Court Opinion

ID: 2977151
Source: CourtListenerOpinion
Date Created: 2015-09-22 18:03:26.85727+00
Date Added: 2024-06-11T15:38:49.783270
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                           File Name: 08a0674n.06
                           Filed: November 4, 2008

                                            No. 07-6329

                           UNITED STATES COURT OF APPEALS
                                FOR THE SIXTH CIRCUIT

HANGER PROSTHETICS & ORTHOTICS                            )
EAST, INC.                                                )        ON APPEAL FROM THE
                                                          )        UNITED STATES DISTRICT
       Plaintiff-Appellant,                               )        COURT FOR THE EASTERN
                                                          )        DISTRICT OF TENNESSEE
v.                                                        )
                                                          )                           OPINION
RICHARD HENSON, ET AL.                                    )
                                                          )
       Defendants-Appellees.

BEFORE:        MOORE and COLE, Circuit Judges; and GRAHAM,* District Judge.

       COLE, Circuit Judge. The issues before this Court arise out of two lawsuits by Plaintiff-

Appellant Hanger Prosthetics & Orthotics East, Inc., (“Hanger”). Hanger filed its first lawsuit in the

chancery court of Knox County, Tennessee against William Kitchens and Choice Medical, Inc.

(“Choice”) seeking damages from Kitchens and Choice for, inter alia, Kitchens’s breach of a non-

compete contract and Choice’s role in procuring that breach. The chancery court found for Hanger

and awarded it damages in the amount of $720,546.

       Hanger filed its second lawsuit in the United States District Court for the Eastern District of

Tennessee against Defendants-Appellees Richard Henson and Marty Altshuler (collectively,

“Defendants”). The sole cause of action in the complaint relates to Defendants’ role as owners and

       *
        The Honorable James L. Graham, United States District Judge for the Southern District of
Ohio, sitting by designation.
No. 07-6329
Hanger Prosthetics & Orthotics East, Inc. v. Henson, et al.

principals of Choice in the procurement of Kitchen’s breach of contract. In district court,

Defendants—asserting corporate immunity and judicial estoppel— moved to dismiss under Fed. R.

Civ. P. 12(b)(6). On consideration of the parties’ briefs, the district court reinterpreted sua sponte

Defendants’ estoppel argument as one of res judicata or claim preclusion. The district court then

found that res judicata applied and dismissed Hanger’s claim. Hanger now appeals that dismissal.

For the reasons explained below, we agree that res judicata does apply, and we AFFIRM the

judgment of the district court.

                                         I. BACKGROUND

A.     The State Court Proceedings

       Hanger filed a complaint on November 15, 2004, in the chancery court of Knox County,

Tennessee against Kitchens and Choice. The complaint requested injunctive relief and damages

stemming from the alleged breach of a non-compete agreement between Kitchens and Hanger. The

complaint sought relief based on “breach of contract, misappropriation of confidential information

and trade secrets, tortious interference with contractual relations, tortious interference with business

relations, conspiracy and unfair competition.” (JA 14.)

       The chancery court concluded that a valid and enforceable non-compete agreement existed

between Kitchens and Hanger, and that Choice was liable for tortious interference with contract

under Tenn. Code Ann. § 47-50-109 and for tortious interference with business relationships under

common law. In its opinion, the chancery court adopted Hanger’s proposed statement of facts. The

facts presented by Hanger and adopted by the chancery court state in relevant part:

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Hanger Prosthetics & Orthotics East, Inc. v. Henson, et al.

       9.      In the summer of 2004, [Henson], a founder and co-owner of [Choice], set up
       a meeting with Kitchens to discuss employment opportunities at Choice. At this
       meeting, Henson informed Kitchens that Choice wanted to hire Kitchens to run
       Choice’s orthotics and prosthetics practice in the Knoxville area. In this role,
       Kitchens would be not only an orthotics practitioner, but also a practice manager and
       sales representative responsible for growing Choice’s orthotics practice in the
       Knoxville area. Henson pursued Kitchens for this position largely because of
       Kitchens’ extensive relationships with referring physicians in the Knoxville area,
       developed during Kitchens’ fourteen years of employment with [Hanger].

