Opinion ID: 764374
Heading Depth: 2
Heading Rank: 2

Heading: Foreign Application of the Entire Controversy Doctrine

Text: 17 In order to decide whether to apply New Jersey law or federal law, we must follow the rules laid down in Erie and its progeny. We are required to weigh the significance and substantive character of the state preclusion rule, and the likelihood that application of the federal rule would produce forum-shopping by parties, against the importance of the federal interests underlying the federal rule. See Byrd v. Blue Ridge Rural Elec. Co-op., Inc., 356 U.S. 525, 535-40, 78 S.Ct. 893, 2 L.Ed.2d 953 (1958). If a rule is outcome-determinative, so that applying the federal rule would change the result of a case filed in federal court from the result in an identical state court case, it is likely to affect parties' decisions where to litigate, and applying the state rule is generally appropriate. On the other side, a strong federal policy embodied in constitutional principles or federal law justifies the application of a federal rule. In this case, the relevant federal interests are embodied in Federal Rule of Civil Procedure 13, which establishes federal claim joinder rules, and in federal principles of res judicata. We conclude that New Jersey's interest in the entire controversy doctrine, while weighty, does not require us to adopt it in order to decide the preclusive effects of non-New Jersey cases.
18 Paramount notes that none of the lawsuits filed in the aftermath of the accident was litigated in New Jersey state court (three were brought in federal court and two were removed). 3 It argues that the New Jersey Rules of Court containing the entire controversy doctrine are procedural and therefore should not be applied in federal court. Paramount also submits that New Jersey's interest in preserving the resources of its courts is minimal, if not absent, here, where all of the prior cases were litigated outside of the New Jersey courts. See Henkels & McCoy, Inc. v. Adochio, 906 F.Supp. 244, 249 (E.D.Pa.1995) (declining to apply the doctrine where both the previous case and the instant case were in the Eastern District of Pennsylvania). 19 Paramount further contends that, when a prior decision's preclusive effect is examined, it is the prior jurisdiction's preclusion law that should generally be applied. See Restatement (Second) of Judgments § 87 (1982). Paramount reasons that federal preclusion law should apply to determine the preclusive effects of federal diversity judgments. In the absence of a prior New Jersey judgment on the merits, Paramount maintains, we have no reason to apply New Jersey's supercharged preclusion doctrine. 20 The defendants respond that the Full Faith and Credit Act, 28 U.S.C. § 1738 (1994), requires a federal court hearing a New Jersey tort claim to be bound by New Jersey substantive law, of which the entire controversy doctrine is a part. See Rycoline Prods., Inc. v. C & W Unlimited., 109 F.3d 883, 887 (3d Cir.1997). We note some initial discomfort with this description, as we believe that the entire controversy doctrine, like all preclusion doctrine, should generally be characterized as procedural. We take up Rycoline and the substance/procedure divide infra, noting here only that the Supreme Court has long instructed us that the substance/procedure line is not dispositive when federal courts must choose which sovereign's law to apply. See Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945). 21 The defendants also point out that federal courts have occasionally applied the entire controversy doctrine to determine the effects of non-New Jersey judgments, but the parties in prior decisions have not contested the application of the doctrine. 4 Nor have we resolved the broader issue of whether federal or state res judicata law governs successive diversity actions. See Venuto v. Witco Corp., 117 F.3d 754, 758 & n. 7 (3d Cir.1997). We have, however, decided that federal law governs the preclusive effect of a prior diversity judgment on a subsequent federal question case. See In re Kaplan, 143 F.3d 807, 814-15 (3d Cir.1998). We noted in Kaplan that the Supreme Court used federal law to determine the preclusive effect of a prior diversity judgment in Heiser v. Woodruff, 327 U.S. 726, 66 S.Ct. 853, 90 L.Ed. 970 (1946). Though the issue was not then before us, we also suggested that the rationale for applying federal preclusion law to determine the effects of a prior diversity judgment on a later federal question case was quite similar to the rationale for doing so in a later diversity case. See Kaplan, 143 F.3d at 815 n. 15.
