Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_06-cv-00411/USCOURTS-caed-2_06-cv-00411-9/pdf.json

Nature of Suit Code: 440
Nature of Suit: Other Civil Rights
Cause of Action: 42:1983 Civil Rights Act

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

GENERAL STEEL DOMESTIC

SALES, LLC, dba GENERAL

STEEL CORPORATION,

NO. CIV. S-06-411 LKK/KJM

Plaintiff,

v. O R D E R

JOHN W. SUTHERS, et al.,

Defendants.

 /

Plaintiff General Steel Domestic Sales, LLC (“General Steel”)

alleges that defendants conspired together in violation of the

Racketeering Influenced Corrupt Organizations Act (“RICO”), 18

U.S.C. § 1961, to ruin plaintiff’s business and force defendant

government agencies to prosecute plaintiff for false consumer law

violations, and violated plaintiff’s civil rights under 42 U.S.C.

§ 1983. As a result, plaintiff alleges loss of business and seeks

$500,000 in compensatory damages and $500,000 in punitive damages

against each individual defendant.

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 Defendants request that their motion to dismiss be heard 1

prior to the motion to stay.

2

General Steel has named some sixty defendants, including

individuals from the Colorado Attorney General’s Office (“Colorado

AG”), the Sacramento County District Attorney’s Office (“Sacramento

defendants”), and the New Mexico Attorney General’s Office (“New

Mexico AG”); the Denver/Boulder Better Business Bureau, its

individual board of directors, and the corporate Better Business

Bureau office (collectively, “BBB”); Gannett Co. TV station and its

reporter Chip Yost (“Gannett”); Steelwise LLC and several of its

employees (“Steelwise”); and finally General Steel customers Dana

Beers, Sue Beers and Kirk Jarvis (collectively, “Nebraska

defendants”).

Pending before the court are three motions: the Nebraska

defendants and Steelwise each have filed motions to dismiss for

lack of personal jurisdiction, and BBB has filed a motion to stay 1

under either the Colorado River or Younger abstention doctrines,

in which Gannett has joined. The court resolves the matter on the

parties’ papers and after oral argument. For the reasons set forth

below, the court grants the motion to dismiss with respect to the

Nebraska defendants and Steelwise, and stays the remainder of the

case.

I. Background

The crux of plaintiff’s complaint is that defendants allegedly

conspired together to create the false impression that General

Steel, which is in the business of selling steel buildings, was

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 Based on the status report filed on February 5, 2007, and 2

representations made to the court at oral argument, it appears that

the Colorado AG’s suit has settled or is in the final steps of

settlement. As part of that settlement, defendant is obligated to

dismiss all the public entity defendants, including the only

California residents in this case (i.e., the Sacramento

defendants). However, given that the parties have twice

represented to the court that they were about to settle --

prompting the court to twice continue the hearings on the pending

motions -- the court will not presume that this will occur.

Moreover, BBB has requested that the court adjudicate its motion

despite the potential dismissal of the public entity defendants,

given that its motion has been languishing since April 2006.

3

violating consumer protection laws and engaging in unfair business

practices and illegal advertising. According to General Steel,

this conspiracy led to its prosecution in various civil actions and

injured General Steel’s business and reputation.

The relevant facts for purposes of the motion to stay pending

before the court concern prior ongoing litigation. Specifically,

some of the defendants in this case have either initiated suit

against General Steel in state court, or have already previously

been sued by General Steel in state court. First, both the

Sacramento defendants and the Colorado AG’s office have pending

suits against General Steel. The Sacramento defendants currently 2

have a quasi-criminal action against plaintiff pending in

California Superior Court based on alleged violations of consumer

protection and unfair business practice laws. People of the State

of California v. General Steel Domestic Sales LLC, et al., 05-AS03689. In addition, the Colorado AG’s office sued General Steel

and a number of its employees in Colorado state court in 2004.

Colorado v. General Steel, et al., 2004-CV-143. The litigation

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 Following an eight-day bench trial, the court in the 3

Colorado AG’s case found in December 2004 that General Steel had

engaged in an elaborate scheme of consumer fraud and made false

representations as to their goods and services.

 The individual BBB board members named in this federal 4

action were not previously named in the state action.

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concerns allegations that General Steel violated the Colorado

Consumer Protection Act in connection with its sale of steel

buildings to consumers throughout the United States.3

Second, General Steel has filed two actions in Colorado state

court. The BBB and its employees Jean Herman and Matt Fehling are

presently defendants in a pending state court action initiated by

General Steel in Colorado district court in 2004. General Steel 4

Domestic Sales LLC v. Denver/Boulder BBB, Jean Herman, and Matt

Fehling, 2004-CV-155. The state court action has been stayed

pending the outcome of the Colorado AG’s case against General

Steel. In addition, General Steel is also litigating in Colorado

district court against Steelwise LLC and various former General

Steel employees. General Steel Domestic Sales LLC v. Donahue et

al., 2004-CV-9181.

