MEMORANDUM AND ORDER REGARDING RULINGS BY MAGISTRATE JUDGE KENNETH P. NEIMAN ON DEFENDANT'S MOTION TO STAY AND PLAINTIFF'S MOTION FOR EXPEDITED DISCOVERY (Docket Nos. 2 & 10)
Plaintiff, Atlas Copco. Construction Tools, Inc., ("Atlas") hasbrought this action against the defendant, Allied Construction ProductsLLC ("Allied"), seeking a declaratory judgment regarding aconfidentiality agreement entered into by the parties. A parallel legalaction has made substantial progress in the Cuyohoga County Court ofCommon Pleas in Cleveland, Ohio.
Based in large part on that litigation, Allied moved to stay theinstant proceedings. Conversely, Atlas moved for expedited discovery.Both motions were referred to Magistrate Judge Kenneth P. Neiman forruling, and on December 22, 2003 Magistrate Judge Neiman allowed Allied'sMotion to Stay and denied Atlas's Motion for Expedited Discovery. Atlasfiled an objection to the ruling regarding the stay.Page 2
Atlas contends, preliminarily, that the ruling is, in effect,dispositive and therefore subject to de novo review by thiscourt. The Magistrate Judge treated the motion as non-dispositive, inwhich case he would be subject to reversal only if "clearly erroneous orcontrary to law." Fed.R.Civ.P. 72.
It is not necessary for the court to untangle this threshold dispute,since this court would affirm and adopt the Magistrate Judge's rulingunder either standard. For the reasons set forth compellingly inMagistrate Judge Neiman's memorandum, a stay is appropriate in thisinstance, where the litigation in Ohio has moved quickly and whereadditional parties in the Ohio lawsuit insure that any remedy will becomprehensive. In sum, the Magistrate Judge's ruling is obviously neitherclearly erroneous or contrary to law; moreover the court would (and, asnecessary, hereby does) adopt the ruling upon de novo review.
It is worth adding that Atlas' contention that the Magistrate Judgeaddressed the Motion to Stay using the wrong standard is incorrect.Fairly construed, plaintiff's action seeks only a declaratory judgment.Thus, the standard set forth in Brillhart v. Excess Ins. Co. ofAm., 316 U.S. 491 (1942), applies. Even if the court were toconstrue plaintiff's complaint liberally and find in the catchall claimsfor relief a request for damages, the "exceptional circumstances"standard would be satisfied here.
From whatever perspective, and based upon whatever standard, theMagistrate Judge's ruling was clearly correct. ThePage 3plaintiff's objection is hereby overruled. The Motion to Stay(Docket No. 2) is ALLOWED and the Motion for Expedited Hearing (DocketNo. 10) is DENIED.
It is So Ordered.Page 1
MEMORANDUM AND ORDER WITH REGARD TO DEFENDANT'S MOTION TO STAY (Document No. 2)and PLAINTIFF'S MOTION FOR EXPEDITED DISCOVERY (Document No. 10)
The instant declaratory judgment action concerns a dispute between theplaintiff, Atlas Copco. Construction Tool, Inc. ("Atlas"), and thedefendant, Allied Construction Products LLC ("Allied"), regarding theinterpretation of a Confidentiality Agreement entered into by theparties. A parallel action is proceeding in the Cuyohoga County Court ofCommon Pleas in Cleveland, Ohio, in which Allied, there the plaintiff,has alleged that Atlas violated the Confidentiality Agreement and thatfour former Allied employees not only breached non-disclosure agreementsbut violated the Ohio Trade Secrets Act as well. Presently, Allied hasmoved to stay the instant proceedings. Atlas opposes the motion and hasmoved for expedited discovery. Both motions have beenPage 2referred to this court for hearing and determination. See28 U.S.C. § 636(b)(1)(A).1
For the reasons which follow and after hearing excellent arguments bycounsel on December 12, 2003, the court will allow Allied's motion for astay and deny Atlas's motion for expedited discovery.
The background is not materially in dispute, at least for purposeshere. As set forth in Atlas's verified complaint, Allied, based inCleveland, has manufactured and sold construction products for more thanfifty years. Allied incorporates into one of its key products componentspreviously manufactured by Krupp Maschinentecknik GbmH ("Krupp").
At all times relevant hereto, Allied purchased, assembled and resoldKrupp products pursuant to an April 20, 1993 distributorship agreementwith Krupp (the "Distributorship Agreement"). In 2002, Altas CopcoConstruction Tools GmbH ("Atlas German") — of which Atlas is theUnited States affiliate — acquired the Distributorship Agreementwhich, in November of that year, it terminated. Termination of theDistributorship Agreement is set to take effect on December 31, 2003.
In the interim, in February of 2003, the parties began discussingAtlas's possible acquisition of Allied. To facilitate negotiations, theparties, on March 10, 2003, entered into a Confidentiality Agreementwhich prohibited the improper use of information obtained during theacquisition discussions. With specific reference to the parties'Page 3present dispute, paragraph 10 of the Confidentiality Agreementprohibited the direct or indirect solicitation of each other's employees: During the three year period beginning on the date of this Agreement, neither party will solicit for employment, either directly or indirectly, any person who was an employee of the other party on the date of this Agreement, unless such person was involuntarily terminated and is not under any contractual obligation of non-competition. . . .
