Paramount Pictures Corp. v Allianz Risk Transfer AGParamount Pictures Corp. v Allianz Risk Transfer AG
v
Allianz Risk Transfer AG et al., Respondents, et al., Defendant.
Argued January 10, 2018; decided February 20, 2018
Paramount Pictures Corp. v Allianz Risk Transfer AG, 141 AD3d 464, affirmed.
Garcia, J.
Nearly 10 years ago, following an unsuccessful investment venture, the parties began litigating their dispute in federal court. The district court entered judgment in favor of Paramount Pictures Corporation—the defendant in that action—and that judgment was affirmed on appeal. Paramount—now the plaintiff—subsequently initiated this state court action. In this appeal, defendants assert that Paramount‘s claim is barred by res judicata because it should have been asserted as a counterclaim in the earlier federal action. We agree.
I.
In 2004, Melrose Investors LLC was formed as a special purpose vehicle to facilitate investment in certain films produced and distributed by plaintiff Paramount Pictures Corporation. Defendants Allianz Risk Transfer AG, Marathon Structured Finance Fund, L.P., Newstar Financial Inc., and Munich Re Capital Markets New York, Inc. (the investors) invested in Melrose‘s debt and equity.
Prior to investing, the parties exchanged and executed a number of documents, including a private placement memorandum (PPM) and a subscription agreement. The subscription agreement contained a number of representations and warranties, including, among others, a waiver provision and a covenant not to sue. Section 4 (s) of the subscription agreement provided that Paramount had not “made any express or implied representation,
In December 2008, the investors brought suit in the District Court for the Southern District of New York, asserting claims for securities fraud (a federal question), common-law fraud (a state-law cause of action), and unjust enrichment (a state-law cause of action).1 The investors alleged that they had relied on “Paramount‘s knowing misrepresentations and omissions of information material to [the investors‘] decision to invest in securities.” In particular, the investors claimed that Paramount had induced them to invest through “disclosures in the PPM stating that Paramount regularly employed specific risk mitigation techniques when producing and distributing films,” but that, “contrary to the specific and repeated representations in the PPM,” Paramount “materially altered its production and distribution plans” with regard to the Melrose investment so as to “dramatically reduce the use of a key risk mitigation technique described in the PPM.” In its answer, Paramount asserted, among other things, (i) that the investors’ claims were barred because, contrary to the allegations, they had “relied on documents and information apart from the PPM in making their investment decisions,” and (ii) that one of those documents, the subscription agreement, contained an “express waiver” barring those claims. Paramount did not assert any counterclaims or otherwise allege that the investors had breached the covenant not to sue.
Following a bench trial, Paramount moved for entry of judgment in its favor. The district court granted Paramount‘s motion, finding “no basis for disregarding the subscription agreement” and “no legal reason why th[e] claim waiver would not apply as a matter of law.” Because the waiver was “valid and enforceable,” the court determined that “plaintiff investors waived their claims.” The court further noted: “In paragraph 4
While the investors’ appeal was pending in the Second Circuit, Paramount commenced this action in Supreme Court, alleging that the investors had breached the covenant not to sue in the subscription agreement by filing the federal action.2 Paramount seeks compensatory damages of not less than $8 million—the attorneys’ fees it allegedly incurred in the federal action, plus interest. The investors moved to dismiss the complaint, arguing, among other things, that Paramount‘s stаte court action was barred by res judicata because Paramount was required, and failed, to raise its claim as a compulsory counterclaim in the federal suit. Paramount opposed the motion.
Supreme Court denied the investors’ motion to dismiss. The court “decline[d] to apply
The Appellate Division unanimously reversed, granting the investors’ motion and dismissing Paramount‘s complaint (Paramount Pictures Corp. v Allianz Risk Transfer AG, 141 AD3d 464 [1st Dept 2016]). While noting that “New York‘s permissive counterclaim rule would save [Paramount‘s claim] from the traditional bar of res judicata,” the court determined that “the inquiry does not end there where the prior action was adjudicated in a compulsory counterclaim jurisdiction” (id. at 467). The Court then determined that Paramount‘s claim was compulsory under
We granted Paramount‘s motion for leave to appeal (28 NY3d 909 [2016]).
II.
