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Aptim Corp. v. McCall

United States Court of Appeals, Fifth Circuit

April 17, 2018

APTIM CORPORATION, Plaintiff-Appellee,
DORSEY RON MCCALL, Defendant-Appellant.

          Appeals from the United States District Court for the Eastern District of Louisiana

          Before REAVLEY, SMITH, and OWEN, Circuit Judges.

          JERRY E. SMITH, Circuit Judge:

         The Shaw Group ("Shaw") sued Dorsey McCall, its former employee, in state court for allegedly violating noncompete and nonsolicitation agreements. After being acquired in part by Aptim Corporation ("Aptim"), Shaw sought to dismiss its state action while Aptim pursued a federal-court action to enforce the arbitration clause in McCall's employment contract. The federal district court declined to abstain, it compelled arbitration, and it stayed the state-court proceeding. We find no error and affirm.


         McCall resigned from Shaw in January 2016. He then began working for an affiliate of Bernhard Capital Partners Management LP and later became the CEO of Allied Power Management, LLC ("Allied"), a direct competitor of Shaw's. Believing that McCall had violated the noncompete and nonsolicitation agreements in his employment contract, Shaw sued McCall in state court.[1]Those agreements state that arbitration will occur in New Orleans and that the employer may file for injunctive relief from a judicial authority without waiving the right to arbitrate the underlying dispute.

         On June 15, 2017, Shaw sued in state court, requesting injunctive relief and damages. The state court issued a Joint Protective Order.[2] On June 30, Aptim acquired Shaw's capital services segment, which included the rights to McCall's employment agreement. Aptim and Shaw moved to substitute Aptim in the state-court action on July 6, which McCall opposed on July 10. On July 17, Aptim and Shaw withdrew their motion for substitution. That same day, Aptim filed a demand for arbitration with the American Arbitration Association, and Shaw filed both an amended petition, deleting its request for damages, and a motion to dismiss the amended petition with prejudice. McCall filed an opposition to the motion for voluntary dismissal, an answer to Shaw's complaint, a reconventional demand, a petition for declaratory judgment, a motion to consolidate, and a motion for constructive contempt against Aptim for demanding arbitration in violation of the protective order, though Aptim was not then a party to the case.

         On August 21, Aptim, without Shaw, sued in federal court to compel arbitration and to stay the state-court proceeding, seeking arbitration on the same contractual violations that Shaw had raised in state court: that McCall had breached his noncompete agreement by working for Allied and his non-solicitation agreement by poaching fifteen of Shaw's senior employees. Before the federal court ruled, the state court on September 1 issued an order joining Aptim in the state-court action effective June 30 (the day the motion for substitution had been originally filed); finding that Aptim and Shaw had waived their arbitration rights by initiating the state-court action; and granting McCall's motion to stay arbitration.

         On September 19, the federal district court ordered Aptim and McCall to arbitrate their dispute and stayed the state-court action as between Aptim and McCall. On September 25, the court clarified its order to state that all persons and entities in privity with Aptim and McCall must submit to arbitration, thus staying the state-court litigation by McCall against Shaw. On appeal, McCall asserts the federal district court erred by declining to abstain under Colorado River Water Conservation District v. United States, 424 U.S. 816, 817 (1976), erred by compelling the parties to arbitrate, and violated the Anti-Injunction Act by enjoining the state-court proceedings.


         A Colorado River abstention analysis begins with a heavy thumb on the scale in favor of exercising federal jurisdiction, and that presumption is overcome only by "exceptional circumstances." Stewart v. W. Heritage Ins. Co., 438 F.3d 488, 491 (5th Cir. 2006). Federal courts have a "virtually unflagging obligation . . . to exercise the jurisdiction given them." Colo. River, 424 U.S. at 817. Even so, a court may choose to abstain, awaiting the conclusion of state-court proceedings in a parallel case, based on principles of "[w]ise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation." Id. (quoting Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183 (1952)).

         Whether to abstain is not a question answered by the recitation of "a mechanical checklist" but instead rests "on a careful balancing of the important factors as they apply in a given case, with the balance heavily weighted in favor of the exercise of jurisdiction." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16 (1983). To determine whether exceptional circumstances are present, the court considers the following six factors:

(1) assumption by either court of jurisdiction over a res, (2) relative inconvenience of the forums, (3) avoidance of piecemeal litigation, (4) the order in which jurisdiction was obtained by the concurrent forums, (5) to what extent federal law provides the rules of decision on the merits, and (6) the adequacy of the state proceedings in protecting the rights of the party invoking federal jurisdiction.