II. Standard

Motion to Dismiss for Lack of Personal Jurisdiction

When a defendant challenges the sufficiency of personal

jurisdiction, the plaintiff bears the burden of establishing that

the exercise of jurisdiction is proper. Sinatra v. National

Enquirer, Inc., 854 F.2d 1191, 1194 (9th Cir. 1988).

Analysis of the appropriateness of the court's personal

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jurisdiction over a defendant in a case in which the court

exercises diversity jurisdiction is resolved under California's

long arm statute. Aanestad v. Beech Aircraft Corp., 521 F.2d 1298,

1300 (9th Cir. 1974). The statute authorizes the court to exercise

personal jurisdiction on any basis consistent with the due process

clause of the United States Constitution. Cal. Code Civ. Proc. §

410.10; Rocke v. Canadian Auto Sport Club, 660 F.2d 395, 398 (9th

Cir. 1981).

Consistent with the due process clause, the court may exercise

personal jurisdiction over a defendant when the defendant has

certain minimum contacts with the forum state such that the

maintenance of the suit does not offend traditional notions of fair

play and substantial justice. Int’l Shoe Co. v. Washington, 326

U.S. 310, 316 (1945). If the defendant is domiciled in the forum

state, or if the defendant's activities there are "substantial,

continuous and systematic," a federal court can exercise general

personal jurisdiction as to any cause of action involving the

defendant, even if unrelated to the defendant's activities within

the state. Perkins v. Benguet Consolidated Mining Co., 342 U.S.

437 (1952); Data Disc, Inc. v. Systems Technology Assoc., Inc., 557

F.2d 1280, 1287 (9th Cir. 1977).

If a non-resident defendant's contacts with California are not

sufficiently continuous or systematic to give rise to general

personal jurisdiction, the defendant may still be subject to

specific personal jurisdiction on claims arising out of defendant's

contacts with the forum state. Burger King Corp. v. Rudzewicz, 471

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U.S. 462, 477-78 (1985); Haisten v. Grass Valley Medical

Reimbursement Fund, Ltd., 784 F.2d 1392, 1397 (9th Cir. 1986). 

The court employs a three-part test to determine whether the

exercise of specific jurisdiction comports with constitutional

principles of due process. See Schwarzenegger v. Fred Martin Motor

Co., 374 F.3d 797, 802 (9th Cir. 2004). First, specific

jurisdiction requires a showing that the out-of-state defendant

purposefully directed its activities toward residents of the forum

state or purposefully availed itself of the privilege of conducting

activities in the forum state, thus invoking the benefits and

protections of its laws. Burger King, 471 U.S. at 474-75. Second,

the controversy must be related to or arise out of defendant's

contact with the forum. Ziegler v. Indian River County, 64 F.3d

470, 473 (9th Cir. 1995). Third, the exercise of jurisdiction must

comport with fair play and substantial justice, i.e., it must be

reasonable. Haisten, 784 F.2d at 1397.

III. Analysis

A. Motions to Dismiss for Lack of Personal Jurisdiction

Steelwise and the Nebraska defendants have filed a motion to

dismiss for lack of personal jurisdiction, which primarily

addresses whether jurisdiction is proper in light of RICO. General

Steel maintains that personal jurisdiction is premised upon four

grounds: (1) RICO, (2) pendant personal jurisdiction, (3) the

conspiracy theory of jurisdiction, and, at least with respect to

Steelwise, (4) California’s long-arm statute. For the reasons set

forth below, the court finds that plaintiff has failed to establish

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personal jurisdiction under any of these grounds.

1. Personal Jurisdiction Under RICO

First, plaintiff argues that personal jurisdiction is proper

under RICO. 18 U.S.C. § 1962. A federal court may exercise

personal jurisdiction in a civil RICO case pursuant to § 1965(b),

which provides that:

In any action under section 1964 of this chapter in

any district court of the United States in which it is

shown that the ends of justice require that other

parties residing in any other district be brought

before the court, the court may cause such parties to

be summoned, and process for that purpose may be

served in any judicial district of the United States

by the marshal thereof.

“Congress intended the ‘ends of justice’ provision to enable

plaintiffs to bring all members of a nationwide RICO conspiracy

before a court in a single trial.” Butcher's Union Local No. 498,

United Food and Commercial Workers v. SDC Inv., Inc. (“Butcher’s

Union”), 788 F.2d 535, 539 (9th Cir. 1986). The fatal flaw with

plaintiff’s position is that it has not sufficiently alleged a

single nationwide conspiracy involving Steelwise or the Nebraska

defendants.

