SHEPHERD, Circuit Judge.
In Colorado River Water Conservation District v. United States, the United States Supreme Court held that exceptional circumstances may permit a federal court to refrain from hearing a case and instead defer to a concurrent, parallel state-court proceeding. The question in this appeal is whether a federal court may utilize Colorado River to stay a federal shareholder-derivative proceeding that contains a valid claim within the exclusive jurisdiction of the federal courts. We hold that such a case may not be stayed pursuant to Colorado River. Thus, we vacate the stay order and remand the case for further proceedings consistent with this opinion.
This controversy began in 2012 with a New York Times investigative report. The report detailed an alleged bribery scheme involving Wal-Mart's Mexican subsidiary and Mexican government officials, suggested that Wal-Mart violated the Foreign Corrupt Practices Act, and questioned the sufficiency of Wal-Mart management's response. In the wake of this report, several shareholder-derivative lawsuits were filed across the country, including shareholder-derivative lawsuits in Delaware state court (the Delaware proceeding)
The Delaware and Federal proceedings largely mirror each other. Both proceedings focus on Wal-Mart management's alleged breach of its fiduciary duties under Delaware law. Notably, however, the Plaintiffs in the Federal proceeding bring two claims pursuant to the Securities Exchange Act of 1934 (the Securities Act claims). Because federal courts have exclusive jurisdiction over Securities Act claims, see 15 U.S.C. § 78aa, these claims have not been pled in the Delaware proceeding. The Defendants moved to stay the Federal proceeding pending the resolution of the Delaware proceeding. The district court, in reliance on Colorado River, granted the Defendants' motion. The district court found that the Delaware proceeding would adequately protect the Plaintiffs' rights and that the proceedings' redundancy justified Colorado River abstention. In the alternative, the district court concluded that its inherent power to stay proceedings in the interest of controlling its docket was sufficient to support the stay. The Plaintiffs appeal the district court's order.
This appeal raises three issues: (1) whether the district court's order is final under 28 U.S.C. § 1291; (2) whether the district court abused its discretion in utilizing the Colorado River doctrine to stay the Plaintiffs' case; and (3) if Colorado River abstention is inappropriate, whether the district court abused its discretion by relying on its inherent power to stay proceedings in the interest of controlling its docket to accomplish a result identical to that achieved through the use of Colorado River.
We begin by addressing our jurisdiction to hear the Plaintiffs' appeal. See 28 U.S.C. § 1291; Kreditverein der Bank Austria Creditanstalt fur Niederösterreich und Bergenland v. Nejezchleba, 477 F.3d 942, 945 (8th Cir.2007).
In analyzing the finality of a stay order, we have considered: (1) whether the concurrent proceedings involve similar litigants; (2) whether the concurrent proceedings involve similar claims and issues; (3) whether the concurrent proceeding's judgment would have res judicata effect in federal court; and (4) whether the district court's order contemplated further district court involvement in the proceeding. See Kreditverein, 477 F.3d at 946; Boushel, 985 F.2d at 408-09; Lunde v. Helms, 898 F.2d 1343, 1345 (8th Cir.1990) (per curiam).
The Federal and Delaware proceedings involve substantially similar litigants. Since the shareholders in the Federal and Delaware proceedings bring their suits derivatively, Wal-Mart is the true plaintiff in interest in both proceedings. In re M & F Worldwide Corp. S'holder Litig., 799 A.2d 1164, 1174 n. 31 (Del.Ch.2002) (quoting In re MAXXAM, Inc./Federated Development S'holders Litig., 698 A.2d 949, 956 (Del.Ch. 1996)); accord In re Sonus Networks, Inc., S'holder Derivative Litig., 499 F.3d 47, 63-64 (1st Cir.2007). Though, to our knowledge, no consolidated complaint in the Delaware proceeding has been filed, the Wal-Mart officers named in the separate Delaware complaints largely match those in the Federal proceeding. Cf. Clark v. Lacy, 376 F.3d 682, 686 (7th Cir.2004) ("The addition of a party or parties to a proceeding, by itself, does not destroy the parallel nature of state and federal proceedings.").
More critically, the core claims and issues in each proceeding correspond. The Plaintiffs in the Federal proceeding assert two main claims
Next, a judgment rendered in Delaware will likely preclude subsequent litigation in the Federal proceeding. Under the full faith and credit statute, 28 U.S.C. § 1738, a judgment rendered in Delaware is entitled to the same preclusive effect in federal court as it would receive in Delaware. Minch Family LLLP v. Buffalo-Red River Watershed Dist., 628 F.3d 960, 966 n. 4 (8th Cir.2010). Accordingly, the Delaware proceeding's preclusive effect on the Federal proceeding is largely determined by Delaware law.