The viability of Paramount‘s instant claim hinges on the preclusive effect of the parties’ prior federal judgment. As the United States Supreme Court has instructed, “[t]he preclusive effect of a federal-court judgment” on a subsequent state court action is “determined by federal common law” (Taylor v Sturgell, 553 US 880, 891 [2008]; see also Semtek Int‘l Inc. v Lockheed Martin Corp., 531 US 497, 507 [2001], quoting Deposit Bank v Frankfort, 191 US 499, 514-515 [1903]). “For judgments in federal-question cases,” the “uniform federal rules of res judicata” apply (Taylor, 553 US at 891 [internal quotation marks and brackets omitted]) whereas, “[f]or judgments in diversity cases, federal law incorporates the rules of preclusion applied by the State in which the rendering court sits” (id. at 891 n 4, citing Semtek, 531 US at 508). The United States Supreme Court “has the last word on the claim-preclusive effect of all federal judgments” (Semtek, 531 US at 507).
The Supreme Court has not squarely addressed the applicable federally prescribed rule of decision—the uniform federal rules or state preclusion law—in a case where, as here, the judgment in the parties’ federal action encompassed both federal- and state-law claims.3 Where federal and state preclusion law dictate the same result, the applicable law is irrelevant; whether analyzed under federal law or under state law
In the absence of a federal quеstion claim, the res judicata rules of New York—the “State in which the [rendering] court” sat—would ordinarily govern the preclusive effect of state-law claims (Semtek, 531 US at 508). But “even when States are allowed to give federal judgments . . . no more than the effect accorded to state judgments“—i.e., in diversity cases—“that disposition is by direction of [the United States Supreme Court], which has the last word on the claim-preclusive effect of all federal judgments” (Semtek, 531 US at 507). As such, the Supreme Court has provided that state preclusion law may apply to federal diversity judgments only to the extent state law is not “incompatible with federal interests” (id. at 509).5
Those federal interests are heightened where, as here, the federal judgment encapsulates matters of federal substantive law. In addition to the general interests underlying res judicata—judicial economy, finality, consistency, among other things—the “need for a uniform federal rule” is enhanced where federal, rather than state, substantive law is at issue (id. at 508). Given those objectives, the Supreme Court has been unequivocal: Though “no federal textual provision addresses the claim-preclusive effect of a federal-court judgment in a federal-question case,” the Court has “long held that States cannot give those judgments merely whatever effect they would give their own judgments, but must accord them the effect that this Court prescribes” (id. at 507; see also Taylor, 553 US at 891).
III.
In federal court,
A.
The preclusive effect of a judgment is determined by two related but distinct concepts—issue preclusion and claim preclusion—which collectively comprise the doctrine of “res judicata” (see Taylor, 553 US at 892). Issue preclusion, also known as collateral estoppel, bars the relitigation of “an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment” (New Hampshire v Maine, 532 US 742, 748-749 [2001]; see also Restatement [Second] of Judgments § 27). As a result, the determination of an essential issue is binding in a subsequent action, even if it recurs in the context of a different claim (Taylor, 553 US at 892).
While issue preclusion applies only to issues actually litigated, claim preclusion (sometimes used interchangeably with “res judicata“) more broadly bars the parties or their privies from relitigating issues that were or could have been raised in that action (Cromwell v County of Sac, 94 US 351, 352 [1877]). The doctrine “encompasses the law of merger and bar“—it precludes the relitigation of all claims fаlling within the scope of the judgment, regardless of whether or not those claims were in fact litigated (Migra v Warren City School Dist. Bd. of Ed., 465 US 75, 77 n 1 [1984]; Monahan v New York City Dept. of Corr., 214 F3d 275, 285 [2d Cir 2000]; Wright § 1417). As such, claim preclusion serves to bar not only “every matter which was offered and received to sustain or defeat the claim or demand,” but also “any other admissible matter which might have been offered for that purpose” (Nevada v United States, 463 US 110, 129-130 [1983], citing Cromwell, 94 US at 352). In other words, claim preclusion may “foreclos[e] litigation of a matter that never has been litigated, because of a determination that it should have been advanced in an earlier suit” (Migra, 465 US at 77 n 1).
B.
Invoking the doctrine of claim preclusion, the investors contend that Paramount‘s covenant not to suе claim should have been litigated in the prior federal action, and therefore Paramount‘s state court action is barred.6 To establish claim preclusion, a party must show: (1) a final judgment on the merits, (2) identity or privity of parties, and (3) identity of claims in the two actions (see Blonder-Tongue Laboratories, Inc. v University of Ill. Foundation, 402 US 313, 323-324 [1971]; Allen, 449 US at 94; Chase Manhattan Bank, N.A. v Celotex Corp., 56 F3d 343, 345-346 [2d Cir 1995]). The sole issue in this case is whether the claim to be litigated is “the same” as the claims previously litigated by the parties.