It is well-established that “the right to nationwide service

in RICO suits is not unlimited.” Id. at 539. Thus, for instance,

the act of “merely naming persons in a RICO complaint does not, in

itself, make them subject to section 1965(b)'s nationwide service

provisions.” Id. Rather, the complaint must reveal factual

allegations supporting the existence of a single nationwide

conspiracy. The facts of Butcher’s Union are instructive on the

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limits of nationwide service. In that case, it was this very court

that initially held that jurisdiction under RICO was improper. The

plaintiffs in that case maintained that there was a nationwide

conspiracy of “union-busting” among four separate employers that

was carried out by their lawyers. Id. at 537. The plaintiffs

conceded, however, that the defendant employers had no connection

with each other beyond the use of the same lawyers, and that each

individual conspiracy was largely independent. Id. at 536. 

Accordingly, this court held that the plaintiffs had failed

to allege a nationwide pattern of racketeering activity in which

the four defendant employees were participants. Specifically, the

plaintiffs failed to allege that the defendants had “specific

knowledge of or participation in any of the other conspiracies.”

Id. at 539. This led “inexorably to the conclusion that this

‘case’ is in fact four separate cases each involving an independent

conspiracy.” Id. at 538. As such, there was only jurisdiction

over the conspiracy centered around the California-based defendant

employer. Id.

Similarly, here, plaintiff has failed to allege a single

nationwide conspiracy. Its conclusory statement to the contrary

wholly fails to satisfy plaintiff’s burden of proving that personal

jurisdiction is proper. The crux of the allegations against

Steelwise is that Steelwise stole proprietary information and

turned it over to the Colorado AG. There is no allegation that

Steelwise consented to a larger agreement implicating individuals

in California or the multitude of other defendants in this case

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(e.g., the Nebraska defendants). While General Steel points out

that “[a] formal agreement is not necessary,” United States v.

Frega, 179 F.3d 793, 893 (9th Cir. 1998), that does not change the

requirement that the defendant at least “was aware of the essential

nature and scope of the enterprise and intended to participate in

it,” Baumer v. Pachl, 8 F.3d 1341, 1346 (9th Cir. 1993). Because

General Steel has made no such showing, RICO does not provide a

basis for jurisdiction over Steelwise.

For substantially similar reasons, RICO does not provide for

personal jurisdiction over the Nebraska defendants. The main

allegation against the Nebraska defendants, who were former

customers of General Steel, is that they provided false information

to the Colorado AG. FAC ¶ 124-27. Specifically, according to

General Steel, when the Nebraska defendants were unable to obtain

a return of deposits paid to General Steel for the purchase of a

steel building, they falsely informed the Colorado AG of General

Steel’s deceptive trade practices. Id. Again, however, there is

no allegation linking the Nebraska defendants with any individual

in California, such as the Sacramento defendants. Accordingly,

General Steel has failed to allege the existence of a single

nationwide conspiracy that encompasses the Nebraska defendants.

2. Pendant Personal Jurisdiction

General Steel also argues that jurisdiction is proper under

“pendant personal jurisdiction.” This doctrine provides that “a

court may assert pendent personal jurisdiction over a defendant

with respect to a claim for which there is no independent basis of

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personal jurisdiction so long as it arises out of a common nucleus

of operative facts with a claim in the same suit over which the

court does have personal jurisdiction.” Action Embroidery Corp.

v. Atlantic Embroidery, Inc., 368 F.3d 1174, 1180 (9th Cir. 2004).

The doctrine is typically applied where a federal claim for which

there is nationwide personal jurisdiction is combined with other

claims for which there is not nationwide personal jurisdiction.

Id. at 1180-81.

General Steel asserts that because personal jurisdiction over

the various defendants is proper under RICO, its § 1983 claims may

now be brought under the pendant personal jurisdiction doctrine.

Given that the court has found that RICO cannot provide a basis for

jurisdiction with respect to Steelwise or the Nebraska defendants,

pendant jurisdiction over these additional claims is similarly

lacking.

3. Conspiracy Theory of Jurisdiction

Alternately, plaintiff contends that personal jurisdiction may

be exercised over Steelwise and the Nebraska defendants under a

conspiracy theory of jurisdiction. Under this theory, when one coconspirator is subject to personal jurisdiction in a particular

forum, then all of the other co-conspirators are possibly subject

to personal jurisdiction in that forum. As an initial matter, the

court finds that plaintiff has failed to allege a conspiracy with

respect to all defendants and the theory is therefore inapplicable

on this basis alone.

Furthermore, the validity of conspiracy theory of jurisdiction

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 Other courts faced with the theory have come to divergent 5

conclusions. Compare Davis v. A & J Electronics, 792 F.2d 74, 75-

76 (7th Cir. 1986) (declining to adopt theory), Kipperman v.

McCone, 422 F. Supp. 860, 873 (N.D. Cal. 1976) (same), and

California Clippers, Inc. v. United States S. F. Ass'n, 314 F.