Stewart, 438 F.3d at 491. We review for abuse of discretion the district court's decision whether to abstain, and we exercise de novo review to the extent that the decision turns on an interpretation of law. Black Sea Inv., Ltd. v. United Heritage Corp., 204 F.3d 647, 649-50 (5th Cir. 2000).

         McCall asserts that there are exceptional circumstances because the state court issued a ruling on the question of arbitrability before the federal court ruled. This case, however, is subject to the same discretionary balancing of the Colorado River factors as any other abstention inquiry.


         The first factor weighs against abstention. Because this is an in per-sonam action, there is no res. An absence of property is not "a merely neutral item, of no weight in the scales."[3] Instead, it "supports exercising federal jurisdiction."[4]


         The second factor is neutral. The relative convenience of the forums "primarily involves the physical proximity of the federal forum to the evidence and witnesses." Evanston, 844 F.2d at 1191. The question requires finding not that the state court is a "better" or "more convenient" forum but that the "inconvenience of the federal forum is so great" as to warrant abstention. Id. at 1192. "When courts are in the same geographic location, the inconvenience factor weighs against abstention." Stewart, 438 F.3d at 492. The state courthouse is in Baton Rouge, and the federal district court is in New Orleans. Both Allied and Shaw are headquartered in Baton Rouge, and McCall resides closer to Baton Rouge than to New Orleans. The 80-mile distance does not compare to the 300-mile distance in Colorado River.[5] The two courthouses are within the same geographic location for all practical purposes. Because nothing in this case demonstrates that the inconvenience of the federal forum is "so great, " Evanston, 844 F.2d at 1191, this factor is neutral at best.


         The third factor weighs against abstention. Given the strong federal policy favoring arbitration, the concern about piecemeal litigation "is not applicable in the FAA context." Safety Nat'l Cas. Corp. v. Bristol-Myers Squibb Co., 214 F.3d 562, 565 (5th Cir. 2000). Piecemeal litigation is a different concern from the worry of obtaining conflicting judgments in parallel actions involving the same parties and the same questions. The remedy for conflicting judgments is not abstention, but the application of res judicata. Kelly Inv., Inc. v. Cont'l Common Corp., 315 F.3d 494, 498 (5th Cir. 2002).


         The fourth factor, regarding the order in which jurisdiction was obtained, slightly favors abstention. The inquiry centers more on the progress made in the relative forums, not on the date of initial filing. Moses H. Cone, 460 U.S. at 21. If the progress made is just "jurisdictional posturing" with little progress on the merits, the factor "weighs against abstention." Black Sea Inv., 204 F.3d at 651. This factor is difficult to weigh, as the parties characterize the timeline and progress quite differently. And it is unusual in our abstention jurisprudence to confront a case in which the same side filed both the state and federal actions, though Aptim was not a party to the state suit when it filed in federal court.

         Numerous motions were filed in state court before the federal case began. The state and federal action were filed on June 15 and August 21, respectively. Aptim was not joined in the state action until September 1, which was more than a week after it filed its federal action and was several weeks after it and Shaw had withdrawn the motion to substitute and Shaw had attempted to dismiss the suit entirely on July 17.

         Despite the number of filings, the state action was not necessarily progressing. When the federal suit was filed at the end of August, the state court had not ruled on any of Shaw's July 17 motions, none of which concerned the merits. Shaw sought to dismiss before any rulings had been issued and only one month after filing. In fact, Shaw even sought and was granted mandamus from the state appellate court ordering the state trial court to rule on Shaw's motion to dismiss voluntarily by August 23. The state court denied the voluntary dismissal on August 24. It was not until September 1 that the state court made any progress.

         Before the federal court compelled arbitration, the state court issued an order staying the arbitration Aptim had initiated. Thus, this factor favors arbitration, but only slightly, considering the complete set of circumstances. Aptim sought arbitration just weeks after acquiring Shaw, the state court had made minimal progress when the district court action was filed, and Aptim was a nonparty in the state-court proceeding until the state court simultaneously issued the stay and joined it in the suit.

         McCall insists that the fact that the state trial court ruled on whether arbitration should proceed, and did so before the federal district court did, should be accorded almost decisive weight. McCall would be correct if the state trial court's ruling would be res judicata or would collaterally estop Aptim. If a state court's ruling would be given preclusive effect by another court of that state, then federal courts must also give preclusive effect to that ruling.[6] If the preclusive ruling is dispositive of the federal action, then the federal court should abstain and dismiss because there is no point in proceeding further, irrespective of the other relevant factors in assessing abstention under Colorado River.[7]

