The Scotts Company LLC v. Seeds, Inc. , 688 F.3d 1154 ( 2012 )


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  •                   FOR PUBLICATION
    UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    THE SCOTTS COMPANY LLC, an             
    Ohio limited liability company,
    Plaintiff-Appellant,
    v.
    No. 11-35235
    SEEDS, INC., a Washington
    corporation; MILLHORN FARMS,                   DC No.
    2:10-cv-0327 LRS
    INC., an Idaho corporation; MAPLE
    LEAF FARMS, INC., a Washington                 OPINION
    corporation; TIM FREEBURG, an
    Idaho sole proprietor; MICA CREEK,
    INC., a Washington corporation,
    Defendants-Appellees.
    
    Appeal from the United States District Court
    for the Eastern District of Washington
    Lonny R. Suko, District Judge, Presiding
    Argued and Submitted
    April 13, 2012—Seattle, Washington
    Filed August 10, 2012
    Before: Procter Hug, Jr., A. Wallace Tashima, and
    Consuelo M. Callahan, Circuit Judges.
    Opinion by Judge Tashima
    9117
    SCOTTS COMPANY v. SEEDS, INC.              9119
    COUNSEL
    Colin Folawn, Schwabe, Williamson & Wyatt, Seattle, Wash-
    ington, for the plaintiff-appellant.
    Roger Sandberg, Esser & Sandberg, Pullman, Washington,
    for defendant-appellee Seeds, Inc.
    Peter C. Erbland, Paine Hamblen, Coer d’Alene, Idaho, for
    defendants-appellees Millhorn Farms, Inc., Maple Leaf
    Farms, Inc., Mica Creek, Inc., and Tim Freeburg.
    OPINION
    TASHIMA, Circuit Judge:
    Federal courts have broad authority to “look beyond the
    pleadings, and arrange” — or realign — “the parties accord-
    ing to their sides in the dispute.” City of Indianapolis v. Chase
    Nat’l Bank of N.Y., 
    314 U.S. 63
    , 69 (1941) (internal quotation
    marks omitted). We hold that when a federal court evaluates
    9120               SCOTTS COMPANY v. SEEDS, INC.
    realigning the parties in a case, it may not consider claims
    made in a different case.
    I.
    In September 2007, The Scotts Company (“Scotts”) and
    Seeds, Inc. (“Seeds”) entered into a Supply Agreement that
    obligated Scotts to buy cleaned and processed Kentucky Blue-
    grass seed from Seeds. The Supply Agreement allowed Scotts
    to audit Seeds to ensure Seeds’ compliance with the terms of
    the Agreement. Scotts, an Ohio LLC, brought a diversity
    action against Seeds, a Washington corporation, in federal
    district court for breach of this audit provision.1 Shortly after
    Scotts filed its federal action, Millhorn Farms, Inc., Maple
    Leaf Farms, Inc., Mica Creek, Inc., and Tim Freeburg
    (“Growers”) sued Seeds and Scotts in Washington state court.
    Maple Leaf Farms and Mica Creek are both Washington cor-
    porations. Millhorn Farms is an Idaho corporation and Tim
    Freeburg, a sole proprietor, is a citizen of Idaho. In their state
    court complaint, the Growers alleged that in May 2008, Seeds
    added an addendum to each of their contracts, in which Seeds
    agreed to pay twenty cents per pound for Kentucky Bluegrass
    seed above the original contract price. The Growers alleged
    that Seeds failed to pay this additional twenty cents per pound
    for the 2009 harvest and that Seeds did not make a scheduled
    September 2010 payment. In its state court answer, Seeds
    alleged that it had not paid the Growers because it had not
    been paid by Scotts. Seeds also filed an amended cross-claim
    against Scotts for breach of contract and unfair and deceptive
    business practices.
    1
    Scotts entered into a similar Supply Agreement with Dye Seed Ranch,
    Inc. (“Dye”) and brought a parallel action against Dye in district court.
    The Scotts-Dye litigation proceeded in tandem with the Scotts-Seeds liti-
    gation and the appeal in that case, No. 11-35234, was consolidated with
    this case on appeal. Scotts and Dye voluntarily dismissed their dispute
    before oral argument.
    SCOTTS COMPANY v. SEEDS, INC.               9121
    After the Growers sued Seeds and Scotts in state court,
    Seeds moved to dismiss this federal action under Federal Rule
    of Civil Procedure Rule 12(b)(7), contending that the Growers
    were indispensable parties. In response, Scotts filed an
    Amended Complaint which added the Growers as defendants.
    The Amended Complaint sought a declaration that the audit
    is a condition precedent to Scotts’ payment to Seeds, specific
    performance, and damages caused by Seeds’ breaches of con-
    tract. It also sought a declaration that Scotts had not materi-
    ally breached the Growers’ contracts and that the Growers
    may not enforce the Supply Agreement. The Growers did not
    answer the Amended Complaint.
    The Growers and Seeds moved the district court to realign
    the Growers as plaintiffs and Seeds and Scotts as defendants.
    Seeds also moved the court, in the alternative, to stay or dis-
    miss the case in favor of the related state court proceedings.
    The district court granted both motions. The realignment
    stripped the district court of subject matter jurisdiction
    because defendant Seeds was not diverse to all of the now-
    plaintiff Growers. The district court alternatively held that it
    would stay the federal proceedings in favor of the related state
    court proceedings under either the Brillhart doctrine, Brillhart
    v. Excess Ins. Co., 
    316 U.S. 491
     (1942), or the Colorado
    River doctrine, Colorado River Water Conservation Dist. v.
    United States, 
    424 U.S. 800
     (1976).
    Because the parties’ realignment resulted in the absence of