Supp. 1057, 1066-67 & n.5 (N.D. Cal. 1970) (same) with Second

Amendment Foundation v. U.S. Conference of Mayors, 274 F.3d 521,

524 (D.C. Cir. 2001) (adopting theory). 

 Plaintiff does not contend that there is general or specific 6

jurisdiction with respect to the Nebraska defendants.

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in this circuit is in doubt. In Piedmont Label Co. v. Sun Garden 5

Packing Co., 598 F.2d 491 (9th Cir. 1979), the Ninth Circuit

expressly rejected “any implication . . . that members of a

conspiracy, as agents of one another, ‘transact business’ for venue

purposes in any district where one of them transacts business.”

Id. at 492. The court again had the opportunity to adopt the

theory in Underwager v. Channel 9 Australia, 69 F. 3d 361 (9th Cir.

1995), but it did not reach the merits of the theory because the

plaintiff there had failed to sufficiently allege conspiracy.

Similarly, the court sees no reason to adopt it now.

4. California’s Long-Arm Statute

General Steel also maintains that personal jurisdiction is

proper with respect to Steelwise under California’s long-arm

statute. The pertinent facts here are straightforward. The 6

Steelwise defendants are former employees of General Steel. After

leaving General Steel and founding Steelwise, a dispute arose over

the alleged theft of trade secrets and confidential proprietary

data, which were turned over to the Colorado AG, who then gave the

information to the Sacramento DA. Steelwise also maintains a

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website used for advertisement and the sale of steel buildings over

the internet.

A. Specific Jurisdiction

First, General Steel argues that specific jurisdiction exists

in this case. In analyzing a claim of specific jurisdiction, there

must be purposeful availment by the defendant of the forum state;

the claim must arise out of the forum-related activities; and the

exercise of jurisdiction must be reasonable. Schwarzenegger v.

Fred Martin Motor Co., 374 F.3d 797, 802 (9th Cir. 2004). The

purposeful direction of activities at a forum state alone can

justify a finding of purposeful availment. Id. at 803. The test

for purposeful direction requires that the defendant (1) commit an

intentional act that is (2) expressly aimed at the forum state and

that (3) causes harm that the defendant knows is likely to be

suffered in the forum state. Id. at 802.

Here, plaintiff alleges that Steelwise engaged in two forms

of purposeful direction of activities at California. Pl.’s Opp’n

13:26-14:13. First, Steelwise is alleged to have provided

information stolen from plaintiff to the Sacramento DA. This was

allegedly done in order to hurt plaintiff’s business in California,

and caused harm in California. Second, Steelwise maintains a

website advertising its products that can be accessed by California

residents. The court disagrees that either of these activities

constitutes purposeful direction

Under the purposeful direction test, the intentional act

committed by defendant must be “expressly aimed at the forum

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state.” By plaintiff’s own allegations, however, Steelwise has not

engaged in such conduct. Plaintiff alleges that Steelwise obtained

stolen data and provided it to the Colorado AG. The Colorado AG

then provided same information to the Sacramento DA. Regardless of

whom eventually gained access to the information, defendant’s

conduct involved only the Colorado AG. This conduct was not

expressly aimed at California and is not sufficient to constitute

purposefully directed activity.

Also unavailing is the fact that Steelwise operates a website

accessible to California residents. For specific jurisdiction to

attach, it must be determined that “but for” a defendant’s forumrelated activities, the plaintiff would not have suffered injury.

Callaway Golf Corp v. Royal Canadian Golf Assoc., 125 F. Supp. 2d

1194, 1204 (C.D. Cal. 2000). Plaintiff alleges that Steelwise’s

website is “evidence of motive for” and “closely related to”

conspiracy to harm plaintiff’s business. Pl.’s Opp’n at 15. This

wholly fails to demonstrate how Steelwise’s website gave rise to

the current suit. Accordingly, these allegations are insufficient

to meet the “but for” test necessary for this court to exercise

specific jurisdiction. 

B. General Jurisdiction

Second, plaintiff maintains that Steelwise’s website also

constitutes sufficiently continuous and systematic contacts with

California to confer general jurisdiction. General jurisdiction

exists if the non-resident's contacts with the forum are continuous

and systematic, and the exercise of jurisdiction satisfies

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 Plaintiff merely asserts, ipse dixit, that Steelwise’s 7

“Internet advertising for sale of its pre-engineered buildings [is]

directed at California residents . . .” Pl.’s Opp’n at 15.

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"traditional notions of fair play and substantial justice." Reebok

Int'l Ltd. v. McLaughlin, 49 F.3d 1387, 1391 (9th Cir. 1995). “The

standard for establishing general jurisdiction is fairly high and

requires that the defendant's contacts be of the sort that

approximate physical presence.” Bancroft & Masters, Inc. v.

Augusta Nat. Inc., 223 F.3d 1082, 1086 (9th Cir. 2000), citing

Brand v. Menlove Dodge, 796 F.2d 1070, 1073 (9th Cir. 1986); Gates

Learjet Corp. v. Jensen, 743 F.2d 1325, 1331 (9th Cir. 1984).