       10.     At this meeting, Kitchens informed Henson that he had signed the Agreement
       and that the Agreement contained a non-compete provision. Henson instructed
       Kitchens to fax him a copy, which Kitchens did. Henson and his co-owner
       [Altshuler] then gave the Agreement to their attorney to review. After consulting
       with their attorney, Henson and Altshuler offered Kitchens the position managing
       Choice’s orthotics practice. Kitchens accepted the position, turning in his resignation
       letter on August 4, 2004. However, Kitchens still remained with [Hanger] until
       September 1, 2004, fulfilling the 30-day notice period prescribed by his Agreement.

       11.     After September 1, Kitchens began working for Choice as the practice
       manager of its orthotics practice. Henson and Kitchens visited area physicians to
       announce Kitchens’ new employment with Choice, and Kitchens sent out written
       announcements that mentioned his prior service at [Hanger] and announced his
       employment with Choice. To grow the orthotics practice at Choice, Kitchens
       immediately began soliciting referrals from physicians and physician practice groups
       that he had serviced on behalf of [Hanger].

       11. [sic] On September 29, 2004, once [Hanger] learned that Kitchens was soliciting
       its referral sources and engaging in direct competition in the Knoxville area on behalf
       of Choice, counsel for [Hanger] notified Kitchens and Choice in writing that
       Kitchens’ activities on behalf of Choice violated Kitchens’ non-compete agreement.
       In these letters, [Hanger] demanded that Kitchens and Choice cease and desist such
       activity. Counsel for Choice responded that [Hanger] was not entitled to enforce the
       Agreement, because [Hanger] was not party to the Agreement and because the
       Agreement contained no assignment clause that would allow it to be assigned to
       [Hanger]. [Hanger’s] counsel responded with documentation showing that the name
       on the Agreement, “Fillauer Orthopedic,” is a trade name used by [Hanger].
       Choice’s counsel reiterated his argument against the enforceability of the Agreement,
       and Kitchens continued performing orthotics work in the Knoxville area on behalf
       of Choice.

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       12.      On November 15, 2004, [Hanger] filed suit seeking temporary and injunctive
       relief, as well as damages, as a result of Kitchens’ activities on behalf of Choice.
       After conducting a preliminary hearing on the matter, the Court issued a temporary
       injunction on February 23, 2005 prohibiting Kitchens from performing orthotics
       work on behalf of Choice within the 75-mile area prescribed by Kitchens’
       Agreement. [The final sentence of this paragraph is omitted because the chancery
       court did not adopt it.]

       13.     After Kitchens discontinued his orthotics practice on behalf of Choice in the
       non-compete area, Choice hired Harold Chaffins (“Chaffins”) to be Choice’s
       orthotics representative in the Knoxville area. In this capacity, Chaffins continued
       to service the referral sources and patients that Kitchens had solicited to that point.

(Hanger’s Proposed Findings of Fact and Conclusions of Law, submitted to the chancery court on

October 3, 2005.)

       In its conclusions of law, the chancery court determined that Choice intentionally interfered

with Kitchens’ agreement with Hanger and induced Kitchens to breach that agreement:

               It is inescapable from the testimony of the principals of Choice Medical
       [Defendants here] and defendant Kitchens that Kitchens’ non-compete agreement
       was made known to defendant Choice well before Kitchens gave notice of his intent
       to leave Hanger. In fact, the agreement was submitted to Choice’s counsel for
       review.