         McCall does not contend that the state court's determination that Shaw and Aptim waived their rights to arbitrate would be given preclusive effect by Louisiana courts. In fact, at the hearing, the federal district court stated "that there was no final judgment, so neither res judicata nor issue preclusion applies."[8] McCall did not take issue with that statement and does not contend that preclusion applies. To the contrary, in his briefing in our court, McCall opines that the federal district court's stay of the state court proceedings "ensur[es] that the state court would never be able to enter a final judgment entitled to preclusive effect." Accordingly, the state court's ruling is not decisive regarding abstention because the state court's interlocutory ruling regarding arbitration is not entitled to full faith and credit under the Full Faith and Credit Act.[9]

         Greater progress alone "does not give rise to 'exceptional circumstances' capable of overcoming the strong presumption in favor of retaining jurisdiction." Saucier, 701 F.3d at 465. Instead, the federal and state courts have concurrent jurisdiction, and the state court was not so far ahead as to counsel the federal court to stay its hand. Just as we concluded under the third factor, the solution to inconsistent judgments is through a plea of res judicata after one court enters a final judgment.


         The fifth factor weighs against abstention. "The presence of a federal law issue 'must always be a major consideration weighing against surrender [of jurisdiction], ' but the presence of state law issues weighs in favor of surrender only in rare circumstances." Murphy v. Uncle Ben's, Inc., 168 F.3d 734, 739 (5th Cir. 1999) (quoting Evanston, 844 F.2d at 1193).

         The Federal Arbitration Act ("FAA") is the underlying law and embodies "a liberal federal policy favoring arbitration agreements, " Moses H. Cone, 460 U.S. at 24, that serves as the backdrop for any FAA litigation. The FAA itself is an outlier: It created substantive federal law but not federal-question jurisdiction. Thus its enforceability is left largely to state courts. Id. at 25 n.32 ("[A]lthough enforcement of the [FAA] is left in large part to the state courts, it nevertheless represents federal policy to be vindicated by the federal courts where otherwise appropriate."). This factor, therefore, has less significance but still weighs against abstention. Id. at 25-26.


         The sixth factor, evaluating the adequacy of state proceedings to protect the rights of the party invoking federal jurisdiction, can only be neutral or weigh against abstention. Stewart, 438 F.3d at 493. Nothing has impugned the state court's ability fairly to determine the legal questions at issue, so this factor is neutral.


         Reviewing the six factors, two are neutral, one weighs slightly in favor of abstention, and three weigh against abstention. To overcome the strong presumption in favor of federal jurisdiction, a party must show exceptional circumstances. The factors here do not demonstrate such circumstances, and the district court was correct to exercise jurisdiction.


         McCall points to three out-of-circuit decisions in which the state court ruled first and the appellate court found abstention proper. He contends those cases demonstrate that the state court's issuance of a ruling should be a primary focus of the abstention inquiry, almost to the point of being conclusive. In addition to our treatment of this contention under the fourth factor, we address each of these cases in turn.


         In Vulcan Chemical Technologies, Inc. v. Barker, 297 F.3d 332 (4th Cir. 2002), suit was filed in the state court, which compelled arbitration. Arbitration concluded with a multi-million dollar judgment on the merits against Vulcan, which sued in federal court to vacate the award. The state court confirmed the award before the federal court ruled. Id. at 335. After the federal district court had vacated the award two months after the state court's confirmation of it, the Fourth Circuit reversed, finding that five of the six Colorado River factors favored abstention and one was neutral. Id. at 341-43.

         In addition to undertaking the typical six-factor analysis, the Fourth Circuit noted that the motive for filing in federal court was critical. Up until the arbitrator entered its award, Vulcan had "gladly litigated" in state court and had "gladly arbitrated there before an agreed-upon arbitrator." Id. at 343. Its federal filing was merely a "strategy to obtain a second opinion." Id.

         The same is not true here. In Vulcan, over two years of litigation and a complete disposition of the merits had occurred in state court before the federal filing. Aptim filed in federal court before the state court had done anything on the merits, so its motive could not have been to get a second opinion. Instead, Aptim asserted its arbitration rights on July 17, just weeks after acquiring Shaw.


         McCall points next to Preferred Care of Delaware, Inc. v. VanArsdale, 676 F. App'x 388 (6th Cir. 2017). Based on the particular facts of the case and the state-law issue underlying the state-court decision on arbitrability, the Sixth Circuit affirmed the abstention. The opinion divided Colorado River's six-factor test into eight factors and found that the first two weighed slightly against abstention, five strongly favored abstention, and one was neutral. Id. at 394-97.

         This is again far different from how the factors play out in the present case. The Sixth Circuit examined each factor in turn and did not base its ruling solely on the fact that the state court issued an order finding the arbitration clause invalid under state law before the federal court ruled. No state-law question is at issue here, and the weighing of ...

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