Plaintiff has neither alleged nor demonstrated sufficient

facts to show that Steelwise’s internet presence approximates

physical presence. Significantly, there is no evidence that

Steelwise targets California customers. See Bancroft, 223 F.3d 7

at 1086 (finding no general jurisdiction where defendant did not

target advertising toward California). Similarly, there is no

evidence as to the volume or frequency of business that Steelwise

transacts with California. See Gates Learjet, 743 F.2d at 1331.

And even assuming, arguendo, that Steelwise maintains an

interactive website (as opposed to a passive one), this would not

be enough, without more, to confer general jurisdiction. See

Millenium Enterprises, Inc. v. Millenium Music, LLP, 33 F. Supp.

2d 907, 920 (D. Or. 1999) (finding no general jurisdiction where

“defendants have done nothing more than publish an interactive Web

site”).

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In any event, the only legal authority cited by plaintiff

speaks to internet commerce creating specific, rather than general,

jurisdiction. See, e.g., Stomp, Inc. v. NeatO, LLC, 61 F. Supp.

2d 1074, 1077 (C.D. Cal. 1999) (“Since the assertion of specific

jurisdiction requires a lower threshold of contacts than does

general jurisdiction, the Court addresses only the issue of whether

it can assert specific jurisdiction . . .”). In short, plaintiff

has wholly failed to meet its burden of proving that the exercise

of jurisdiction is proper.

B. Motion to Stay

BBB has filed a motion to stay under either the Younger or

Colorado River abstention doctrines. Because the court finds that

abstention is proper under Younger for the reasons set forth below,

it need not address whether abstention under Colorado River is

warranted.

The Younger abstention doctrine provides that federal courts

should not interfere with pending state proceedings under certain

circumstances. Younger v. Harris, 401 U.S. 37, 46 (1971).

Although Younger originated in the context of a request to enjoin

a pending criminal prosecution, it has been extended to encompass

proceedings in the civil context, Huffman v. Pursue, Ltd., 420 U.S.

592, 607 (1975), and requests for declaratory relief, Samuels v.

Mackell, 401 U.S. 66, 72 (1971). 

The doctrine is animated by concerns of comity, federalism,

and equity. Younger, 401 U.S. at 43-44. Moreover, “[w]hen a case

falls within the proscription of Younger, a district court must

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dismiss [or stay] the federal action.” Fresh Int’l Corp. v.

Agricultural Labor Relations Bd., 805 F.2d 1353, 1356 (9th Cir.

1986). This is true despite the “virtually unflagging obligation

of federal courts to exercise the jurisdiction given to them.”

Smith v. Central Ariz. Water Conservation Dist., 418 F.3d 1028,

1033 (9th Cir. 2005) (internal quotation marks omitted).

1. Middlesex Test

Younger abstention is appropriate when the three requirements

of the Middlesex test are satisfied: (1) there must be ongoing

state judicial proceedings, (2) the proceedings must implicate

important state interests, and (3) there must be an adequate

opportunity in the state proceedings to raise federal questions.

Middlesex County Ethics Committee v. Garden State Bar Ass’n, 457

U.S. 423, 432 (1982); Delta Dental Plan of Cal., Inc. V. Mendoza,

139 F.3d 1289, 1294 (9th Cir. 1998). The first two requirements

address the concerns of comity and federalism, while the last

requirement addresses the concern of equity. While all three

concerns are important, “comity is the main reason for federal

court restraint in the face of ongoing state judicial proceedings.”

Gilbertson v. Albright, 381 F.3d 965, 975 (9th Cir. 2004).

a. Ongoing State Proceedings

Here, the first element of the Middlesex test is satisfied.

The dispositive issue is whether the state proceedings were

underway prior to initiation of the federal proceedings. Wiener

v. County of San Diego, 23 F.3d 263, 266 (9th Cir. 1994). At the

time that General Steel filed the present lawsuit, it was already

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the defendant in two ongoing state court actions: one filed by the

Colorado AG’s office and another filed by the Sacramento DA’s

office. Furthermore, General Steel’s suit against the BBB in

Colorado district court, filed in 2004, was initiated prior to the

present suit. Accordingly, the first prong of the Middlesex test

is satisfied.

b. Important State Interests

The second requirement of the Middlesex test, that there be

important state interests implicated, is also met. “The importance

of the interest is measured by considering its significance

broadly, rather than focusing on the state’s interest in the

resolution of an individual case.” Baffert v. Cal. Horse Racing

Bd., 332 F.3d 613, 618 (9th Cir. 2003). The pending state cases

clearly implicate important state interests, and General Steel does

not seriously dispute otherwise. See Williams v. Washington, 554

F.2d 369, 370 (9th Cir. 1977) (abstaining under Younger because the

state’s interest in prosecuting a consumer protection law was an

important governmental interest).

