Wednesday, March 16, 2016

FYI: 6th Cir Reverses Dismissal of Class Action That Overlapped With Another Earlier-Filed Class Action

The U.S. Court of Appeals for the Sixth Circuit recently reversed a district court's dismissal of a putative class action lawsuit, holding that while the district court was correct that the first-to-file rule applied because of a previous class action involving substantially the same parties and claims, it was an abuse of discretion to dismiss the present case given the jurisdictional and procedural hurdles the plaintiffs would face if forced to become part of the earlier class action filed in another federal judicial district.

 

A copy of the opinion is available at:  Link to Opinion

 

In March of 2014, a group of landowners in Medina, Ohio sued a natural gas company in the U.S. District Court for the Northern District of Ohio, alleging that the defendant stored natural gas under their property without compensation in violation of the Natural Gas Act, 15 U.S.C. § 717f.

 

The defendant received a "Certificate of Public Convenience and Necessity from the Federal Energy Regulatory Commission ("FERC") permitting it to store natural gas in the "Medina Field," "a naturally-occurring system of porous underground rock" into which defendant pumped natural gas during the low-demand summer months and extracted it in the winter, when demand is high. In exchange for the permit, the Natural Gas Act required the defendant to compensate any landowner whose land forms part of the Medina Field. The Act also required the defendant to file an eminent domain proceeding in the federal district court where the property is located if it could not reach agreement with the landowners.

 

The defendant offered each owner $250 in exchange for an easement allowing the natural gas storage under their land, which was rejected. The defendant did not file an eminent domain proceeding thereafter as required by the Act.

 

Meanwhile, in 2012, another group of landowners had previously filed a class action on behalf of all similarly situated Ohio landowners against the same defendant in the U.S. District Court for the Southern District of Ohio based on the same alleged conduct of not compensating owners after storing natural gas under their lands.

 

In response to the complaint in the present lawsuit, the defendant filed a counterclaim in the first case in April of 2014 seeking to exercise its power of eminent domain over the entire putative class, which included the landowners in the present case.

 

The defendant then moved to dismiss the present case, arguing that under the so-called "first-to-file" rule the putative class plaintiffs in the present case should litigate their claims in the earlier case. The district court found that the first-to-file rule applied and dismissed the present case, from which the plaintiffs appealed.

 

On appeal, the Sixth Circuit, reviewing the dismissal under an abuse of discretion standard, explained that the "first-to-file rule is a prudential doctrine that grows out of the need to manage overlapping litigation across multiple districts … [and] provides that, 'when actions involving nearly identical parties and issues have been filed in two different district courts, the court in which the first suit was filed should generally proceed to judgment."

 

Noting a scarcity of case law in the Sixth Circuit applying the rule, the Court explained that other circuit courts "generally evaluate three factors: (1) the chronology of events, (2) the similarity of the parties involved, and (3) the similarity of the issues or claims at stake." If all three factors apply, the court "must also determine whether any equitable considerations, such as evidence of 'inequitable conduct, bad faith, anticipatory suits, [or] forum shopping,' merit not applying the first-to-file rule in a particular case."

 

The Court found that all three factors were satisfied in the case at bar, and therefore that the first-to-file rule presumptively applied.

 

The first factor was satisfied because it "simply asks which of the two overlapping cases was filed first" and, although the Court agreed with the plaintiffs that defendant never filed an eminent domain action complaint, and its counterclaim in the first case not filed until after the present case was already pending, the Court agreed with the defendant that the first case was filed over a year before the plaintiffs here filed their case.

 

Turning to the second factor, similarity of the parties, the Court explained that the "first-to-file rule applies when the parties in the two actions 'substantial[ly] overlap,' even if they are not perfectly identical." It then found that even though the class in the earlier case had not been certified, because "for purposes of identity of the parties when applying the first-to-file rule, courts have looked at whether there is substantial overlap with the putative class even though the class has not yet been certified…", the plaintiffs here "undoubtedly would be members" of the class in the first case once certified. Even if the class in the first case included additional class members not parties to the present case, the overlap sufficed to satisfy the second factor.

 

The Sixth Circuit reasoned that even if the plaintiffs here opted out of the class once certified in the first action, this "would undercut the purpose of the first-to-file rule: parties, not courts, would determine when the rule could be applied and could force resource-draining duplicative class actions to proceed simultaneously. This would unduly burden the courts, and could be used as a vexatious litigation tactic. While the opt-out right may allow for (and perhaps anticipate) duplicative litigation, … it should not prospectively prohibit courts' efforts to conserve resources by applying the first-to-file rule."

 

Addressing the third factor, similarity of the issues, the Court noted that, as with the second factor, "the issues need only to substantially overlap in order to apply the first-to-file rule." Because the plaintiffs here brought substantially the same claims and were seeking the same relief as the landowners in the first case, the Sixth Circuit found the third factor was satisfied.

 

The Sixth Circuit then addressed whether equitable considerations weighed against applying the first-to-file rule, pointing out that while "[c]ourts have repeatedly warned that the first-to-file rule 'is not a mandate directing wooden application of the rule without regard to extraordinary circumstances, inequitable conduct, bad faith or forum shopping … deviations from the rule should be the exception, rather than the norm." The Court found that the defendant did not engage in forum shopping or other inequitable conduct by trying to litigate all claims in the first case, and thus "the equities to not clearly support finding that this is one of those rare cases" where the first-to-file rule should not apply.

 

Turning to the final issue, the Sixth Circuit agreed with the district court that the first-to-file rule applied to the case at bar and "[o]ther circuits have held that dismissal is an option available to a district court when applying the first-to-file rule" in some circumstances.  However, the Court found that the case at bar was not one of those circumstances.

 

Relying on the fact that "[o]ther circuits have said that a district court can abuse its discretion by dismissing a case under the first-to-file rule when doing so could adversely affect a party's interests", the Sixth Circuit concluded that the district court abused its discretion by dismissing the second action.

 

The Court reasoned that both the plaintiffs in the present case and the defendant argued that the class could not be certified in the first case, and if this happened the plaintiffs here would not be parties to that case, which could prejudice their ability to have their claims heard on the merits.

 

By way of examples, the Sixth Circuit noted the statute of limitations could pose a problem and, more importantly in the Court's view, because the district court did not specify whether the dismissal was with or without prejudice, meaning it would be treated as an adjudication on the merits by default under Fed. R. Civ. P. 41(b), "will be barred from pursuing their claims against [the defendant natural gas company] if the class in the first case is not certified, if it is certified and the plaintiffs here choose to opt out, or if the plaintiffs here successfully challenge being joined in the first case via the defendant's counterclaim.

 

Because in the Court's view dismissal of the present case would bar the plaintiffs "from fully protecting their interests, even while [the first case] goes forward," the Court concluded that the district court should have stayed the present lawsuit instead of dismissing it. The district court's dismissal order was accordingly reversed and the case remanded for further proceedings consistent with the Sixth Circuit's opinion.  

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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Email: rwutscher@MauriceWutscher.com

 

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