    complete diversity of citizenship between defendant Seeds, on
    the one hand, and newly-aligned plaintiffs-Growers, on the
    other, the district court dismissed the action for lack of subject
    matter jurisdiction under Rule 12(b)(1). Scotts timely
    appealed.
    II.
    A complaint’s alignment of the parties “is not binding on
    the courts.” Dolch v. United Cal. Bank, 
    702 F.2d 178
    , 181
    9122             SCOTTS COMPANY v. SEEDS, INC.
    (9th Cir. 1983). Instead, “[w]e must align for jurisdictional
    purposes those parties whose interests coincide respecting the
    ‘primary matter in dispute.’ ” Prudential Real Estate Affili-
    ates, Inc. v. PPR Realty, Inc., 
    204 F.3d 867
    , 873 (9th Cir.
    2000) (quoting Cont’l Airlines, Inc. v. Goodyear Tire & Rub-
    ber Co., 
    819 F.2d 1519
    , 1523 (9th Cir. 1987)). “This inquiry
    involves factual determinations of the type ordinarily left to
    the district court and reviewed for clear error.” Id. at 872-73.
    The district court realigned the parties because it found that
    Scotts’ audit claim “is ancillary to the primary dispute that
    pits the Growers against Seeds . . . and in turn, against
    Scotts.” After realignment, Washington citizens were on both
    sides of the dispute; consequently, diversity jurisdiction was
    destroyed. See 
    28 U.S.C. § 1332
    ; Diaz v. Davis (In re Digi-
    marc Corp. Derivative Litig.), 
    549 F.3d 1223
    , 1234 (9th Cir.
    2008) (“Diversity jurisdiction requires complete diversity
    . . . .”) (citing Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267,
    267 (1806)).
    [1] In determining this “primary matter in dispute,” the
    district court relied on claims made by the Growers in their
    state court action. It explained that “[a]ll of the disputes in this
    case . . . arise because the Growers have not been paid” and
    that, because the “Growers are the ultimate recipients of the
    funds at issue,” they are “most adversely affected by the dis-
    pute.” But the Growers had not answered Scotts’ Amended
    Complaint in federal court, and they sought the disputed funds
    in state court. In response to Scotts’ objection on this ground,
    the district court stated that “Scotts unduly narrows the scope
    of the inquiry regarding what constitutes the ‘primary dispute’
    by focusing narrowly on the ‘federal lawsuit.’ ” We hold that
    this was error. When considering the primary purpose of a
    federal case in a realignment inquiry, a court may not con-
    sider claims made in a different case.
    This holding is consistent with our practice in past cases.
    In Continental Airlines, we analyzed the principal purpose of
    SCOTTS COMPANY v. SEEDS, INC.              9123
    McDonnell Douglas’ federal declaratory judgment action
    against Continental Airlines and three other defendants that
    arose out of an airplane accident. 
    819 F.2d at 1523
    . In our
    analysis, we did not consider the claims in a state court suit
    arising out of the same accident that was brought by Conti-
    nental Airlines against McDonnell Douglas and one of Conti-
    nental Airlines’ federal co-defendants. See 
    id.
     at 1523 n.2
    (considering the principal purpose of McDonnell Douglas’
    “federal suit”). Similarly, in Prudential Real Estate Affiliates,
    we evaluated a defendant’s argument that her co-defendants
    should be realigned as plaintiffs by considering the conflicts
    among the parties with respect to the question presented in the
    federal suit. 
    204 F.3d at 873-74
    . In our analysis, we did not
    consider the claims made in a an ongoing related state suit
    brought by the defendant who sought realignment against her
    federal co-defendants. 
    Id.
     The Third Circuit has also affirmed
    realignment based on answers filed in federal court by the
    realigned parties without considering arguments in related
    state court litigation. See Emp’rs Ins. of Wausau v. Crown
    Cork & Seal Co., 
    942 F.2d 862
    , 866 (3d Cir. 1991).
    This holding also avoids undermining the Colorado River
    doctrine. Under Colorado River, 
    424 U.S. at 813
    , and a subse-
    quent line of cases, see, e.g, Moses H. Cone Mem’l Hosp. v.
    Mercury Constr. Corp., 
    460 U.S. 1
    , 19 (1983), a federal court
    may stay a federal case in favor of a related state case only
    in exceptional circumstances. “The federal district courts ordi-
    narily must apply the test outlined in Colorado River . . . in
    determining whether to stay federal proceedings in favor of
    pending state court proceedings concerning the same subject
    matter.” 40235 Wash. St. Corp. v. Lusardi, 
    976 F.2d 587
    , 588
    (9th Cir. 1992). If a district court could consider claims in
    related state cases in its primary purpose inquiry, such a flexi-
    ble realignment doctrine could undermine the strict Colorado
    River test.
    [2] The district court erred when it determined the primary
    purpose of this federal lawsuit by considering the claims
    9124                SCOTTS COMPANY v. SEEDS, INC.
    made in a different lawsuit. On remand, should the district
    court reconsider the realignment-of-parties issue, it should
    limit its inquiry of what constitutes the primary dispute to the
    primary purpose of this federal case.2
    III.
    A district court may, in its discretion, stay or dismiss a fed-
    eral case in favor of related state proceedings: (1) when an
    action seeks only declaratory relief, Wilton v. Seven Falls Co.,
    