Here, the Colorado AG action is enforcing the Colorado

Consumer Protection Act, a remedial statute that protects consumers

from consumer fraud and ensures fair competition. As the Colorado

Supreme Court noted, the statute was “clearly enacted to control

various deceptive trade practices in dealing with the public and

as such is obviously designed to both declare and enforce an

important public policy.” People ex rel. Dunbar v. Gym of America,

493 P.2d 660, 665 (Colo. 1975). Likewise, the law being enforced

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by the Sacramento DA addresses the important state interest of

prohibiting unfair business practices. Indeed, the violation of

one of the statutes constitutes a misdemeanor. Cal. Bus. &

Professions Code § 17500. Finally, because the court in the action

against BBB ordered a stay of proceedings pending resolution of the

Colorado AG’s case, allowing this suit to proceed would undermine

the important state interest of preventing circumvention of

judicial orders. Thus, the court finds that the second prong of

the Middlesex test is met.

c. Adequate Opportunity to Raise Federal Claims

The third prong of the Middlesex test is whether an adequate

opportunity exists to raise the federal claims in the ongoing state

court proceedings. Notably, the issue is not whether General Steel

actually raised its federal claims in the state court proceedings.

Rather, the issue is whether it was afforded the opportunity to do

so. See Gilbertson, 381 F.3d at 983 (holding that a party’s

“failure to avail himself of the opportunity does not mean that the

state procedures are inadequate”); Dubinka v. Judges of Superior

Court, 23 F.3d 218, 224 (9th Cir. 1994) (finding the third prong

of the Middlesex test met because parties “had an adequate

opportunity to raise their constitutional challenges in the state

proceedings”); Lebbos v. Judges of Superior Court, 883 F.2d 810,

815 (9th Cir. 1989) (noting that the “pertinent inquiry is whether

the state proceedings afford an adequate opportunity to raise the

constitutional claims”) (internal quotation marks omitted). 

The burden rests with plaintiffs to show that they are

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procedurally barred from raising their federal claims in the state

court proceedings. Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 14

(1987). There is a presumption that state courts provide an

adequate forum for the adjudication of federal claims. Id. at 15.

Moreover, with respect to the particular claims at issue, there is

no dispute that state and federal courts have concurrent

jurisdiction over RICO and § 1983 claims. See Tafflin v. Levitt,

493 U.S. 455 (1990) (concurrent jurisdiction over civil RICO

actions); Maine v. Thiboutot, 448 U.S. 1, 3 n.1 (1980) (concurrent

jurisdiction over § 1983 claims).

i. Colorado AG Suit 

General Steel argues that it could not have raised its federal

claims in the state court actions. As an example, it points to the

allegation that the Colorado AG and Sacramento DA caused a

manufacturer to cease doing business with General Steel via threats

and intimidation, which is purportedly cognizable under § 1983 but,

according to General Steel, could never have been raised in the

Colorado AG action. As support, it cites the case of Genzler v.

Longanbach, 410 F.3d 630 (9th Cir. 2005), which held that absolute

immunity attaches to quasi-judicial activity, such as evaluating

evidence, but not to police-like activity, such as evidence

gathering. This case does not appear relevant except to suggest,

albeit very obliquely, that the alleged misconduct of the Colorado

AG and Sacramento DA constitutes a different transaction or

occurrence than the one giving rise to the Colorado AG’s case

against General Steel.

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Admittedly, the relief available in such a context might 8

be the exclusion of evidence, rather than damages, as General Steel

has requested here. Nevertheless, this distinction goes to the

issue of whether a stay versus a dismissal is appropriate, rather

than whether Younger abstention is appropriate in the first

instance. See Gilbertson, 381 F.3d at 980 (noting that where

relief is not available in state proceedings for a damages action,

the proper course of action is to stay the federal action).

20

General Steel maintains that the applicable state rules of

civil procedure barred its federal claims. As support, it recites

Rule 14(a) of the Colorado Rules of Civil Procedure, which limits

cross-claims made by the defendant to a “person not a party to the

action who is or may be liable to him for all or part of

plaintiff’s claims against him.” Co. Rule Civ. P. 14(a). In other

words, General Steel argues that even if the Colorado AG’s office

engaged in unconstitutional conduct, this would not mean that the

AG would be liable for General Steel’s violation of Colorado’s

consumer protection law -- thereby foreclosing General Steel’s

ability to raise its federal claims under Rule 14(a).

Plaintiff’s argument ignores two critical considerations.

First, General Steel could have challenged the constitutionality

of the Colorado AG’s actions in the state proceedings outside the

context of Rule 14(a). Improper investigative techniques and

evidence gathering, for instance, can be litigated in opposition

to the admissibility of evidence. Indeed, General Steel in fact 8

did raise certain constitutional arguments in the state

proceedings, although these were rejected on the merits. See

Nelson Decl., Ex. 5 (September 27, 2004 Order) at 2-7 (rejecting

due process claim based on Gore v. BMW).