               The evidence is overwhelming that Choice was not engaged in the orthotics
       and prosthetics business in the Knoxville area and that the hiring of defendant
       Kitchens gave them access to a ready market based upon the long standing physician
       relationship developed by Kitchens as an agent of Hanger. The proof is
       overwhelming that it was the business plan of Choice to have Kitchens contact these
       physicians with whom he had long standing relationships, notify them that he was no
       longer working at Hanger and induce them to continue to use Kitchens as an agent
       of Choice rather than continuing their relationships with Hanger.

       ...

               The Court is satisfied that the elements of [tortious interference with contract
       and tortious interference with business relationships] has been met and accordingly,
       Hanger may submit proof, if any, of damages incurred as a result.

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             The Court finds that there is insufficient evidence to establish that Choice
       misappropriated plaintiff’s trade secrets or that it conspired to misappropriate
       Hanger’s confidential information.

(JA 71-72.)

       Following a hearing to determine the amount of damages, the chancery court issued specific

findings regarding the amount of liability.1 The court concluded that it was undisputed that the

temporary injunction had not been violated, and, therefore, the court assessed damages for the period

of Kitchens’ employment with Choice through the issuance of the injunction: September 1, 2004

to February 23, 2005. The court concluded that the judgment should include net losses during that

period, as well as treble damages against Choice for procurement of the breach of contract under

Tenn. Code Ann. § 47-50-109. On March 26, 2007, the chancery court entered a specific damages

award—$240,180 in lost profits, which, when trebled under Tenn Code Ann. § 47-50-109, totaled

$720,546.00—the first $240,180 to be assessed against Kitchens and Choice jointly and severally,

and the remaining $480,364 to be assessed against only Choice.

B.     The Federal Court Proceedings

       1. Hanger’s Complaint

       On April 5, 2007, Hanger filed a complaint in the United States District Court for the Eastern

District of Tennessee requesting damages stemming from breach of contract. Specifically, the

complaint states:

       1
        In its Memorandum Opinion on damages, the chancery court reconsidered its earlier opinion
and determined that Choice was not guilty of tortious interference with business relationships.
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       1.      This is an action for damages arising from Defendants’ procurement of breach
       of contract under Tenn. Code Ann. § 47-50-109. Henson and Altshuler are the
       principals and owners of [Choice], which provide[s] orthotic and prosthetic products
       and services in competition with Hanger in the State of Tennessee. On September
       1, 2004, Defendants knowingly and tortiously induced [Kitchens], Hanger’s key
       orthotist in the Knoxville area, to breach his non-compete agreement with Hanger by
       accepting employment with and actively working for Choice in the Knoxville area.
       As a Choice employee, Kitchens, on behalf of and with the assistance of Choice,
       wrongfully solicited and obtained numerous orthotics referrals from physicians
       whom Kitchens knew solely because of his employment with Hanger.

       2.     On November 15, 2004, Hanger filed [suit in chancery court]. In the State
       Court Action, Hanger sought injunctive relief and damages against Kitchens and
       Choice for several claims, including breach of contract and inducement or
       procurement of breach of contract.

       3.     After conducting a trial on the issue of liability on August 30, 2005, the Court
       found that Kitchens breached his non-compete agreement with Hanger and that
       Choice, through the actions of its principals Henson and Altshuler, procured such
       breach in violation of Tenn. Code Ann. § 47-50-109.

(JA 4-5). The complaint continues with a description of the chancery court’s conclusions regarding

damages, stating that the chancery court found Choice liable for “$720,546, representing treble

damages, and costs. The treble damages award against Choice was based on the actions of Henson

and Altshuler in procuring Kitchens’ breach of contract.” (JA 5.)

       In the fact section of the Complaint, Hanger repeats the allegations made in, and adopted by,

the state court, and continues by describing Defendants’ actions as owners of Choice—the Defendant

in the state court proceeding:

       18.     As found in the State Court Action, Choice, through its owners and principals
       Henson and Altshuler, continued to use Kitchens as an orthotist in the Knoxville area
       in violation of Kitchens’ non-compete agreement with Hanger. By their actions in
       violation of Hanger’s rights, Kitchens and Choice obtained numerous orthotics and
       referrals for Choice from physicians in the Knoxville area, physicians Kitchens had

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Hanger Prosthetics & Orthotics East, Inc. v. Henson, et al.

         formally services on behalf of Hanger. Kitchens also performed virtually all of the
         orthotics work for Choice related to these referrals.