The Supreme Court has not articulated a precise test for determining whether there is an identity of claims for purposes of claim preclusion, and lower courts do not apply a uniform standard (see John F. Wagner, Jr., Proper Test to Determine Identity of Claims for Purposes of Claim Preclusion by Res Judicata under Federal Law, 82 ALR Fed 829, § 2 [a]; Nevada, 463 US at 130 n 12, 131; I.A.M. Natl. Pension Fund, Ben. Plan A v Industrial Gear Mfg. Co., 723 F2d 944, 947-948 [D DC 1983]). Prior to the adoption of the
The common-law doctrine of claim preclusion mirrored these limitations. For purposes of res judicata, case law focused on the precise “cause of action” asserted in the two suits (see United States v Memphis Cotton Oil Co., 288 US 62, 67-68 [1933]; see also In re General Adjudication of All Rights to Use Water in Gila Riv. Sys. & Source, 212 Ariz 64, 70, 127 P3d 882, 888 [2006]) and, guided by the aim of pleading—“to frame one single legal issue“—that phrase came to have “a very narrow meaning” (Williamson, 186 F2d at 469). Indeed,
“in the days when civil procedure still bore the imprint of the forms of action and the division between
law and equity, the courts were prone to associate claim with a single theory of recovery, so that, with respect to one transaction, a plaintiff might have as many claims as there were theories of the substantive law upon which he could seek relief against the defendant” (Restatement [Second] of Judgments § 24, Comment a).
One version of the test, for instance, examined the “primary right” of the plaintiff that had allegedly been infringed, and scrutinized whether the two actions involved an alleged infringement of that same legal right by the same wrongful act or omission (see Wagner, 82 ALR Fed 829, § 2 [a]; Restatement [Second] of Judgments § 24, Comment a; Baltimore S. S. Co. v Phillips, 274 US 316, 321 [1927]). Another test focused on whether the same evidence that was considered in the first judgment would sustain the second (see Nevada, 463 US at 130 n 12; see also Wagnеr, 82 ALR Fed 829, § 2 [a]; Restatement [First] of Judgments § 61). These narrow conceptions of a “claim” limited the effects of res judicata, enabling piecemeal litigation with minimal risk of preclusion (see Williamson, 186 F2d at 469; Restatement [Second] of Judgments § 24, Comment a).
But “[d]efinitions of what constitutes the ‘same cause of action’ ” for purposes of claim preclusion “have not remained static over time” (Nevada, 463 US at 130 [citations omitted]). Increasingly, modern practice has placed a premium on the policies underlying res judicata—notions of efficiency, finality, and judicial economy, among other things. The earlier common-law rule favoring claim isolation and party autonomy has been gradually supplanted by a new “general philosophy“—one of “limiting the number of law suits possible over one controversy” (Proceedings of the American Bar Association Institute at 247). In response to these evolving procedural ideas, courts have broadened preclusion principles to “apply in contexts not formerly recognized at common law” (Allen, 449 US at 94), and “[t]he scope of claims barred has expanded” (Conway, 60 U Chi L Rev at 145). In turn, modern conceptions of res judicata embrace a broadened notion of the scope of a “claim” (see Williamson, 186 F2d at 469 [“(T)he meaning of ‘cause of action’ for res judicata purposes is much broader today than it was earlier“]; see also Vestal, 66 Mich L Rev at 1723-1724 [noting that the “increase in the use of the principle of res judicata/preclusion in the federal courts” is embodied in, among other
This progression is also reflected in the concomitant evolution of modern procedural rules—namely, pleading and joinder reforms—that similarly operate to urge consolidation of related claims into a single action (Proceedings of the American Bar Association Institute at 247; Restatement [Second] of Judgments § 24, Comment a; Conway, 60 U Chi L Rev at 141; Williamson, 186 F2d at 469-470; Funny Guy, 293 Va at 146, 795 SE2d at 892).
C.
This modern notion of res judicata has called for a broadened standard for determining whether two claims—or, as in this case, a claim and counterclaim—are the “same” for purposes of claim preclusion. Though courts tasked with applying the “uniform federal rules of res judicata” employ a variety of formulations for purposes of defining a “claim,” the clear trend has been towards the adoption of a transactional analysis (see Wagner, 82 ALR Fed 829, § 2 [a]; see also Nevada, 463 US at 130 n 12; Conway, 60 U Chi L Rev at 145 n 23; Restatement [Second] of Judgments § 24, Comment a).7
The approach embodied in the Second Restatement similarly provides that “[a] defendant who may interpose a clаim as a counterclaim in an action but fails to do so” is precluded from relitigating that claim if
“(a) [t]he counterclaim is required to be interposed by a compulsory counterclaim statute or rule of court, or
“(b) [t]he relationship between the counterclaim and the plaintiff‘s claim is such that successful prosecution of the second action would nullify the initial judgment or would impair rights established in the initial action” (Restatement [Second] of Judgments § 22).