    515 U.S. 277
    , 282-88 (1995) (discussing Brillhart, 
    316 U.S. at 494-95
    ), or (2) when exceptional circumstances exist,
    Moses H. Cone, 
    460 U.S. at 14
     (quoting Colorado River, 
    424 U.S. at 813
    ). The district court in this case held that if it were
    not dismissing the case for lack of subject matter jurisdiction,
    it would stay the case pending resolution in state court for
    either reason.
    We review both rulings for abuse of discretion. See Wilton,
    
    515 U.S. at 289
    ; Travelers Indem. Co. v. Madonna, 
    914 F.2d 1364
    , 1367 (9th Cir. 1990). We hold that the district court
    abused its discretion.
    A.
    [3] A district court may, in its discretion, decline to hear a
    declaratory judgment action when a related case is pending in
    state court. Wilton, 
    515 U.S. at 289
    . But this discretionary
    jurisdictional rule does not apply to “[c]laims that exist inde-
    pendent of the request for a declaration.” Snodgrass v. Provi-
    dent Life & Accident Ins. Co., 
    147 F.3d 1163
    , 1167 (9th Cir.
    1998). These “independent” claims are instead evaluated
    2
    Scotts also argues that the district court’s consideration of the claims
    in the state court proceedings was erroneous because the state court case
    was commenced after the federal case. Because we hold that, in this case,
    the district court erred in considering the state court claims at all, we need
    not separately consider Scotts’ later-in-time argument.
    SCOTTS COMPANY v. SEEDS, INC.                9125
    under the Colorado River doctrine. 
    Id.
     In this context, a claim
    is independent if it “would continue to exist if the request for
    a declaration simply dropped from the case.” 
    Id. at 1168
    ; see
    also United Nat’l Ins. Co. v. R&D Latex Corp., 
    242 F.3d 1102
    , 1113 (9th Cir. 2001).
    [4] Scotts seeks both declaratory and non-declaratory relief
    in its Amended Complaint. Therefore, the district court was
    correct to evaluate whether Scotts’ non-declaratory claim is
    independent of its declaratory claim. The district court cor-
    rectly stated the independence rule, but it did not correctly
    apply that rule in its analysis. Instead, the district court ana-
    lyzed whether the two sets of claims contained overlapping
    facts: it found that the request for an audit is the “driving
    force behind all other issues” and that Scotts will have a basis
    for its non-declaratory claims “[o]nly if that audit shows some
    improprieties.” This approach is incorrect. See United Nat’l
    Ins. Co., 
    242 F.3d at 1112
     (“It appears the district court
    believed that, for purposes of this analysis, two claims are
    ‘independent of’ one another only if one can be resolved with-
    out disposing of the legal issues raised in the other . . . . We
    do not believe this is the proper analysis.”). The district court
    abused its discretion when it applied the incorrect rule. See
    Casey v. Albertson’s Inc., 
    362 F.3d 1254
    , 1257 (9th Cir.
    2004).
    [5] Scotts’ damages claim is independent because it would
    be viable without the declaratory claim. Snodgrass, 
    147 F.3d at 1168
    . “[W]hen other claims are joined with an action for
    declaratory relief . . . , the district court should not, as a gen-
    eral rule, remand or decline to entertain the claim for declara-
    tory relief.” Gov’t Emps. Ins. Co. v. Dizol, 
    133 F.3d 1220
    ,
    1225 (9th Cir. 1998) (en banc) (citation omitted). Therefore,
    the district court should not have declined to entertain the
    claim for declaratory relief under the Brillhart doctrine.
    Instead, these claims should have been evaluated under the
    Colorado River doctrine.
    9126             SCOTTS COMPANY v. SEEDS, INC.
    B.
    Exceptional circumstances must be present for a district
    court to abstain from Scotts’ independent non-declaratory
    judgment claim and its related declaratory judgment claims.
    Colorado River, 
    424 U.S. at 813
    ; also Moses H. Cone, 
    460 U.S. at 16
     (“[T]he decision whether to dismiss a federal action
    because of parallel state-court litigation does not rest on a
    mechanical checklist, but on a careful balancing of the impor-
    tant factors as they apply in a given case, with the balance
    heavily weighted in favor of the exercise of jurisdiction.”).
    [6] In analyzing whether Colorado River applies, the dis-
    trict court stated that “[n]o showing of ‘exceptional circum-
    stances’ is required to support a decision to abstain from
    hearing a declaratory relief action.” The district court pro-
    ceeded to consider the Colorado River factors without explic-
    itly finding that exceptional circumstances were present. The
    district court abused its discretion because it failed to find
    exceptional circumstances before declining to exercise its
    jurisdiction. See Am. Int’l Underwriters (Philippines), Inc. v.
    Cont’l Ins. Co., 
    843 F.2d 1253
    , 1256 (9th Cir. 1988) (“[T]he
    district court judge in this case must have exercised discretion
    within the ‘exceptional circumstances’ limits of the Colorado
    River abstention doctrine.”). On remand, the district court
    shall consider whether exceptional circumstances exist that
    would justify declining to exercise its jurisdiction.
    IV.
    The judgment of the district court dismissing the case for
    lack of subject-matter jurisdiction is reversed and remanded
    for further proceedings. On remand, the district court may
    consider whether the parties should be realigned by evaluating
    the parties’ interests with respect to the primary purpose of
    this case. If the district court reconsiders possible abstention,
    it should first determine whether exceptional circumstances
    exist under the Colorado River test, which would justify
    SCOTTS COMPANY v. SEEDS, INC.              9127
    declining to exercise its jurisdiction over this case. If it does
    not find the requisite exceptional circumstances, it shall pro-
    ceed to hear the merits of this case.
    REVERSED and REMANDED.
    