         19.     Choice and Kitchens continued their unlawful competition with Hanger until
         the Chancery Court issued a temporary injunction on February 23, 2005, prohibiting
         further violation of Kitchens’ non-compete agreement pending the resolution of the
         matter on the merits.

(JA 9-10.) The fact section next describes the proceedings in the state court, and attempts to include

the chancery court’s conclusions:

         23.      Hanger expressly and affirmatively pleads the issues, facts, and/or claims
         raised [above] are already conclusively established by the findings of fact and
         conclusions of law, actually litigated and necessarily decided, by the Chancery Court
         in its rulings . . . .

(JA 11.) The statement of facts concludes:

         24.    Henson and Altshuler, through their individual actions, procured the breach
         of Kitchens’ Employment Agreement with Hanger and are liable in their individual
         capacity as joint tortfeasors for procurement of breach of contract under Tenn. Code
         Ann. § 47-50-109.

(JA 11.) Finally, Hanger’s requested relief is the amount of damages determined by the chancery

court.

         2. Defendants’ Motion to Dismiss

         On May 22, 2007, Defendants filed a motion to dismiss the complaint for failure to state a

claim upon which relief could be granted under Federal Rule of Civil Procedure 12(b)(6). The

motion states:

         Defendants, Henson and Altshuler, as corporate officers of [Choice], are immune
         from any action brought herein based on actions taken by them in their corporate
         capacity with [Choice]. Further, Plaintiff is judicially estopped to take an
         inconsistent position in this litigation as to liability under Tenn. Code Ann. § 47-50-
         109 from that which was taken by the Plaintiff in the companion state court action.

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(JA 90.)

       On June 11, 2007, Hanger filed its response to Defendants’ motion to dismiss, arguing that

Defendants were not entitled to immunity and that judicial estoppel should not apply. Hanger also

argued that the preclusive doctrine of collateral estoppel did not bar its action against Defendants.

       3. The District Court Decision

        On October 16, 2007, the district court granted Defendants’ motion to dismiss. In so doing,

the district court restated the facts from Hanger’s complaint, and concluded that Defendants’

estoppel argument was dispositive. The district court did not address Defendants’ immunity

argument.

       In its analysis, the district court interpreted Defendants’ estoppel argument as one of claim

preclusion:

               Defendants argue that plaintiff is “judicially estopped to assert an individual
       claim against the corporate officers of Choice Medical. The allegations and relief
       sought in the present matter conflict with the allegations and statements of positions
       taken by Plaintiff in the State Court Action.” Mem. of Law in Supp. of Defs.’ Mot.
       to Dismiss at 8 [Doc. 9]. The court interprets this argument essentially as one of
       claim preclusion: Because the plaintiff had a full and fair opportunity to litigate its
       claim in the prior state court action, plaintiff is now precluded from raising this claim
       in federal court.

(JA 120.) The district court determined that Tennessee law would apply, and then provided:

              Tennessee recognizes two preclusion doctrines, res judicata and collateral
       estoppel. As noted by the Tennessee Supreme Court,

               The doctrine of res judicata, [or claim preclusion], bars a second suit
               between the same parties or their privies on the same cause of action
               with respect to all issues which were or could have been litigated in
               the former suit. Collateral estoppel operates to bar a second suit
               between the same parties and their privies on a different cause of

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Hanger Prosthetics & Orthotics East, Inc. v. Henson, et al.

               action . . . as to issues which were actually litigated and determined
               in the former suit.