By incorporating compulsory counterclaims statutes and rules—adopted in all federal jurisdictions, and in the vast majority of states—the Restatement employs the transactional approach embodied in those statutes and rules to broaden the scope of a “cause of action” to which res judicata applies (see Wright § 1417; see also Restatement [Second] of Judgments § 22).
In a “modern procedural system“—which “permits the presentation in [one] action of all material relevant to the transaction“—“[t]he transaction is the basis of the litigative unit or entity which may not be split,” irrespective of the variant legal theories available (Restatement [Second] of Judgments § 24,
IV.
Under any transactional analysis, Paramount‘s covenant not to sue claim is sufficiently related to the investors’ claims in the federal case so as to preclude its assertion in a subsequent action (Pike, 266 F3d at 91). In their federal suit, the investors predominantly alleged that, thrоugh material misrepresentations and omissions, Paramount induced them to invest in the Melrose investment. These fraud-type allegations necessarily implicate the negotiations surrounding the Melrose investment—namely, the representations, warranties, and disclosures made by Paramount in connection with the transaction. The investors’ claims therefore required the district court to consider the scope and validity of the various documents exchanged and agreements executed in connection with the Melrose investment, including the PPM (cited frequently in the investors’ federal complaint) and, as relevant here, the subscription agreement.
Indeed, in its ruling, the district court reached issues that would likely prove dispositive to Paramount‘s instant claim: the court noted that the waiver provision of the subscription agreement also contained “an agreement by the plaintiffs in no event to bring any claim“—i.e., a covenant not to sue—and held that those provisions were “binding” on the investors. This overlap of essential facts is exemplified most poignantly by Paramount‘s offensive assertion of collateral estoppel in the instant case with respect to the district court‘s factual and legal findings concerning the subscription agreement.
At bottom, Paramount‘s covenant not to sue claim is based on the “same transaction” as the federal action (the Melrose investment); it involves much of the “same evidence” (the subscription agreement and surrounding negotiations); and its essential facts (the scope and validity of the subscription agreement‘s provisions) were present in the first action (see Monahan, 214 F3d at 285). Unlike in cases involving malicious prosecution or other similar claims, Paramount did not “depend[ ] upon the judgment” in the federal action in order to allege a breach of the covenant not to sue (Mount Everest Ski Shops, Inc. v Nordica USA, Inc., 736 F Supp 523, 525 [D Vt 1989]; Mali v Federal Ins. Co., 720 F3d 387, 395 [2d Cir 2013]). Nor did its claim depend on events subsequent to the filing of the investors’ complaint (see Harris v Steinem, 571 F2d 119, 123 [2d Cir 1978]; see also Star Mark Mgt., 2009 WL 2922851, *7-9, 2009 US Dist LEXIS 81170, *18-24; Chrysler Corp. v Fedders Corp., 540 F Supp 706, 713 n 2 [SD NY 1982]). Rather, the covenant not to sue claim accrued immediately when the investors filed suit in the federal action and could be resolved upon consideration of nearly identical factual and legal issues.8 Accordingly, because it should have been asserted in the parties’ federal action, Paramount‘s claim is barred by res judicata.
V.
Pursuant to federal principles of claim preclusion—the applicable rules of decision in this case (Semtek, 531 US at 507)—Paramount‘s covenant not to sue claim is transactionally related to the investors’ claims in the federal case, amounting to the same “claim” for purposes of res judicata. As such, Paramount‘s claim should have been asserted in the parties’ prior federal action. Because it was not, it is now barred.
The order, insofar as appealed from, should be affirmed, with costs.
Rivera, J. (concurring).
I agree with the plurality that plaintiff Paramount Pictures Corporation is barred by res judicata from pursuing a claim for attorneys’ fees based on defendants’ alleged breach of a covenant not to sue, because
Indeed, the posture of this case and the manner in which the parties have litigated the issues render it particularly ill-suited
The facts relevant to the res judicata analysis are not in dispute. Several investment entities (investors) sued Paramount in federal district court for the Southern District of New York for securities fraud, arising from Paramount‘s alleged misrepresentations and omissions. In that lawsuit, Paramount argued that the investors waived their right to sue for fraud under a waiver clause contained in section 4 (t) of the parties’ subscription agreement. Section 4 (t) also contains what the parties refer to as a “covenant not to sue,” by which each investor “agree[d] that in no event shall it assert any claim or bring any action contradicting the acknowledgments and agreements in this paragraph.” After a bench trial, the district court dismissed the complaint, determining, in relevant part, that the investors waived their claims and failed to establish the alleged fraud, and further noting that the investors made a binding agreement “in no event to bring any claim.” The Second Circuit affirmed, concluding that the investors failed to establish the underlying facts of their claims and thus that the district court properly dismissed the complaint (Marathon Structured Fin. Fund, LP v Paramount Pictures Corp., 622 Fed Appx 85, 87 [2d Cir 2015]).