Document Info

Docket Number: 11-35235

Citation Numbers: 688 F.3d 1154

Judges: Callahan, Consuelo, Hug, Procter, Tashima, Wallace

Filed Date: 8/10/2012

Precedential Status: Precedential

Modified Date: 8/5/2023

Authorities (17)

employers-insurance-of-wausau-a-mutual-company-v-crown-cork-seal , 942 F.2d 862 ( 1991 )

American International Underwriters, (Philippines), Inc., a ... , 843 F.2d 1253 ( 1988 )

In Re Digimarc Corp. Derivative Litigation , 549 F.3d 1223 ( 2008 )

Marguerite Dolch v. United California Bank, a Corporation ... , 702 F.2d 178 ( 1983 )

40235 Washington Street Corp. v. W.C. Lusardi , 976 F.2d 587 ( 1992 )

Shannon Casey v. Albertson's Inc., a Delaware Corporation , 362 F.3d 1254 ( 2004 )

Wilton v. Seven Falls Co. , 115 S. Ct. 2137 ( 1995 )

Brillhart v. Excess Insurance Co. of America , 62 S. Ct. 1173 ( 1942 )

the-travelers-indemnity-company-a-connecticut-corporation-v-alex-madonna , 914 F.2d 1364 ( 1990 )

98-cal-daily-op-serv-5338-98-daily-journal-dar-7481-cecil-e , 147 F.3d 1163 ( 1998 )

continental-airlines-inc-v-goodyear-tire-rubber-company-bf-goodrich , 819 F.2d 1519 ( 1987 )

98-cal-daily-op-serv-291-98-daily-journal-dar-398-government , 133 F.3d 1220 ( 1998 )

united-national-insurance-company-a-pennsylvania-corporation-and , 242 F.3d 1102 ( 2001 )

prudential-real-estate-affiliates-inc-v-ppr-realty-inc-ronald , 204 F.3d 867 ( 2000 )

Indianapolis v. Chase Nat. Bank , 314 U.S. 63 ( 1941 )

Colorado River Water Conservation District v. United States , 96 S. Ct. 1236 ( 1976 )

Moses H. Cone Memorial Hospital v. Mercury Construction ... , 103 S. Ct. 927 ( 1983 )

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