Generally, under Delaware law, a judgment rendered in a shareholder-derivative lawsuit will preclude subsequent litigation by the corporation and its shareholders. See Ezzes v. Ackerman, 234 A.2d 444, 445 (Del.1967); La. Mun. Police Emps. Ret. Sys. v. Pyott, 46 A.3d 313, 329-31 & n. 11 (Del.Ch.2012), rev'd on other grounds, 74 A.3d 612 (Del.2013); accord Ross v. Bernhard, 396 U.S. 531, 538, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970); Cramer v. Gen. Tel. & Elecs. Corp., 582 F.2d 259, 269 (3d Cir.1978). Preclusion principles may also apply to other types of dismissals, for instance a shareholder's dismissal for failure to make demand on the board of directors. See Pyott v. La. Mun. Police Emps. Ret. Sys., 74 A.3d 612, 617-18 (Del. 2013); In re Career Educ. Corp. Derivative Litig., C.A. No. 1398-VCP, 2007 WL 2875203, at *10-15 (Del.Ch. Sept. 28, 2007); accord In re Sonus Networks, Inc., 499 F.3d at 64 (applying Massachusetts law and reasoning that the "policy of repose strongly militates in favor of preclusion"). But see Pyott, 46 A.3d at 328-35 (refusing to give issue-preclusive effect to a pre-suit demand dismissal but recognizing that the earlier dismissal "could operate as stare decisis"). Furthermore, despite Delaware's inability to adjudicate the merits of the Securities Act claims, the Delaware proceeding may still preclude litigation of the Securities Act claims in the Federal proceeding. See Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 375-78, 384-87, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996); Brannan v. Eisenstein, 804 F.2d 1041, 1044-45 (8th Cir.1986) ("Notwithstanding the exclusive jurisdiction of the federal courts over the claim, principles of issue preclusion ... remain applicable."); Abbey v. Control Data Corp., 603 F.2d 724, 730-32 (8th Cir.1979) (holding outside directors could, pursuant to the business judgment rule, terminate a derivative action that included a Section 14(a) claim). Though one could construct a hypothetical situation where the Delaware proceeding would not preclude the entire Federal proceeding, such an outcome is unlikely and ignores the realistic risk that the Plaintiffs' lawsuit is effectively dismissed from federal court. See In re Urohealth Sys., Inc., 252 F.3d 504, 507 (1st Cir.2001) (holding that a "probable" preclusive effect is sufficient for appellate jurisdiction over a stay order); Michelson, 138 F.3d at 515-16 (holding that "a realistic possibility" of preclusion creates appellate jurisdiction over stay order).
Two distinctions can be drawn between this case and Kreditverein, Boushel, and Lunde, Eighth Circuit cases involving stay orders that lacked finality. First, unlike the non-federal proceedings in Kreditverein, Boushel, and Lunde, the Delaware proceedings here will resolve nearly every issue and claim raised in the Federal proceeding. In Kreditverein, for instance, the foreign proceeding dealt only with a determination of damages related to one of several claims raised in the federal proceeding. 477 F.3d at 946-47; accord Boushel, 985 F.2d at 408-09. Second, unlike the district courts in Kreditverein, Boushel, and Lunde, the district court here premised its order on Delaware's ability to completely and fully adjudicate the rights of Wal-Mart's shareholders. When the district court in Boushel stayed the federal proceeding, it specifically noted in the stay order that the plaintiffs could return to federal court if they were unable to obtain full relief. 985 F.2d at 408. This "specifically left the door open for further litigation in the federal court." Id. at 410. Similar language can be found in the Kreditverein and Lunde stay orders. Kreditverein, 477 F.3d at 947; Lunde, 898 F.2d at 1345.
Here, the district court stayed and administratively terminated the Federal proceedings in favor of a substantially similar state-court proceeding that will have the realistic effect of precluding any future proceedings in federal court. Accordingly, this order is final and, therefore, appealable.
Having determined that we have appellate jurisdiction, we turn to the merits and begin with the propriety of Colorado River abstention in this case. A district court's decision to abstain pursuant to Colorado River is reviewed for an abuse of discretion. Fru-Con Constr. Corp. v. Controlled Air, Inc., 574 F.3d 527, 534 (8th Cir.2009). "Federal courts, however, have a `virtually unflagging ... obligation to exercise the jurisdiction given them, even when there is a pending state court action involving the same subject matter.'" Id. (quoting Mountain Pure, LLC v. Turner Holdings, LLC, 439 F.3d 920, 926 (8th Cir.2006)); see also Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817-18, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). In keeping with this obligation,
The threshold question is whether the state and federal proceedings are parallel. Id. at 535.