       Massengill v. Scott, 738 S.W.2d 629, 631 (Tenn. 1987). As plaintiff raises a claim
       which could and should have been raised in the state court proceeding, the doctrine
       of res judicata, or claim preclusion, applies to this case.

               In Tennessee, to successfully assert a res judicata defense, the party “must
       demonstrate (1) that a court of competent jurisdiction rendered the prior judgment,
       (2) that the prior judgment was final and on the merits, (3) that both proceedings
       involved the same parties or their privies, and (4) that both proceedings involved the
       same cause of action.” Gerber v. Holcomb, 219 S.W.3d. 914, 917 (Tenn. Ct. App.
       2006) (quoting Young v. Barrow, 130 S.W.3d 59, 64 (Tenn. Ct. App. 2003)).

               This case satisfies all four requirements of the Tennessee test for res judicata,
       or claim preclusion. First, a judgment was rendered by a court of competent
       jurisdiction, the Chancery Court of Knox County, Tennessee. Second, that judgment
       was final and issued on the merits. See Compl. ¶¶ 20-21. Third, the proceeding
       involved the same parties to this litigation. Though defendants are now sued in their
       individual capacities, they were privities of the defendant of the first suit as principals
       and sole owners of Choice Medical. Finally, the proceedings involve the same cause
       of action: by plaintiff’s own admission, this suit arises from the identical set of facts
       and theory of liability for which plaintiff recovered in the Chancery Court. See Resp.
       to Defs.’ Mot. to Dismiss at 11-13.

               In short, it is clear that the doctrine of claim preclusion bars plaintiff’s claim
       for personal liability. Had the plaintiff wished to pierce the corporate veil and hold
       defendants Henson and Altshuler personally liable, plaintiff should have raised those
       claims in the prior state court proceeding. The Full Faith and Credit Act and
       principles of res judicata now bar this court from taking action.

              Because this issue is dispositive, the court need not reach an analysis on the
       merits of defendants’ immunity from personal liability.

(JA 121-22, footnote omitted.) The district court concluded that the “principles of res judicata

preclude plaintiff’s claim for defendants’ personal liability,” and granted Defendants’ motion to

dismiss. This appeal followed.

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                                       II. JURISDICTION

       Defendants are residents of Tennessee, and Hanger is a Delaware corporation with its

principal place of business in Bethesda, Maryland. The district court had jurisdiction under 28

U.S.C. § 1332 because diversity of citizenship exists between the parties and the matter involves

damages in excess of $75,000, exclusive of interest and costs. This Court has jurisdiction under 28

U.S.C. § 1291.

                                 III. STANDARD OF REVIEW

       The Court reviews a district court’s dismissal of plaintiff’s claims under Rule 12(b)(6) de

novo. Zaluski v. United Am. Healthcare Corp., 527 F.3d 564, 570 (6th Cir. 2008). In so doing, the

Court construes the complaint in the light most favorable to the plaintiff and accepts all well-pled

factual allegations as true. Id. A motion under Rule 12(b)(6) will be granted “only if it appears

beyond doubt that the plaintiff can prove no set of facts in support of the claims that would entitle

him or her to relief.” Downie v. City of Middleburg Heights, 301 F.3d 688, 693 (6th Cir. 2002). As

instructed by the Supreme Court in Bell Atlantic Corp. v. Twombly, claims survive a Rule 12(b)(6)

motion only where the “[f]actual allegations [are] enough to raise a right to relief above the

speculative level on the assumption that all of the complaint’s allegations are true.” 127 S. Ct. 1955,

1959 (2007).

       This Court may affirm the district court’s dismissal of a plaintiff’s claims on any grounds,

including those not relied on by the district court. Zaluski, 527 F.3d at 570.

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                                         IV. DISCUSSION

        On appeal, Hanger makes four arguments: (1) that Defendants are not entitled to immunity

from tort liability despite acting within the scope of their authority; (2) that judicial estoppel does

not apply; (3) that the district court erred by considering sua sponte the res judicata doctrine; and (4)

that the district court erred in finding that Hanger’s claim against Defendants is barred by the res

judicata. Because res judicata is dispositive, the Court deals only with that issue below.