While the federal appeal was pending, Paramount filed the instant action in state court against the same investors who were the plaintiffs in the prior federal action, seeking attorneys’ fees for the investors’ alleged breach of the covenant not to sue.
The plurality‘s discussion of which rule of res judicata to apply and the history of federal claim preclusion law is unnecessary (plurality op at 69-71 [part II], 73-77 [part III.B]), but I agree with the plurality‘s conclusion that Paramount‘s claim here is transactionally related to the prior federal claim and, as such, should have been asserted in that case as a compulsory counterclaim (plurality op at 78-80). Although the plurality reaches its judgment after what is ostensibly a “federal res judicata” analysis, it mirrors the analysis under our state law and leads to the same conclusion: Paramount‘s claim is clearly part of the same transaction, and so barred. Paramount effectively conceded that there is a transactional relationship between its claims by alleging in the trial court that the investors were collaterally estopped from denying that section 4 (t)‘s covenant not to sue applied in the state action because the district court found that section 4 (t)‘s waiver provision applied.3
“It is blackletter law that a valid final judgment bars future actions between the same parties on the ‘same cause of action’ ” (Matter of Reilly v Reid, 45 NY2d 24, 27 [1978]). “This State has adopted the transactional analysis approach in deciding res judicata issues [so that] once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy” (O‘Brien v City of Syracuse, 54 NY2d 353, 357 [1981]). Thus, res judicata “applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation” (Matter of Hunter, 4 NY3d 260, 269 [2005]). As explained, and notwithstanding Paramount‘s exhortations to the contrary, Paramount‘s state claim is transactionally related to the investors’ federal claim and should have been raised in the federal
Paramount maintains that this ordinary analysis should not apply because New York is a permissive counterclaim jurisdiction, which reflects a legislative preference to maximize party forum selection. Paramount‘s argument misses the mark and distracts from the central question in this case, namely what prеclusive effect to give the prior federal court judgment. We answer that question by looking to the rules that define the scope and consequences of the litigants’ claims and the final judgment entered. Where the prior litigation took place in a different jurisdiction, our law requires that we begin by looking to the law of the issuing forum to determine the judgment‘s scope in its home jurisdiction. Here, the final judgment in the prior action was entered by a federal court, under a system which has adopted a compulsory counterclaim pleading requirement (see
“[W]hen the Federal suit was commenced, it is indisputably clear that the plaintiffs now before us should have interposed as counterclaims in the earlier litigation the very causes of action now sued upon. Having failed to do so, it necessarily follows that the judgment entered (by the [federal] Court) is res judicata as to the merits of the counterclaims which should have been pleaded. . . . ‘To the extent to which a judgment of a federal court operates as res ajudicata in that court, it operates as res adjudicata in the courts of this state.’ And . . . it likewise operates as res judicata in New York.” (Cummings v Dresher, 18 NY2d 105, 109 [1966, Fuld, J., concurring] [citation omitted], quoting Horne v Woolever, 170 Ohio St 178, 183, 163 NE2d 378, 383 [1959]).
To the extent Paramount suggests that it appropriately relied on New York‘s permissive pleading requirement, it is mistaken. To refrain from asserting a claim carries risks even under New York‘s law. Even if the investors had initially brought suit in New York state court instead of federal court, it is not clear that Paramount‘s state claim would be permitted, as under our jurisprudence New York will not always allow a previously unasserted claim to proceed in a future state action. As the Court has explained, our permissive counterclaim rule “does not . . . permit a party to remain silent in the first action and then bring a second one on the basis of a preexisting claim for relief that would impair the rights or interests established in the first action” (Henry Modell, 68 NY2d at 462 n 2). Paramount unpersuasively claims this state court action could not possibly impair rights or interests established in the prior federal case, since Paramount won in that lawsuit. Nothing in our case law limits the reach of a holding to the victorious party. If the federal decision established the rights and interests of the investors too, New York courts would be required to respect that decision as well.5
Moreover, Paramount‘s approach would encourage simultaneous litigation in two jurisdictions and promote forum shopping,
This case illustrates the point. Although Paramount could have filed its claim in the prior action, it filed its state action while the federal appeal was pending, after the parties had litigated in federal court for seven years, in the hopes of vindicating a claim that might have been impossible to establish under controlling Second Circuit precedent (see Artvale, Inc. v Rugby Fabrics Corp., 363 F2d 1002, 1008 [2d Cir 1966] [holding that a party may not recover attorneys’ fees on an action for breach of a covenant not to sue where the allegedly breaching plaintiff “claim(s) in good faith” that the covenant “had been obtained by unfаir means“]). To permit Paramount‘s use of the state courts in this way undermines the goals of finality and efficiency, in support of a litigant who had every opportunity to bring the claim in federal court but chose not to. Res judicata is one of the cornerstones on which the stability of our legal system rests and New York will not lend its courts or laws to undermine the settled decisions of other legitimate tribunals.6
Wilson, J. (dissenting).