22 We find two New Jersey decisions particularly helpful in elucidating New Jersey's view of the entire controversy doctrine. In Watkins v. Resorts International Hotel & Casino, Inc., 124 N.J. 398, 591 A.2d 592 (N.J.1991), the New Jersey Supreme Court acknowledged the general rule that the preclusive effect of a judgment is determined by the law of the jurisdiction that rendered it, as a logical consequence of the procedures of the issuing court. See id. at 598. This rule affects the application of the entire controversy doctrine in New Jersey state court. Only in limited circumstances may the doctrine preclude an action not otherwise precluded by the res judicata effects of a federal decision. See id. at 598-99. The court held that it was essential to consider the federal law of claim preclusion in determining whether to apply the entire controversy doctrine, as an equitable matter, in state court cases. See id. at 599. Watkins thus suggests that New Jersey recognizes the interests of other jurisdictions that have differing preclusion doctrines. 23 In Mortgagelinq Corp. v. Commonwealth Land Title Ins. Co., 142 N.J. 336, 662 A.2d 536 (N.J.1995), the New Jersey Supreme Court applied the entire controversy doctrine to a plaintiff who had previously sued on the same underlying facts in the federal District Court for the Eastern District of Pennsylvania. Almost a year earlier, a mortgage lender had brought an action in the latter court against Pennsylvania-based companies and individuals who were allegedly the central figures in a fraudulent scheme involving mortgage financing, and the Federal Home Loan Mortgage Corporation (Fannie Mae) had intervened as a plaintiff. The second case was brought in New Jersey state court by the lender and Fannie Mae against New Jersey-based companies and individuals who participated in the same mortgage transactions and who were allegedly accessories in the same scheme. 24 Mortgagelinq stated decisively that the entire controversy doctrine is procedural, and that it was formulated specifically to preserve the resources of New Jersey courts. 5 The Court held that the doctrine bars suits in New Jersey against parties who could have been joined in an earlier suit in another state or in federal court. The result was binding only in New Jersey, however; other jurisdictions could permit litigation against earlier-omitted defendants despite a New Jersey decision dismissing an action on entire controversy grounds. The decision thus attempted to cabin the effect of the doctrine outside of New Jersey courts: 25 We hold that when a party deliberately chooses to fragment litigation by suing certain parties in another jurisdiction and withholds claims against other parties, a New Jersey court need not later entertain the claims against the omitted parties if jurisdiction was available in the first forum. In doing so we do not export our entire controversy doctrine to other jurisdictions, but merely hold that our notions of procedural fairness do not permit the claims that could have been brought elsewhere to be brought in New Jersey. This ruling presupposes that when the procedural rules of foreign jurisdictions permit the omitted claims to be brought later, the foreign jurisdiction is free to entertain such claims. Just as we do not seek to export our procedural requirements of party joinder, we do not seek to export any preclusive effect to our rules of party joinder. 26 .... 27 One of the underpinnings of the entire controversy doctrine, in addition to fairness to the parties, is fairness to the system of judicial administration. Judicial economy and efficiency--the avoidance of waste and delay--remain constants in the application of the entire controversy doctrine. Fragmented and multiple litigation takes its toll on not only the parties but the judicial institution and the public. Each jurisdiction is free to assess the importance of such values.... 28 If Pennsylvania courts do not have a comparable party-joinder rule, principles of comity suggest that New Jersey should not seek to export its entire controversy doctrine to regulate the conduct of attorneys in that jurisdiction. In other words, attorneys conducting litigation in Pennsylvania courts should not have to accommodate their practices to the demands of New Jersey courts. A corollary of that proposition, however, is that New Jersey courts need not necessarily grant relief when parties deliberately refrain from seeking relief in other jurisdictions when doing so would have been much fairer to all parties involved. There is a delicate balance between the interests of the two jurisdictions that must accommodate the interests of justice.... 29 .... 30 Maintaining a cohesive federal system (and the Full Faith and Credit Clause melds the state courts into that system) does not require that the other parts of the federal system honor our entire controversy doctrine. 31 Mortgagelinq, 662 A.2d at 537, 540, 541, 542 (citations omitted). 32 The Mortgagelinq court mentioned that the federal courts are considered those of another sovereign, id. at 541, and suggested that the application of the doctrine in a diversity action in New Jersey federal court might be governed by choice of law principles, indicating that the court did not necessarily expect federal courts in New Jersey to apply the doctrine exactly as the state courts would. See id. at 542. Thus, while Mortgagelinq continued to embrace an expansive view of the doctrine within New Jersey state courts, it heralded an awareness of the doctrine's limits when interjurisdictional problems were involved. While New Jersey cannot, of course, control our understanding of the relevant federal law, we consider Watkins and Mortgagelinq useful explications of the justifications for the doctrine, and hence of New Jersey's interests. We turn, therefore, to an assessment of the relevant state and federal interests. 33