The acquisition discussions eventually deteriorated, and Allied enteredinto a distribution agreement with Atlas's competitor, Sandvik TamrockCorporation, due to become effective January 1, 2004.
On October 29, 2003, Allied filed the Ohio action against Atlas andfour former employees who were allegedly solicited by Atlas as part of anattempt to steal Allied's business. Each of these employees, Alliedclaims, are bound by a confidentiality agreement which will inevitably beviolated given the nature of the employees' past and futureresponsibilities.
Allied asserts that, in accord with Ohio's procedural rules, one of itslawyers telephoned Atlas's corporate counsel at approximately 10:30 a.m.on October 29, 2003, and indicated that Allied would be filing itscomplaint at approximately 1:30 p.m., together with an ex parte motionfor a temporary restraining order seeking to enjoin Atlas from hiringAllied's employees. As it turns out, Atlas too had decided to commencethe instant declaratory judgment action and filed its complaint at 12:07p.m. that same day.
The Ohio action has proceeded apace. On November 14, 2003, the Ohiocourt granted a portion of the temporary relief requested by Allied andrestrained Atlas fromPage 4soliciting or hiring any of Allied's employees. However, onNovember 28, 2003, after the completion of some discovery, includingdepositions, the Ohio court — as the parties have since reported tothis court — vacated the restraining order and denied Allied'srequest for a preliminary injunction. At the same time, the Ohio courtdenied Atlas's motion to stay those proceedings. The parties report thata status conference is scheduled in Ohio for today, December 22, 2003.Accordingly, the court has expedited this memorandum.
II. LEGAL STANDARDS
The Declaratory Judgment Act ("DJA"), under which Atlas initiated thepresent matter, gives the court the authority "[i]n a case of actualcontroversy within its jurisdiction" to "declare the rights and otherlegal relations of any interested parties seeking such declaration,whether or not further relief is or could be sought."28 U.S.C. § 2201. The DJA is designed to enable parties "to clarifylegal rights and obligations before acting upon them." Ernst &Young v. Depositors Econ. Protection Corp., 45 F.3d 530, 534 (1stCir. 1995) (citing Step-Saver Data Sys., Inc. v. Wyse Tech.,912 F.2d 643, 649-50 (3d Cir. 1990) (in turn, citing legislativehistory)). The DJA "is mirrored by Fed.R.Civ.P. 57"and, as such, "[t]he statute and the rule are functionally equivalent."Ernst & Young, 45 F.3d at 534 n.8 (citation omitted).
The DJA, however, "neither imposes an unflagging duty upon the courtsto decide declaratory judgment actions nor grants an entitlement tolitigants to demand declaratory remedies." El Dia, Inc. v. HernandezColon, 963 F.2d 488, 493 (1st Cir. 1992) (citing, inter alia,Green v. Mansour, 474 U.S. 64, 72 (1985)). See also DeNovellisv. Shalala, 124 F.3d 298, 313 (1st Cir. 1997). Indeed, the SupremeCourtPage 5has specifically held that the DJA "is an enabling Act, whichconfers a discretion on the courts rather than an absolute right upon thelitigant." Green, 474 U.S. at 72. For its part, the FirstCircuit has indicated that a court should exercise its discretion onlyafter considering "the totality of the circumstances." El Dia,963 F.2d at 494.
The court's decision to exercise jurisdiction in a declaratory judgmentaction may be informed by its factual nexus to a pending state matter. Asthe Supreme Court explained in Brillhart v. Excess Ins. Co. ofAm., 316 U.S. 491 (1942), "[o]rdinarily it would be uneconomical aswell as vexatious for a federal court to proceed in a declaratoryjudgment suit where another suit is pending in a state court presentingthe same issues, not governed by federal law, between the same parties."Id. at 495. The question for a district court presented withsuch a situation, the Court explained, is to determine "whether thequestions in controversy between the parties to the federal suit, andwhich are not foreclosed under the applicable substantive law, can betterbe settled in the proceedings pending in the state court." Id.In making such a determination, the Court continued, a court will need toexamine "the scope of the pending state court proceeding and the natureof defenses open there," an inquiry which naturally entails considerationof "whether the claims of all parties in interest can satisfactorily beadjudicated in that proceeding, whether necessary parties have beenjoined, whether such parties are amenable to process in that proceeding,etc." Id. In fact, the Court noted, a court might be indulgingin "[g]ratuitous interference" if it permitted a federal declaratoryaction to proceed when the parties have sufficient opportunity to resolvethe issue in a pending state court action. See id.
Confirming the viability of Brillhart, the Supreme Court inWilton v. Seven FallsPage 6Co., 515 U.S. 277 (1995), rejected a claim that a districtcourt should stay or dismiss a declaratory judgment only in "exceptionalcircumstances." Id. at 286. The court held that "[d]istinctfeatures of the [DJA] . . . justify a standard vesting district courtswith greater discretion in declaratory judgment actions than thatpermitted under the `exceptional circumstances' test of ColoradoRiver [Water Conservation Dist. v. United States, 424 U.S. 800(1976),] and Moses H. Cone [Mem'l Hosp. v. Mercury Constr.Corp., 460 U.S. 1 (1983)]." Wilton, 515 U.S. at 286.