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Second, there are other procedural options available to

General Steel. Aside from impleading a third-party defendant,

plaintiffs may, and indeed must, assert any compulsory

counterclaims arising out of the same transaction or occurrence

that is the subject matter of the opposing party’s claim. Co. Rule

Civ. P. 13(a) (“A pleading shall state as a counterclaim any claim

. . . the pleader has against any opposing party, if it arises out

of the transaction or occurrence”). The purpose of the rule is

to avoid multiple lawsuits among the parties to a transaction or

occurrence. In re Estate of Kroitiuk, 12 P.3d 302 (Colo. App.

2000). Here, General Steel could have raised its federal claims

in the state suit under Rule 13(a). For example, one of the

underlying claims in the present action against the Colorado AG is

that they wrongfully initiated suit based on false reports and

complaints. These alleged acts plainly arise out of the same

transaction or occurrence that gave rise to the Colorado AG’s suit.

Moreover, General Steel’s initial reliance on Rule 13(a),

limiting the scope of cross-claims, is misplaced. Rule 20(a)

allows permissive joinder of any third parties against whom there

is a right to relief arising out of the same transaction or

occurrence, or series of transactions or occurrences. Co. Rule

Civ. P. 20(a). Particularly in light of the liberal “series of

transactions or occurrences” language, it appears that General

Steel could have asserted its federal claims against the defendants

now seeking abstention.

In sum, General Steel has not met its burden of proving that,

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under either Rule 13(a) or under Rule 20(a), it did not have the

opportunity to raise its federal claims against the defendants now

seeking abstention.

ii. Sacramento DA Suit

In addition, General Steel has the opportunity to raise its

federal claims in the Sacramento DA’s case. The claims against the

Sacramento DA in that case are similar to those against the

Colorado AG: they include, for instance, allegations that the

Sacramento DA wrongfully initiated suit based on false information.

As described above, however, these claims can be raised in the

state court proceedings.

Nevertheless, General Steel argues that because the underlying

claim in the Sacramento DA case was California’s Unfair Competition

Law, which imposes strict liability, it could not implead a thirdparty defendant. As support, it notes that Cal. Code Civ. P.

§ 428.10(b) only permits the filing of a cross complaint against

anyone, whether a party to the action or not, where the cause of

action arises out of the same transaction, occurrence, or series

of transactions or occurrences as the underlying action.

Again, this argument is incomplete for the same reasons as

described above. First, General Steel again overlooks the fact

that, as in Colorado, a defendant in California may file any

counter-claim against the plaintiff, whether or not it arises out

of the same transaction or occurrence as the underlying action.

Cal. Code Civ. P. § 428.10(a). See, e.g., Kajima Eng’g Constr.,

Inc. v. City of Los Angeles, 95 Cal. App. 4th 921 (2002) (approving

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of a RICO counterclaim). 

Second, it is doubtful that even under the rules for filing

a cross-complaint, General Steel’s claims against the Sacramento

DA (or any of the other defendants, such as the BBB) would not

arise from the same “series of transactions or occurrences” giving

rise to the Sacramento DA’s action in state court. See, e.g.,

People v. Rath Packing Co., 85 Cal. App. 3d 308 (1978) (company

sued by district attorney filed counterclaim and cross-claim

against third party alleging violations of federal law, including

due process). 

Again, General Steel has not met its burden of proving that

the state forum is inadequate, and certainly not by reference to

“unambiguous authority.” Baffert, 332 F.3d at 619 (holding that

the court "must assume that state procedures afford an adequate

remedy, in the absence of unambiguous authority to the contrary").

iii. Other State Court Actions

Moreover, while General Steel focuses on why it allegedly

could not raise its federal claims in the two state-initiated

consumer protection actions, it tellingly avoids any real

discussion of why it could not have raised these claims in the

other two state court actions, which it initiated. In addition,

General Steel has failed to refute the BBB’s paragraph-by-paragraph

analysis explaining why each of the allegations in its federal

complaint parallel those already made in the four separate state

court proceedings. Accordingly, the court finds that plaintiff

could have raised its federal claims through these state court

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proceedings.

2. Interference with State Proceedings

Even if the three requirements of the Middlesex test are met,

General Steel urges the court to exercise jurisdiction because

doing so “would have no effect at all” on any of the pending state

court cases. Pl.’s Opp’n at 16. The requisite level of

interference required for Younger abstention is not altogether

clear, but the Ninth Circuit has retreated from its previous

position that “direct interference” is required. Cf. Green v. City

of Tucson, 255 F.3d 1086 (9th Cir. 2001). In Gilbertson, the court

clarified:

If a state-initiated proceeding is ongoing, and if it

implicates important state interests (as refined by NOPSI),

and if the federal litigant is not barred from litigating

federal constitutional issues in that proceeding, then a

federal court action that would enjoin the proceeding, or

have the practical effect of doing so, would interfere in a

way that Younger disapproves. 