34
35 Rycoline held that a federal court deciding a federal cause of action is bound by the entire controversy doctrine when determining the effect of a prior New Jersey state court judgment. The court characterized the doctrine as an aspect of the substantive law of New Jersey, by virtue of the Full Faith and Credit Act. Rycoline, 109 F.3d at 887. Thus, the plaintiffs, who had filed a previous suit in New Jersey state court, were subject to the rigors of the entire controversy doctrine when they filed a second suit in New Jersey federal court, although they were able to proceed because we decided that New Jersey would not apply the doctrine while the first suit was still pending. 36 The defendants claim that the just-quoted phrase from Rycoline obligates us to apply the entire controversy doctrine as part of New Jersey substantive law under Erie. We believe that the question is slightly more complex. The Full Faith and Credit Act provides that the judicial proceedings of a state court shall have the same full faith and credit within every court in the United States as they have by law or usage in the courts of the issuing state. Thus, federal courts must give the same preclusive effect to a state court judgment as another court of that state would, unless to do so would violate due process. See Rycoline, 109 F.3d at 887. In this case, there are only federal judgments, and the Full Faith and Credit Act is not by its terms applicable. It is usually thought that federal judgments receive full faith and credit by virtue of federal common law. See, e.g., Ronan Degnan, Federalized Res Judicata, 85 Yale L.J. 741, 744-50 (1976) (discussing the development of the rule requiring respect for federal judgments); cf. Embry v. Palmer, 107 U.S. 3, 10, 2 S.Ct. 25, 27 L.Ed. 346 (1883) ([T]he judgments of the courts of the United States have invariably been recognized as upon the same footing, so far as concerns the obligation created by them, with domestic judgments of the states, wherever rendered and whereever [sic] sought to be enforced.). 37 To the extent that Rycoline labelled the entire controversy doctrine substantive for purposes of the Full Faith and Credit Act, we conclude that it meant only that New Jersey law governed the preclusive effects of an earlier New Jersey state court judgment. This is exactly what the Act requires. See University of Tennessee v. Elliott, 478 U.S. 788, 794, 106 S.Ct. 3220, 92 L.Ed.2d 635 (1986). We decline to read one phrase in a decision that depended on completely different issues as determining the result in this case. Rather, our interpretation of Rycoline renders it consistent with the long line of New Jersey cases labelling the entire controversy doctrine procedural. See, e.g., Oliver v. Ambrose, 152 N.J. 383, 705 A.2d 742, 746 (N.J.1998); Harley Davidson Motor Co. v. Advance Die Casting, Inc., 150 N.J. 489, 696 A.2d 666, 668 (N.J.1997); Mortgagelinq; Woodward-Clyde Consultants v. Chemical & Pollution Sciences, Inc., 523 A.2d 131, 135 (N.J.1987). At all events, the substance/procedure divide is not necessarily the controlling factor in determining when a federal court must apply state law. See Guaranty Trust Co., 326 U.S. at 109-10. 38 Under Mortgagelinq, a dismissal on entire controversy grounds is not a dismissal on the merits; this rule helps to ensure that the doctrine will not have untoward extraterritorial effects. 6 However, New Jersey law still determines the preclusive effects of a prior New Jersey state court judgment on the merits, as in Rycoline. 39
40 New Jersey's main justification for the doctrine, its interest in preserving its judicial resources, is minimized when none of the prior litigation took place in New Jersey state courts. See Rochelle Cooper Dreyfuss & Linda J. Silberman, Interjurisdictional Implications of the Entire Controversy Doctrine, 28 Rutgers L.J. 123, 156 (1996). New Jersey state courts still apply the doctrine in such cases, which conserves some of New Jersey's judicial resources by precluding subsequent litigation in New Jersey. By contrast, when both prior and subsequent litigation takes place outside the New Jersey state courts, it is hard to see any New Jersey resource interest whatsoever, except inasmuch as the size of the federal docket indirectly affects the state courts. 