I begin with a proposition as to which I believe the plurality and I agree: New York is a “permissive counterclaim” jurisdiction, so that, had Allianz Risk Transfer AG‘s initial lawsuit been filed in New York State court, without a federal securities law claim, Paramount Pictures Corporation would not have been required to file as a counterclaim thereto its claim that Allianz breached the contract‘s covenant not to sue. New York‘s legislature has adopted a different rule from
First, Semtek Int‘l Inc. v Lockheed Martin Corp. (531 US 497, 508 [2001]) holds that a federal court sitting in diversity must apply the res judicata rules of the forum state. Taylor v Sturgell (553 US 880, 891 [2008]) holds that a federal court vested with federal question jurisdiction must apply federal common-law res judicata rules. Neither case decides what a federal court should do when both federal and state-law claims are present. The plurality concludes that, so long as a federal court‘s judgment is entered in an action that raised a federal claim, the preclusive effect of all claims disposed of in that lawsuit must be determined by federal res judicata law. The Supreme Court has not directly decided that question, but I believe thе Supreme Court would decide the question differently, holding that the claim-preclusive effect of each claim in the federal action should be determined by the res judicata principles of the jurisdiction whence each claim sprung.2 The legal source of each claim, not the source of the federal court‘s jurisdiction, should determine the applicable claim-preclusion law. Here, under my approach, the claim-preclusive effect of the dismissal of Allianz‘s federal securities law claim would be determined by federal res judicata principles, but the claim-preclusive effect of the dismissal of Allianz‘s New York State law claims would be determined by New York‘s res judicata principles. Paramount‘s claim would not be barred by New
Second, my above disagreement with the plurality‘s conclusion does not matter in this case, because Paramount‘s counterclaim for breach of the covenant not to sue is not barred by federal or New York claim-preclusion doctrine. The plurality misinterprets federal claim-preclusion law and reaches the wrong result in its application. Neither the Supreme Court nor the Federal Courts of Appeals have decided whether a covenant not to sue can be separately litigated in state court as a matter of federal res judicata. In federal courts, it is
I.
A.
As the plurality explains, the preclusive effect of a judgment of a federal court is determined by federal common law, which, in turn, is ultimately pronounced by the United States Supreme Court (see Semtek, 531 US at 503). In Semtek, the Supreme Court directed that federal courts sitting in diversity (that is, when no federal question is present) must apply the preclusion law of the state in which the federal court sits (id. at 508). Where a lawsuit is based on the violation of the federal constitution or a federal statute, “federal courts participate in developing ‘uniform federal rule[s]’ of res judicata, which [the United States Supreme Court] has ultimate authority to determine and declare” (Taylor, 553 US at 891). Semtek involved state-law claims only; Taylor involved a federal claim only. Neither case explicitly states how the claim-preclusive effect should be determined when, as here, a case involves both federal and state-law claims.
The plurality‘s answer to that question is that “where federal preclusion principles would operate to preclude a claim—and state-law principles would yield a conflicting outcome—the ‘federal courts’ interest in the integrity of their own processes’ justifies the displacement of New York law,” citing Semtek (plurality op at 71).3 In Semtek, the Supreme Court illustrated the type of incompatibility that might require resort to federal res judicata principles—dismissal of a lawsuit with prejudice for “willful violation of discovery orders,” because allowing the plaintiff to re-file in state court would implicate “federal courts’ interest in the integrity of their own processes” (see Semtek at 509). Nothing remotely like that comes into play simply because a state, as here, has made a choice that differs from the choice made in
The plurality‘s answer is not the answer I predict the Supreme Court will eventually give. Instead, Semtek‘s rationale requires us to analyze the claim-preclusive effects of the federal claim and the state-law claims separately. In the present case, the claim-preclusive effect of the judgment dismissing the federal 10b-5 claim should be determined by the “uniform federal rules of res judicata” (Taylor, 553 US at 891 [internal quotation marks and brackets omitted]). The claim-preclusive effect of the judgment as to the state-law fraud and unjust enrichment claims, however, should be determined by New York‘s rules of res judicata.