Applying these standards, we determine that the Delaware and Federal proceedings are not parallel. Though most of the issues raised in the Federal proceeding are duplicated in Delaware, Delaware courts have no jurisdiction to directly address the merits of the Plaintiffs' Securities Act claims. 15 U.S.C. § 78aa ("The district courts of the United States ... shall have exclusive jurisdiction... of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder."). Furthermore, the Delaware proxy-misrepresentation claim will require a showing of bad faith, see Arnold v. Soc'y for Sav. Bancorp, Inc., 650 A.2d 1270, 1287-88 (Del.1994), unlike the negligence standard that applies to the Securities Act proxy-misrepresentation claim. SEC v. Das, 723 F.3d 943, 954 (8th Cir.2013).
Even more critical than these differences, however, is the consensus among circuits that Colorado River does not apply when an exclusively federal claim is properly before the district court. The Second, Seventh, and Ninth Circuits have held that Colorado River is not appropriate when a plaintiff raises a non-frivolous claim over which federal courts have exclusive jurisdiction. Medema v. Medema Builders, Inc., 854 F.2d 210, 213-15 (7th Cir.1988); Andrea Theatres, Inc. v. Theatre Confections, Inc., 787 F.2d 59, 63-64 (2d Cir. 1986); Silberkleit v. Kantrowitz, 713 F.2d 433, 435-36 (9th Cir.1983) (citing Turf Paradise, Inc. v. Arizona Downs, 670 F.2d 813, 820-21 (9th Cir.1982)); cf. Kruse v. Snowshoe Co., 715 F.2d 120, 124 (4th Cir. 1983). The Defendants have not cited to, nor could we find, a circuit court that has held a federal court may use Colorado River to stay or dismiss a claim within the exclusive jurisdiction of the federal courts.
A strict limitation on the scope of Colorado River is consistent with the narrow nature of the doctrine and Congress's grant of exclusive federal jurisdiction. When exclusive federal jurisdiction is at play, "abstention would run counter to Congress' determination, reflected in grants of exclusive federal jurisdiction, that federal courts should be the primary fora for handling such claims." Andrea Theatres, Inc., 787 F.2d at 63. "Congress grants exclusive federal jurisdiction in order to cultivate uniformity and expertise, and sometimes to ensure the use of more liberal federal procedural protections." Medema, 854 F.2d at 213; see also Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 383, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996). When a district court employs Colorado River in the face of exclusive federal jurisdiction, it not only abdicates its general grant of jurisdiction but also ignores Congress's desire to have federal courts adjudicate Securities Act claims. See Matsushita Elec. Indus. Co., 516 U.S. at 386, 116 S.Ct. 873 ("Congress' intent to provide an exclusive federal forum for adjudication of suits to enforce the Exchange Act is clear enough."). The prospect of increased judicial efficiency cannot justify such "perfunctory deference to Congress's intent in committing the 1934 Act claim to exclusive federal jurisdiction." See Medema, 854 F.2d at 214-15 & n. 2; see also Will v. Calvert Fire Ins. Co., 437 U.S. 655, 673, 98 S.Ct. 2552, 57 L.Ed.2d 504 (1978) (Brennan, J., dissenting) ("[A]s evinced by the exclusive jurisdiction of the federal courts to determine 1934 Act claims, the relevant federal policy here is the precise opposite of that found to require deference to the concurrent state proceeding in Colorado River.").
The Defendants argue that the numerous decisions from the Second, Seventh, and Ninth Circuits — holding that Colorado River cannot be used when the federal proceeding contains an exclusively federal claim — do not apply here because those cases did not arise in the derivative setting and therefore did not involve a potentially dispositive threshold issue of state law.
The Defendants' argument is persuasive, especially given the two-fold nature of shareholder-derivative litigation, a suit by the shareholders compelling the corporation to act and a suit by the corporation against those liable to it. See Ross v. Bernhard, 396 U.S. 531, 534-35 & n. 4, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970); Aronson v. Lewis, 473 A.2d 805, 811 (Del.1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 253-54 (Del.2000); see also Potter v. Hughes, 546 F.3d 1051, 1055-56 (9th Cir.2008) (analyzing Federal Rule of Civil Procedure 23.1 as a "logical antecedent" to whether the court had subject matter jurisdiction over the case). Nevertheless, we reject the Defendants' argument because it ignores the formal differences between the two proceedings after the threshold demand determination.
We cannot simply assume that Delaware's demand requirements will dispose of this controversy. See Shields v. Murdoch, 891 F.Supp.2d 567, 579 (S.D.N.Y. 2012). The Defendants may be correct; the initial demand inquiry may dispose of both proceedings. The Delaware Chancery Court may, however, excuse pre-suit demand and allow the Delaware proceeding to continue. If the Delaware action proceeds, it will not directly adjudicate the Wal-Mart shareholders' potential Securities Act claims. The resulting divergence of the Federal and Delaware proceedings, and the practical elimination of the Securities Act claims, casts doubt on the parallel nature of the two proceedings. See Fru-Con Constr. Corp., 574 F.3d at 535 ("[J]urisdiction must be exercised if there is any doubt as to the parallel nature of the state and federal proceedings.").
