionally, concern that a party
will lose its case does not demonstrate the inadequacy of a forum.
Id. at 29 (party "could not demonstrate the inadequacy of the
Puerto Rico courts merely by predicting that they would lose their
case" (citing San
Patricio, 596 F.3d at 9)).
In situations involving parallel state court litigation
where deferring the exercise of jurisdiction is proper, this
circuit has historically ordered a stay rather than a dismissal.
Jiménez, 597 F.3d at 32. Accordingly, we instruct the district
court to stay these proceedings pending final disposition of the
appellate process in the Puerto Rico courts.
IV.
Given our resolution of this appeal, we need not address
a number of arguments raised on appeal, including whether Rule 19
is preempted by the FAA, whether the district court engaged in
"constructive" abstention through Rule 19, or whether the Award
should be confirmed or vacated.
The district court's order dismissing the case under Fed.
R. Civ. P. 12(b)(1) is reversed and the case is remanded. The
district court shall proceed in a manner consistent with this
opinion. So ordered. No costs are awarded.
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