Case Information
*2 Before MURPHY, MELLOY, and SHEPHERD, Circuit Judges.
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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.
I.
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) and in the United States District Court for the Western District of Arkansas (the Federal proceeding). The lawsuits in the Western District of Arkansas were consolidated, and a consolidated complaint was filed by the plaintiff-shareholders (the Plaintiffs) against several Wal-Mart officers (the Defendants). See J.A. 92 (Consolidated Verified Shareholder Derivative Complaint).
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 State Teachers’ Ret. Sys. v. Alvarez, No. 7490 (Del. Ch.) (filed May 3, 2012); N.Y. City Empls.’ Ret. Sys. v. Alvarez, No. 7612 (Del. Ch.) (filed June 8, 2012); Knowles v. Alvarez, No. 7630 (Del. Ch.) (filed June 18, 2012).
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). Cottrell v. Duke, No. 4:12-cv-4041-SOH; La. Mun. Police Emps.’ Ret. Sys.
v. Scott, No. 4:12-cv-4045-SOH; Tuberville v. Duke, 4:12-cv-4046-SOH; Lomax v. Walton, No. 4:12-cv-4047-SOH; William Cottrell v. Duke, No. 4:12-cv-4049-SOH; Richman v. Alvarez, No. 4:12-cv-4069-SOH.
*4 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.
II.
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.
A.
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,
*6 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.,
More critically, the core claims and issues in each proceeding correspond. The
Plaintiffs in the Federal proceeding assert two main claims : (1) breach of various
fiduciary duties under Delaware law and (2) violation of section 14(a) of the
Securities Act, codified at 15 U.S.C. § 78n. See J.A. 164-66. The separate plaintiffs
in the Delaware proceeding assert breach-of-fiduciary-duty claims identical to those
in the Federal proceeding. Additionally, the Delaware plaintiffs allege a Delaware
proxy-misrepresentation claim that shares a materiality element with section 14(a) of
the Securities Act. See Rosenblatt v. Getty Oil Co.,
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,
Finally, the district court’s stated objective was to surrender complete
jurisdiction to the Delaware Chancery Court and allow Delaware to fully adjudicate
the controversy. See Kreditverein, 477 F.3d at 946 (“[A] stay is immediately
appealable if . . . the sole purpose and effect of the stay are precisely to surrender
jurisdiction of a federal suit to another court.” (quoting Moses H. Cone,
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.
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.
B.
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.,
Id. at 535. In the Eighth Circuit, to be parallel, “a substantial similarity must exist
[8]
between the state and federal proceedings, which similarity occurs when there is a
substantial likelihood that the state proceeding will fully dispose of the claims
presented in the federal court.” Id. When any doubt exists as to the parallel nature
of concurrent state and federal proceedings, the district court cannot utilize Colorado
River to refuse its jurisdiction. Id. (citing AAR Int’l, Inc. v. Nimelias Enter., S.A.,
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,
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.,
Generally, federal courts hold “no more right to decline the exercise of
jurisdiction which is given, than to usurp that which is not given.” New Orleans Pub.
Serv., Inc. v. Council of New Orleans,
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,
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. When a shareholder sues derivatively, the
shareholder must satisfy the pleading requirements of Federal Rule of Civil Procedure
23.1, which incorporate a threshold issue of substantive state law, the sufficiency of
demand or excuse. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95-97
(1991); Gomes v. Am. Century Cos.,
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,
We cannot simply assume that Delaware’s demand requirements will dispose
of this controversy. See Shields v. Murdoch,
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 forum to assert a remedy chosen by Congress. See Levy v. Lewis, 635
F.2d 960, 967 (2d Cir. 1980) (“[F]ederal courts must hear claims within their
exclusive jurisdiction, for otherwise the right alleged would never be fully
adjudicated.”). “Congress plainly contemplated the possibility of dual litigation in
state and federal courts relating to securities transactions” and still, deliberately
decided to vest federal courts with exclusive jurisdiction to adjudicate Securities Act
claims, claims that frequently arise in the derivative setting. See Matsushita Elec.
Indus. Co.,
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
*16
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,
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.
C.
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,
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.,
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 an
action pending the outcome of a similar or identical state court action filed before the
federal action.” Applegate v. Devitt, 509 F.2d 106, 108-09 (8th Cir. 1975) (per
curiam); see also Augustin v. Mughal,
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,
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
*19
serves the interests of judicial economy. See Lunde,
III.
Accordingly, we vacate the district court’s order and remand for further proceedings consistent with this opinion.
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Notes
[1] Klein v. Walton, No. 7455 (Del. Ch.) (filed Apr. 25, 2012); Cohen v. Alvarez, No. 7470 (Del. Ch.) (filed Apr. 27, 2012); Gerber v. Alvarez, No. 7477 (Del. Ch.) (filed May 1, 2012); Brazin v. Walton, No. 7489 (Del. Ch.) (filed May 3, 2012); Cal.
[3] We do not address whether the district court’s stay order is subject to
interlocutory review as a collateral order under Cohen because the Plaintiffs have
failed to raise the argument in either of their briefs or at argument. See Ngure v.
Ashcroft,
[4] This effect-driven analysis leads us to reject the Defendants’ contention that the district court’s alternative rationale for staying the case—the district court’s inherent power to control its docket—immunizes the stay order from appeal. However the district court labeled its analysis, we must analyze the practical effects of the district court’s actions.
[5] The Plaintiffs also bring a claim under Section 29(b) of the Securities Act to recover the compensation the Defendants received while violating Section 14(a) and a claim for contribution and indemnity. See J.A. 164-68.
[6] We pass no judgment on appellate jurisdiction in a case where an indefinite
delay is not accompanied by any potential preclusive effect. Contra Blue Cross &
Blue Shield of Ala. v. Unity Outpatient Surgery Ctr., Inc.,
[7] Because we hold that the Delaware and Federal proceedings are not parallel,
we do not address whether exceptional circumstances exist in this case. See Fru-Con
Constr. Corp.,
[8] Though our finality inquiry closely follows the Colorado River parallelism
inquiry, the two are slightly different in this case. When determining finality for
appellate jurisdiction purposes, our focus is on the practical effect of the district
court’s order. See Kreditverein,
[9] We reject the Defendants’ contention that Fuller v. Ulland,
[10] The Court in Moses H. Cone clarified that district courts retain discretion but
must apply the proper standard:
Under . . . Colorado River, of course, the decision whether to defer to
the state courts is necessarily left to the discretion of the district court in
the first instance. Yet to say that the district court has discretion is not
to say that its decision is unreviewable;
such discretion must be
exercised under the relevant standard prescribed by this Court. In this
c a s e ,
t h e r e l e v a n t s t a n d a r d
i s C o l o r a d o Riv e r ’ s
exceptional-circumstances test, as elucidated by the factors discussed
in that case
. As we shall now explain, we agree with the Court of
Appeals that the District Court in this case abused its discretion in
granting the stay.
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,