The Defendants counter that the two proceedings remain parallel despite the Securities Act claims' elimination because the shareholders in the Delaware proceeding would be able to litigate a similar Delaware-based proxy-misrepresentation claim. We disagree. Notwithstanding the similarities between Federal and Delaware claims in this case, granting a district court the discretion to pretermit Securities Act claims, in favor of a state proceeding that lacks jurisdiction to hear them, demotes the Securities Act claims to a secondary status and deprives plaintiffs of a
We share the district court's legitimate concern that shareholders may utilize Securities Act claims to gain a tactical advantage, secure a separate federal forum, and avoid consolidation with state actions. The district court discussed the Federal proceeding's potential vexatious nature as an exceptional-circumstance factor weighing in favor of abstention. Since we hold the Federal and Delaware proceedings are not parallel, we need not weigh the exceptional-circumstances factors. Nonetheless, we note that other circuits have declined to adopt a categorical rule barring Colorado River when an exclusively federal claim is raised in the federal proceeding, for instance Colorado River may still remain appropriate if the claim is frivolous. See Medema, 854 F.2d at 215. We need not consider the wisdom of these exceptions here, however, because the district court did not consider them in the first instance.
In conclusion, we join the Second, Seventh, and Ninth Circuits and hold that the Colorado River doctrine may not be used to stay or dismiss a federal proceeding in favor of a concurrent state proceeding when the federal proceeding contains a claim over which Federal courts have exclusive jurisdiction.
The district court provided an alternative basis for imposing the stay, a district court's inherent power to stay proceedings in the interest of controlling its docket. We review a district court's decision to stay a case on this basis for abuse of discretion. See Lunde, 898 F.2d at 1345.
We begin with the often quoted phrase relied upon by the district court, "the power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants." Landis v. N. Am. Co., 299 U.S. 248, 254, 57 S.Ct. 163, 81 L.Ed. 153 (1936); see also Kreditverein, 477 F.3d at 945-46. We have often recognized a district court's inherent power to manage and control its docket. See, e.g., Missouri ex rel. Nixon v. Prudential Health Care Plan, Inc., 259 F.3d 949, 952-54 (8th Cir.2001); Lunde, 898 F.2d at 1345. In Kreditverein, the court noted that these inherent powers coexist with the Colorado River doctrine and the line dividing the two powers is not immediately clear. See 477 F.3d at 945-46. Though these powers coexist, they are different and cannot be used, as they were here, as alternative methods for accomplishing an identical result.
A year before the Supreme Court's ruling in Colorado River, we recognized a split among the circuits regarding a district court's power to "stay proceedings in
Post Colorado River, our precedent has recognized that a district court retains its inherent power to control its docket when facing concurrent state and federal litigation. See Lunde, 898 F.2d at 1345 ("[W]e hold the district court did not clearly abuse its discretion in staying the federal case pending resolution of the on-going state proceedings. In our view, this is a matter of docket management."). This power, however, is not limitless. Colorado River, reaffirmed by Moses H. Cone, sets forth the proper test for a district court to apply when the district court's order, in the context of concurrent state and federal duplicative litigation, absent the application of other abstention doctrines, amounts to a complete refusal to exercise jurisdiction.
On remand, the district court may impose a more finite and less comprehensive stay, if it concludes that such a stay properly balances the rights of the parties and serves the interests of judicial economy.
Accordingly, we vacate the district court's order and remand for further proceedings consistent with this opinion.
In September 2012, the Delaware plaintiffs consolidated their lawsuits and agreed to proceed jointly to inspect the books and records of Wal-Mart, pursuant to Del.Code Ann. tit. 8, § 220. Order Regarding Case Management at 8, In re Wal-Mart Stores, Inc.: Delaware Derivative Litig., Consolidated C.A. No. 7455-CS (Del. Ch. Sept. 5, 2012). On October 15, 2013, the Delaware Chancery Court issued a final order in the section 220 proceeding. The Delaware defendants appealed that order to the Delaware Supreme Court and filed a motion to stay the Delaware case pending the appeal. The Delaware plaintiffs have agreed to file their consolidated complaint after resolution of the appeal. See Stipulation and Order Amending Order Regarding Case Management at 1-2, In re Wal-Mart Stores, Inc.: Delaware Derivative Litig., Consolidated C.A. No. 7455-CS (Del. Ch. Nov. 18, 2013).
Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 18-19, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (emphasis added).