41 The risk of unfair surprise is also heightened where the initial litigation did not take place in New Jersey; it may be difficult for responsible lawyers to predict that litigation in New York or California will close the New Jersey federal courts to future claims. See id. at 169; cf. Electro-Miniatures Corp. v. Wendon Co., 889 F.2d 41, 45 & n. 6 (3d Cir.1989) (expressing the concern that, if the entire controversy doctrine were applied to out-of-state judgments in New Jersey federal court, other jurisdictions would be adversely affected by the need to tailor litigation to avoid preclusion in New Jersey). But see Perry Dane, Dignity and Glorious Chaos: A Comment on the Interjurisdictional Implications of the Entire Controversy Doctrine, 28 Rutgers L.J. 173 (1996) (arguing that the problems with the doctrine are overstated). Given New Jersey's recognition, in Watkins and Mortgagelinq, that other jurisdictions have significantly different preclusion doctrines and a strong interest in giving effect to those doctrines, we do not believe that a decision requiring federal courts to apply federal preclusion law would depreciate New Jersey law. 42 Some commentators have argued that Mortgagelinq was wrongly decided and that the Full Faith and Credit Act does not give New Jersey the freedom to give other courts' decisions greater preclusive effect than those courts would allow. See Stephen B. Burbank, Where's the Beef? The Interjurisdictional Effects of New Jersey's Entire Controversy Doctrine, 28 Rutgers L.J. 87 (1996). Professor Burbank argues that Mortgagelinq works against the compelling interest in national unity by requiring litigants in other states to consider the preclusive effects of their cases on future cases in New Jersey, regardless of the preclusion law of the state in which they file complaints. He concludes that, regardless of New Jersey state court practice, federal courts in New Jersey should apply standard preclusion law, rather than the entire controversy doctrine, to the judgments of non-New Jersey courts. See Burbank, supra, at 100-01; see also Dreyfuss & Silberman, supra, at 157-58. 43 Professor Burbank further argues that, when a federal court in New Jersey tries to resolve this conundrum, it should apply the Full Faith and Credit Act rather than Erie balancing. Judicial balancing would be unnecessary, because Congress has explicitly instructed courts how to treat the judgments of state courts. See Burbank, supra, at 103 n. 82. Thus, if the previous litigation involved in this case had taken place in a state court, we would, as a matter of course, give it the preclusive effect it would have in that state's courts. 44 Though we find this argument persuasive, it does not dispose of this case, because the Full Faith and Credit Act does not by its terms apply here. When the prior decision is a federal decision, the Act applies only by analogy. And in that case, it is important to look to Erie principles to decide which sovereign's law to apply. The Full Faith and Credit Act has an important implication, however: If the Act instructs New Jersey federal courts how to determine the preclusive effect of state decisions, there is a compelling argument for treating federal cases similarly. There is no good reason to apply New Jersey entire controversy law to determine the preclusive effects of a federal diversity case from Pennsylvania when the preclusive effects of the same case would have been governed by the law of the issuing court if it had been litigated in Pennsylvania state court. To make different rules for the two types of cases would be absurd, and would only move the potential forum-shopping problem back one level further, to the initial non-New Jersey litigation. 45 We note another factor that diminishes the force of the Erie concerns that generally lead to application of state law. Our Erie jurisprudence counsels us to avoid situations in which parties who can invoke federal jurisdiction are treated differently from those who cannot. Because we are considering a preclusion doctrine, the question is whether parties who can invoke federal jurisdiction will be able to litigate claims that will be precluded for parties who cannot. The risk of inequitable preclusion is minimal, for the following reason: This situation arises only when there has been previous litigation outside the New Jersey state courts. However, the entire controversy doctrine would only bar a subsequent New Jersey suit if the first forum would have had jurisdiction over the claims raised in that subsequent suit. It therefore follows that there was an alternate non-New Jersey forum for the relevant claims, although in some cases that forum would be another state court. The relevant point is that no plaintiff in this situation will find itself entirely unable to litigate its claims; even if it is not able to take advantage of federal jurisdiction, it will have another state in which to bring its claims. 7 46 Any resulting disparity is no more than the disparity created by the very existence of diversity jurisdiction, which allows some parties the option of going to federal court whereas others with identical causes of action cannot. 8 While a decision to apply federal preclusion law would be outcome-determinative in this case, therefore, it would not ex ante cut off or extend any substantive rights that a plaintiff would have in the absence of a New Jersey federal forum, and would be unlikely to encourage significant forum-shopping. 9 47 Our analysis can be summarized as follows: New Jersey has no significant interest in controlling the dockets of other court systems. Moreover, application of a federal rule in the rather unusual circumstances here would be unlikely to create unfairness by causing different results in federal court than in state court or to cause significant forum-shopping. The issues of outcome-determinativeness and a consequent incentive to forum-shop are not free from doubt, however. Therefore, it is important for us to determine whether there is a significant federal interest counseling application of the federal rule. See Fauber v. KEM Transp. & Equip. Co., 876 F.2d 327, 331 (3d Cir.1989). It is to this question that we now turn. 48