In Semtek, the Court held that the claim-preclusive rule of the forum state should be applied in diversity cases:
“Since state, rather than federal, substantive law is at issue there is no need for a uniform federal rule. And indeed, nationwide uniformity in the substance of the matter is better served by having the same claim-preclusive rule (the state rule) apply whether the dismissal has been ordered by a state or a federal court. This is, it seems to us, a classic case for adopting, as the federally prescribed rule of decision, the law that would be applied by state courts in the State in which the federal diversity court sits” (531 US at 508).
With that rationale in mind, it becomes important to recall that the claim-preclusive effect of any judgment is determined by the claims in which the merits were actually adjudicated. Indeed, Semtek held that despite
As was true in Semtek, “any other rule would produce the sort of ‘forum-shopping . . . and . . . inequitable administration of the laws’ that Erie seeks to avoid . . . since filing in, or removing to, federal court would be encouraged by the divergent effects that the litigants would anticipate from likely grounds of dismissal” (id. at 508-509). Under the plurality‘s rule, some parties would be similarly incentivized to forum shop by including a federal claim—related or not, colorable or not—along with state-law claims. Put differently, the claim-
In a case heard in federal court, where both a federal claim and a state-law claim are present, the claim-preclusive effect of the federal claim will be determined by federal claim-preclusion doctrine, as Taylor requires, and the claim-preclusive effect of the state-law claim will be determined by state claim-preclusion doctrine, as Semtek provides. Again, the plurality and I agree that, if the claim-preclusive effect of either one would bar a subsequent claim, it does not matter what the effect of the other would be—the subsequent claim is barred. That is, each claim adjudicated on the merits by the federal court will have its own claim-preclusive effect, independent of the others. Take, as an example, a plaintiff who sues for a declaration of patent invalidity (federal claim) and for unfair competition by the patent holder, based on deceptive marketing of the patented product (state-law claim). Each claim, if decided on the merits, will have a different claim-preclusive effect, based on the nature of the claim itself. The patent claim, if decided in the plaintiff‘s favor, would preclude the patent holder from bringing a later infringement action against the plaintiff (under federal res judicata rules). The unfair competition claim, if decided on the merits, would not bar a subsequent claim by the patent holder for patent infringement. My analytical difference with the plurality (if a federal claim is present, the plurality would apply federal common-law claim preclusion doctrine to determine the effect of all claims in the case, whereas I would apply federal claim-preclusion doctrine to the federal claims and state claim-preclusion doctrine to the state claims) is not the source of our disagreement as to the result here; that disagreement arises from our divergent views on whether the federal court‘s judgment rejecting Allianz‘s federal securities fraud claims operates to preclude Paramount from bringing its claim for breach of the covenant not to sue, discussed below.
B.
If, as I believe, the Supreme Court would direct us to apply New York res judicata principles to determine whether Paramount‘s claim is barred by the prior judgment on the state-law claims, then it would not be barred. (I do not want to read too much into the plurality‘s opinion but, by deciding this case on the basis of a difficult and unsettled proposition of federal law, the plurality implicitly agrees that the result would be different under New York law.) Under New York rules of claim preclusion, Paramount‘s covenant-not-to-sue claim should proceed. When asking whether a litigated claim precludes the defendant in the action from bringing a claim against the original plaintiff, New York‘s “decisive test” is “whether the substance of the rights or interests established in the first action will be destroyed or impaired by the prosecution of the second” (Schuylkill Fuel Corp. v Nieberg Realty Corp., 250 NY 304, 308 [1929]; see also Henry Modell & Co. v Minister, Elders & Deacons of Ref. Prot. Dutch Church of City of N.Y., 68 NY2d 456, 461 [1986]; Eubanks v Liberty Mtge. Banking Ltd., 976 F Supp 171, 173 [ED NY 1997] [“Only a defendant who is silent in the first action and then tries to bring a second action that would undermine ‘the rights or interests established in the first action’ is barred under New York‘s res judicata rule“]). With respect to plaintiff claim splitting, New York has adopted the broader, transactional approach of the Restatement (Second) of Judgments (see Matter of Reilly v Reid, 45 NY2d 24, 30 [1978]). However, those two scenarios must be kept distinct, as New York‘s claim preclusion rule “has a narrower effect on a defendant who then brings her claim in a separate action than it does on the plaintiff who brings successive claims that arise from the same transaction” (Eubanks at 173).