A.      The District Court’s sua sponte authority

        Defendants did not raise the issue of res judicata in district court. Under both federal and

Tennessee law, res judicata is an affirmative defense that should be raised by the defending party.

Fed. R. Civ. P. 8(c) (“In pleading to a preceding pleading, a party shall set forth affirmatively . . .

res judicata . . . and any other matter constituting an avoidance or affirmative defense.”; Tenn. R.

Civ. P. 8.03 (same). In fact, the failure to plead an affirmative defense in the first responsive

pleading “generally results in a waiver of that defense.” Horton v. Potter, 369 F.3d 906, 911 (6th

Cir. 2004) (citing Haskell v. Washington. Township, 864 F.2d 1266, 1273 (6th Cir. 1988)).

        While it is also true that courts generally lack the ability to raise an affirmative defense sua

sponte, see Haskell, 864 F.2d at 1273, this Court has recognized “that it might be appropriate to raise

the res judicata defense sua sponte in certain circumstances.” Hutcherson v. Lauderdale County, 326
F.3d 747 (6th Cir. 2003) (citing Arizona v. California, 530 U.S. 392, 412 (2000) (“This result is fully

consistent with the policies underlying res judicata: it is not based solely on the defendant’s interest

in avoiding the burdens of twice defending a suit, but is also based on the avoidance of unnecessary

judicial waste.”) and Holloway Constr. Co. v. United States Dep’t of Labor, 891 F.2d 1211 (6th Cir.

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1989) (noting that “a district court may invoke the doctrine of res judicata in the interests of, inter

alia, the promotion of judicial economy”). Raising res judicata sua sponte in appropriate cases,

“insures the finality of decisions, conserves judicial resources, and protects litigants from multiple

lawsuits.” McClain v. Apodaca, 793 F.2d 1031, 1032 (9th Cir. 1986).

        This case fits precisely within those circumstances. Hanger previously filed an action against

Kitchens and Choice in state court and was awarded damages on its claims. This second action is

against Defendants Henson and Altshuler for their alleged role in the same matter. Hanger could

have included Defendants in its state court action. However, in state court, Hanger chose to file its

procurement of a breach of contract action against only Choice. As in other cases where courts have

raised res judicata, the district court properly considered the doctrine sua sponte. See, e.g., McClain,
793 F.2d at 1032-33 (bankruptcy court sua sponte raised issue of res judicata; affirmed on appeal);

Minneapolis Auto Parts Co. v. City of Minneapolis, 739 F.2d 408, 409, n.2 (8th Cir. 1984) (claim

preclusion raised for first time on appeal; case certified back to district court to consider the effect

of res judicata); Am. Furniture Co. v. Int’l Accommodations Supply, 721 F.2d 478, 482 (5th Cir.

1981) (res judicata raised sua sponte by court of appeals); Hicks v. Holland, 235 F.2d 183 (6th Cir.

1956) (per curiam) (district court sua sponte raised issues of res judicata; affirmed on appeal), cert.

denied, 352 U.S. 855 (1956). Moreover, this second litigation wastes judicial resources, risks

potentially conflicting judicial determinations, and burdens the parties with multiple lawsuits. For

these reasons, the district court properly raised sua sponte res judicata.

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B.      Res judicata

        Res judicata requires that this Court give the same effect to the Tennessee state court

judgment as would be afforded by another Tennessee state court. 28 U.S.C. § 1738; Marrese v. Am.

Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985). Res judicata refers to the “preclusive

effect of a judgment” and includes both (1) claim preclusion and (2) issue preclusion, also known

as collateral estoppel. Taylor v. Sturgell, 128 S. Ct. 2161, 2171 (2008).2 “Claim preclusion

generally refers to the effect of a prior judgment in foreclosing successive litigation of the very same

claim, whether or not relitigation of the claim raises the same issues as the earlier suit. Issue

preclusion generally refers to the effect of a prior judgment in foreclosing successive litigation of an

issue of fact or law actually litigated and resolved in a valid court determination essential to the prior

judgment, whether or not the issue arises on the same or a different claim.” New Hampshire v.

Maine, 532 U.S. 742, 748-49 (2001).

        The Tennessee Supreme Court has recently restated its law, from a prior unpublished

opinion, on res judicata:3

                The doctrine of res judicata bars a second suit between the same parties on
        the same cause of action with respect to all the issues which were or could have been
        brought in a former suit. Wall v. Wall, 907 S.W.2d 829, 832 (Tenn. App. 1995). A
        plaintiff may not, by disclaiming or failing to present a particular fact or theory,

        2
          However, in Tennessee, res judicata generally refers only to the doctrine of claim
preclusion, and the term collateral estoppel is used to refer to the doctrine of issue preclusion. See,
e.g., Barnett, 215 S.W.3d at 834-35.
        3
         This Court looks to Tennessee law to determine what preclusive effect, if any, the state
court’s judgment has on the proceedings in this Court. See, e.g., Abbott v. Michigan, 474 F.3d 324,
330 (6th Cir. 2007); Hapwood v. City of Warren, 127 F.3d 490, 493 (6th Cir. 1997).
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       preserve such fact or theory to be used as a ground for a second suit. McKinney v.
       Widner, 746 S.W.2d 699 (Tenn. App. 1987).

Barnett v. Milan Seating Sys., 215 S.W.3d 828, 834-835 (Tenn. 2007) (quoting Uselton v. Conwood,

1997 Tenn. LEXIS 108, *10-11 (Tenn. 1997) (emphasis added)). Claim preclusion “is broader in

its application than a mere determination of the questions involved in the prior action. The bar of

the judgment in such cases extends not only to matters actually determined, but also to other matters

which in the exercise of due diligence could have been presented for determination in the prior

action.” Gerber, 219 S.W.3d at 918 (quoting Gaither Corp. v. Skinner, 85 S.E.2d 909, 911 (N.C.

1955)). The underlying purpose for the application of res judicata “is to protect individuals from the

burden of litigating multiple lawsuits, to promote judicial economy, and to promote the policy

favoring reliance on finals judgments by minimizing the possibility of inconsistent decisions”

Gerber, 219 S.W.3d at 918 (quoting W.G. Myers v. Olson, 676 P.2d 822, 824 (N.M. 1984)). Simply

put, “every one is entitled to his day in court, and no more, on the same cause of action; . . . he has

enjoyed this right when he has contested the matter with persons committing the wrong and primarily

liable . . . .” Cantrell v. Burnett & Henderson Co., 216 S.W.2d 307, 310 (Tenn. 1948) (quoting

Loveman Co. v. Bayless, 160 S.W. 841, 843 (Tenn. 1913)).

       The Tennessee courts require the following factors be met before either res judicata doctrine

can be used to bar a subsequent suit:

       One defending on the basis of res judicata or collateral estoppel must demonstrate
       that (1) the judgment in the prior case was final and concluded the rights of the party
       against whom the defense is asserted, and (2) both cases involved the same parties,
       the same cause of action, or identical issues. Scales v. Scales, 564 S.W.2d 667, 670
       (Tenn. App. 1977).

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Barnett, 215 S.W.3d at 834-35 (quoting Uselton, 1997 Tenn. LEXIS 108, *10-11)); see also

Richardson v. Bd. of Dentistry, 913 S.W.2d 446, 459 (Tenn. 1995). Restated for purposes of res

judicata, Tennessee requires that four factors be established: (1) the underlying judgment was

rendered by a court of competent jurisdiction; (2) the same parties were involved in both suits; (3)

the same cause of action was involved in both suits; and (4) the underlying judgment was on the

merits. Gerber, 219 S.W.3d at 917 (quoting Young, 130 S.W.3d at 64).