255 F.3d at 978 (emphasis in original). General Steel seizes upon

this last sentence and presses that federal court involvement in

the present case would neither enjoin pending state proceedings nor

have the practical effect of doing so.

Gilbertson undermines, rather than supports, General Steel’s

position. Gilbertson signaled an expansion of the types of federal

court intervention that were sufficiently intrusive to justify

application of Younger abstention. Previously, Ninth Circuit law

held that Younger abstention was only appropriate in actions

seeking “to enjoin, declare invalid, or otherwise involve the

federal courts in terminating or truncating the state court

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proceedings.” Green, 255 F.3d at 1098. Gilbertson clarified that

this requirement of “direct interference” had no basis in Supreme

Court precedent. Instead, Gilbertson held that federal court

action having the same “practical effect” as an injunction

triggered application of the Middlesex test.

The “practical effect” of an injunction or declaratory relief

in the face of pending state proceedings is that:

It would frustrate the state’s interest in

administering its judicial system, cast a negative

light on the state court’s ability to enforce

constitutional principles, and put the federal court

in the position of prematurely or unnecessarily

deciding a question of federal constitutional law.

Therefore, a determination if the federal plaintiff’s

constitutional rights were violated would be just as

intrusive as a declaratory judgment.

Gilbertson, 381 F.3d at 980. This view is consistent with the most

important concern animating the Younger doctrine — that of comity.

Id. at 975. Accordingly, the Ninth Circuit held that a suit for

purely damages under § 1983 had the same practical effect as an

injunction or declaratory relief. Id. at 979.

Similarly, in the present case, even if federal court

involvement would not stop pending state proceedings in Colorado

and California, it would nevertheless cast aspersion on the

competence of these state courts to adjudicate plaintiff’s federal

claims. Indeed, so strong is this concern that whenever there is

some rational connection between the state court action and the

federal court damages suit, sufficient interference exists to

trigger the Middlesex test. See Gilbertson, 381 F.3d at 980 n.14

(finding insufficient interference only where the underlying

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federal claims are “wholly unrelated” to the issues in the pending

state proceeding). Here, General Steel’s federal claims are

intricately related to the claims made in state court. See Decl.

of Thomas Kelley ¶¶ 13-21. Furthermore, as noted above, concerns

regarding comity are not alleviated simply when the federal

plaintiff chooses not to litigate its federal claim in state court

even though it could have done so. A contrary rule would allow

plaintiffs to bypass Younger and federal court action would ratify

plaintiffs’ circumvention.

3. No Exception to Younger Applies

Even where Younger is implicated, the court is not required

to abstain where (1) the state proceeding was motivated by bad

faith, (2) the challenged statute is flagrantly unconstitutional,

or (3) when exceptional circumstances are present. Gilbertson, 381

F.3d at 983; Ohio Civil Rights Comm’n v. Dayton Christian Schs.,

477 U.S. 619, 626 (1986). General Steel argues that the first

exception applies, because the investigations culminating in the

Sacramento DA and Colorado AG actions were conducted in bad faith,

having as their “sole purpose [] to drive plaintiff out of business

and leave the 150 Colorado citizens employed by General Steel,

unemployed.” Pl.’s Opp’n at 20.

Bad faith “generally means that a prosecution has been brought

without a reasonable expectation of obtaining a valid conviction.”

Baffert, 332 F.3d at 621 (citation omitted). Here, the court in

the Colorado AG action has already found that General Steel was

liable for violating state consumer protection law in “Phase I” of

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the lawsuit. Accordingly, it cannot be said that there was no

reasonable expectation on the part of the Colorado AG in obtaining

a favorable ruling. Moreover, as the Sacramento DA’s action

concerns substantially similar claims, it also cannot be said that

the plaintiffs in that case have acted in bad faith.

4. Stay v. Dismissal

A final consideration is whether a stay or dismissal is

appropriate in this case. In most cases, once it is determined

that Younger abstention applies, “dismissal (and only dismissal)

is appropriate.” Gilbertson, 381 F.3d at 981. However, when only

damages are sought, “it makes sense for the federal court to

refrain from exercising jurisdiction temporarily by staying its

hand until time as the state proceeding is no longer pending.” Id.

This allows the plaintiff to pursue its federal claims in the state

proceedings while preserving its choice of forum with regard to

compensation. Given that General Steel has only requested damages

in this case, a stay is appropriate.

IV. Conclusion

For the reasons set forth above, the Nebraska defendants’ and

Steelwise’s motions to dismiss are GRANTED, and BBB’s motion to

stay is GRANTED.

IT IS SO ORDERED.

DATED: March 2, 2007.

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