49 Federal courts have a significant interest in determining the preclusive effects of federal judgments. See Kaplan, 143 F.3d at 815 n. 15 (citing cases). Kaplan applied federal law to determine the preclusive effects of a diversity judgment on a subsequent federal question case. We believe that its logic is equally applicable here, when successive diversity cases are at issue. The source of federal jurisdiction over the second case should not affect our analysis, because we are concerned with the preclusive effect of the first. As the Second Circuit has put it: 50 One of the strongest policies a court can have is that of determining the scope of its own judgments.... It would be destructive of the basic principles of the Federal Rules of Civil Procedure to say that the effect of a judgment of a federal court was governed by the law of the state where the court sits simply because the source of federal jurisdiction is diversity. 51 Kern v. Hettinger, 303 F.2d 333, 340 (2d Cir.1962). We agree. 52 Paramount persuasively argues that we should apply the general federal rule that the preclusive effects of prior cases are determined by the law of the prior forum. Applying the federal rule would also give effect to the joinder rules of the Federal Rules of Civil Procedure, which define the claims that parties must join if they are not to be later barred. Cf. Hanna v. Plumer, 380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965) (the strong federal policies embodied in the Federal Rules of Civil Procedure justify a refusal to apply an outcome-determinative state procedural rule); Byrd (outcome-determinative state procedural rules do not need to be applied when they are not an integral part of the underlying substantive right and there is a strong countervailing federal policy, such as the policy against disrupting the allocation of power between judge and jury in federal court). Paramount draws further support from the scholarly opinion in Fioriglio v. City of Atlantic City, 963 F.Supp. 415 (D.N.J.1997), which engaged in a calculus similar to ours; Judge Irenas concluded, as we do, that federal joinder and preclusion rules embody an important federal policy that weighs heavily against applying the entire controversy doctrine in these circumstances. See id. at 424. 53
54 We conclude that respecting courts' power to determine the preclusive effects of their own rulings is a significant federal interest. In particular, the claim joinder provisions of the Federal Rules of Civil Procedure express a federal policy about what claims must be joined to avoid later preclusion. Applying New Jersey preclusion law to determine the preclusive effects of federal cases would frustrate the policy embodied in the Rules, and we decline to do so. Instead we will follow the federal rule that the law of the issuing court--here, federal law--determines the preclusive effects of a prior judgment. 10 55 In reaching this result, clearly foreshadowed by Kaplan, we follow the majority of circuits to confront the issue of the law to be applied in successive diversity cases. See, e.g., J.Z.G. Resources, Inc. v. Shelby Ins. Co., 84 F.3d 211, 213-14 (6th Cir.1996); Havoco of America, Ltd. v. Freeman, Atkins & Coleman, Ltd., 58 F.3d 303, 307-08 (7th Cir.1995); Johnson v. SCA Disposal Servs., 931 F.2d 970, 974 (1st Cir.1991); Empire Fire & Marine Ins. Co. v. J. Transport, Inc., 880 F.2d 1291, 1293 n. 2 (11th Cir.1989); Shoup v. Bell & Howell Co., 872 F.2d 1178, 1179 (4th Cir.1989); Aerojet--General Corp. v. Askew, 511 F.2d 710, 715-18 (5th Cir.1975); Kern, 303 F.2d at 340 (Second Circuit). But see Follette v. Wal-Mart Stores, Inc., 41 F.3d 1234, 1237 (8th Cir.1994) (applying state law); Pardo v. Olson & Sons, Inc., 40 F.3d 1063, 1066 (9th Cir.1994) (same). 56 Since we have decided that federal law, rather than the entire controversy doctrine, applies, the obvious question is: What is the federal law? However, the Agusta defendants have not argued, either in the District Court or this court, that federal preclusion principles bar Paramount's suit. We thus deem a possible res judicata argument waived. See Security Servs., Inc. v. K Mart Corp., 996 F.2d 1516, 1519 (3d Cir.1993); Brenner v. Local 514, United Bhd. of Carpenters & Joiners, 927 F.2d 1283, 1298 (3d Cir.1991). 11 We will therefore vacate the judgment in favor of the defendants and remand to the District Court for further proceedings on Paramount's tort claims.