To summarize the above standards, a court, in determining whether toexercise its broad discretion to stay an action pending the outcome of aparallel state matter, should compare the nexus between the two suits,considering the totality of the circumstances. As will be discussed, thearguments proferred by the parties lead the court, in the end, to believethat the instant action should be stayed.
As an initial matter, Atlas makes much of the fact that the instantaction was filed before Allied filed its action in Ohio. In essence,Atlas claims that, in order for the deferential Brillhart andWilton standards to apply, Allied must not only prove that theOhio action raises the same issues as are presented here, but thatAllied's claims in Ohio were pending prior to Atlas's presentaction in this court.
This court does not believe that the "pending" nature of the statecourt action necessarily turns on which matter was filed first,particularly where, as here, the Ohio action concerns, at least in part,other parties. In other words, the court does not believe that theanalysis required by Brillhart and Wilton turns on arace to thePage 7courthouse. The fact that Atlas may have filed its action hereagainst Allied just before Allied filed its lawsuit in Ohio — lessthan two hours before, to be exact — is by no means determinative.See Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 258 (4thCir. 1996) ("although the federal action was filed first, we decline toplace undue significance on the race to the courthouse door"); TempcoElec. Heater Corp. v. Omega Eng'g, Inc., 819 F.2d 746, 749-50 (7thCir. 1987) ("[T]he mere fact that [the plaintiff] filed its declaratoryjudgment action first does not give it a `right' to choose a forum.");Aetna Cas. & Sur. Co. v. Alpha Mech., Inc., 9 F. Supp.2d 585,588 (W.D.N.C. 1998) (race to the courthouse given littleweight).2
Bearing in mind the critical factors which must be considered, thecourt believes that the balance weighs in favor of staying the instantproceedings. See generally Wilton, 515 U.S. at 283-84. First,the issue surrounding the interpretation of the Confidentiality Agreementis identical in both actions. There are no uniquely federal issues. To besure, as Atlas points out, the Confidentiality Agreement, by its ownterms, is to be construed in accordance with the laws of the Commonwealthof Massachusetts. But, Atlas's importuning to the contrary, this courtdoes not believe that it is in a significantly better position than theOhio court to interpret the parties' contract. Moreover, the court doesnot believe that the parties' dispute is of such import — anPage 8"issue of first impression," Atlas claims — as to necessitatethat this action supersede the Ohio action.
Second, the Ohio court has already proceeded apace (and is to becommended for doing so). It makes little sense, therefore, to evensuggest that the Ohio court apply its brakes or even for this court toproceed on a parallel track. Indeed, the Ohio court refused Atlas'srequest that it stay its proceedings.
Third, the Ohio action involves parties in addition to those presenthere, namely, four former employees of Allied against whom independentclaims under Ohio state law have been asserted by Allied. Atlas'sassertions to the contrary, there is no certainty that this court canexercise personal jurisdiction over these four individuals. Atlas'srelated argument regarding Allied's obligation to pursue "compulsorycounterclaims" against these individuals, in the court's opinion, missesthe mark.
Fourth, the Ohio action, as this court understands it, also involves aclaim — asserted by Atlas against Allied as a counterclaim —for damages arising out of alleged bad faith litigation. No such claim ispresent here. As a result, the Ohio action provides a venue not only forthe resolution of all disputes between Allied and Atlas, but for theother parties as well. Proceeding with the instant action, therefore,would result in confusion and piecemeal litigation. Concomitantly,staying the instant action would no doubt promote "judicial economy."
Given the totality of the circumstances, it is appropriate to stay thisaction and to deny Atlas's motion for expedited discovery. Of course,should the Ohio action not proceed in a timely manner, Atlas can alwaysseek to lift the stay and ask that discovery commence. SeeWilton, 515 U.S. at 288 n.2 (citation omitted).Page 9
For the reasons stated, Allied's motion for a stay is ALLOWED andAtlas's motion for expedited discovery is DENIED.
1. Allied's motion for a stay was set forth as an alternative to amotion to dismiss. After a colloquy in court regarding the proceduralposture of the motion, Allied decided to withdraw its motion to dismisswithout prejudice. (See Document No. 19).
2. The cases relied upon by Atlas are inapposite. Two involved thetransfer of venue from one federal district court to another. SeeCianbro Corp. v. Curran-Lavoie, Inc., 814 F.2d 7, 11 (1st Cir.1987); Codex Corp. v. MilgoElec. Corp., 553 F.2d 735, 737-38(1st Cir. 1977). Another, a case decided in 1889, stands for theproposition that a Massachusetts state court may enjoin an individualfrom prosecuting an action in a foreign jurisdiction if the purpose wereto gain an unjust advantage or to evade the laws of the Commonwealth.See Carson v. Dunham, 20 N.E. 312, 313-14 (Mass. 1889). No suchclaims are made here.