        The parties do not dispute that the first, third, and fourth prongs are met: a decision was

rendered by the chancery court of Knox County, Tennessee, the decision involved the same cause

of action on an identical set of facts, and the decision was final and on the merits. We must,

therefore, consider only whether the situation presented here also satisfies the test’s second

prong—that the cases involve the same parties. This prong is met when a cause of action involves

“the same parties or their privies.” Richardson, 913 S.W.2d at 469 (citations omitted). “In the

context of both res judicata and collateral estoppel, the concept of privity relates to the subject matter

of the litigation[.]” State ex rel. Cihlar v. Crawford, 39 S.W.3d 172, 180 (Tenn. Ct. App. 2000)

(citing Harris v. St. Mary’s Med. Ctr. Inc., 726 S.W.2d 902, 905 (Tenn. 1987); Shelly v. Gipson, 400
S.W.2d 709, 712 (Tenn. 1966)). “Privity connotes an identity of interest, that is, a mutual or

successive interest to the same rights.” Cihlar, 39 S.W.3d at 180 (citations omitted). “Establishing

this identity of interest for purposes of applying res judicata will‘depend[] on the facts of each case’”

Hutcherson, 326 F.3d at 759 (citing Cihlar, 39 S.W.3d at 181). In Hutcherson, this Court

determined that an identity of interests existed between a Tennessee corporation and its owners and

                                                  - 15 -
No. 07-6329
Hanger Prosthetics & Orthotics East, Inc. v. Henson, et al.

operators, Wiley Hutcherson and his wife, and we therefore raised sua sponte the issue of res judicata

and dismissed the action. 326 F.3d at 759-60.

       Here, we conclude that Defendants’ interests are identical to those of Choice, and, as such,

privity exists under Tennessee law. While the standards set out in Rule 12(b)(6) typically set a high

hurdle for the application of res judicata, the relevant facts here are uncontroverted. Indeed, Hanger,

in its federal complaint, “expressly and affirmatively pleads that the issues, facts, and/or claims [in

this action] are already conclusively established by the findings of fact and conclusions of law,

actually litigated and necessarily decided, by the Chancery Court . . . .” (JA 11.) Choice is a

Tennessee corporation that provides orthotic and prosthetic products and services. Defendants are

the owners and principals of Choice. Choice’s decision to employ Kitchens was made by

Defendants. And the financial benefits that Choice enjoyed from Kitchens’ employment inured to

Defendants. Moreover, Choice’s liability, as determined by the chancery court, under Tenn. Code

Ann. § 47-50-109 for procurement of a breach of contract was based solely on the actions of

Defendants. As described by the Tennessee Supreme Court in Shelly, “[i]n a situation where a party

is trying to b[r]ing suit against a se[rvant] after having [previously filed] against the master on a

vicarious liability claim, the servant is in privity with the master . . . .” 400 S.W.2d at 712. Here,

Hanger brings an action against Defendants after having previously litigated the same cause of action

against Choice. Both cases involve the alleged actions of Defendants Henson and Altshuler in their

capacities as principals and owners of Choice. As such, Defendants are privies to the subject matter

of litigation that involves the same issues, facts, and cause of action. We therefore conclude that the

doctrine of res judicata applies.

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No. 07-6329
Hanger Prosthetics & Orthotics East, Inc. v. Henson, et al.

                                       V. CONCLUSION

       A court of competent jurisdiction concluded Hanger’s rights as to its procurement of a breach

of contract cause of action. Hanger may not now relitigate that claim against Henson and Altshuler

simply because it failed to include those Defendants in the earlier litigation; to do so would be a

waste of judicial resources and the precise situation that the doctrine of res judicata prohibits. As

such, we AFFIRM the district court’s dismissal of the complaint.

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