II.
The plurality asserts that under federal res judicata principles, a defendant in a prior federal question action cannot later assert, in state court, a counterclaim that arises from the same transaction or occurrence as the original federal claim. How can that be? As the рlurality correctly notes, it cannot be by means of
Instead, the plurality suggests a novel theory: although at the time
As a general matter, the federal cases on which the plurality relies for the proposition that federal common law has expanded to be coterminous with
Second, and much more fundamentally, the doctrine of claim preclusion, which derives from the doctrines of merger and bar, protects the finality of a judgment; courts could not exist unless their judgments meant something, and to mean something, the same essential claim cannot repeatedly be retried by the losing party, in hope of winning someday. Therefore, a plaintiff cannot bring the same or related claims over and over, and the defendant cannot try to attack the original judgment by bringing his or her own claims later. A counterclaim rule, on the other hand, reflects a judgment about whether it would be more efficient to litigate a different claim by a different party in the original lawsuit or a separate lawsuit. A litigant in federal court who chooses not to file a compulsory counterclaim
Of course, a federal court judgment would preclude a defendant from bringing a state court action that would nullify that federal judgment or impair the rights established in the first action; that is the purpose of claim preclusion. Additionally, because of the procedural choice made in
The plurality relies on the history of what constitutes a “claim” for purposes of federal claim preclusion to support its conclusion that federal res judicata now encompasses the compulsory counterclaim law. However, the plurality fails to recognize the different effects of claim preclusion on plaintiffs and defendants. The “expansion” the plurality refers to—what constitutes a claim for purposes of claim preclusion—relates to restrictions on plaintiffs’ “claim splitting.” When a final judgment is rendered in favor of the plaintiff, the plaintiff cannot later bring an action on the original claim or any claims that
Claim preclusion restricts the defendant, too, but in different ways. Absent a compulsory counterclaim rule, there are two situations where a defendant in the first action may be barred from bringing a second action on a claim that could have been raised in the first action: where successful prosecution of the counterclaim in a subsequent action would (1) nullify the original judgment or (2) impair the rights of the parties established in the first action (see Valley View Angus Ranch, Inc. v Duke Energy Field Servs., Inc., 497 F3d 1096, 1101 [10th Cir 2007]; Martino v McDonald‘s Sys., Inc., 598 F2d 1079, 1084-1085 [7th Cir 1979]; 18 Charles Alan Wright et al., Federal Practice and Procedure § 4414 [3d ed]; Restatement [Second] of Judgments § 22, Comment f). “For such an occasion to arise, it is not sufficient that the counterclaim grow out of the same transaction or occurrence as the plaintiff‘s claim” (Restatement [Second] of Judgments § 22, Comment f). It does not matter that the facts relevant to a counterclaim are also relevant to a defense asserted: “[A]fter litigation of the defense judgment is given for the defendant, the dеfendant is not precluded by the rule of merger from maintaining a subsequent action against the plaintiff based upon these facts. In the subsequent action, the rules of issue preclusion will apply to issues litigated and determined in the first action” (Restatement [Second] of Judgments § 22, Comment d [citations omitted]). Nor does it matter that the counterclaim itself could also have been raised as a defense:
“The failure to interpose a defense to the plaintiff‘s claim precludes the defendant from thereafter asserting the defense as a basis for attacking the judgment. But the defendant‘s claim against the plaintiff is not normally merged in the judgment given in that action, and issue preclusion does not apply to issues not actually litigated. The defendant, in short, is entitled to his day in court on his own claim” (id., Comment b [citations omitted]; see also Valley View Angus Ranch at 1101 n 6).
III.
Under both federal and state claim preclusion law, Paramount‘s claim is not barred. Neither precludes a defendant from bringing a claim arising from the same transaction or occurrence as the plaintiff‘s claim, unless doing so would nullify the judgment or impair the rights established in the first action. In federal court,
Although Paramount‘s claim for breach of the covenant not to sue arises from the contract, it does not in any way attack the judgment or impair Allianz‘s rights from the first action. How could it when Paramount was victorious in the first action? Issue preclusion would prevent Allianz from relitigating issues it lost, but neither federal nor New York rules of claim preclusion restrict Paramount from bringing its claim for breach of the covenant not to sue in a separate state court action.9 I therefore dissent.
Judges Stein and Fahey concur; Judge Rivera concurs in result in an opinion, in which Chief Judge DiFiore concurs; Judge Wilson dissents in an opinion; Judge Feinman taking no part.
Order, insofar as appealed from, affirmed, with costs.