Court Opinion

ID: 3166286
Source: CourtListenerOpinion
Date Created: 2015-12-30 15:05:43.879351+00
Date Added: 2024-06-11T11:57:52.725289
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
               APPROVAL OF THE APPELLATE DIVISION

                                  SUPERIOR COURT OF NEW JERSEY
                                  APPELLATE DIVISION
                                  DOCKET NO. A-5867-13T2

J-M MANUFACTURING COMPANY,
INC.,
                                     APPROVED FOR PUBLICATION
     Plaintiff-Appellant,               December 30, 2015
v.                                      APPELLATE DIVISION

PHILLIPS & COHEN, LLP, and
JOHN HENDRIX,

     Defendants-Respondents.

         Argued October 15, 2015 – Decided December 30, 2015

         Before Judges Alvarez, Ostrer, and Haas.

         On appeal from the Superior Court of New
         Jersey, Law Division, Middlesex County,
         Docket No. L-0792-14.

         Robert A. Assuncao argued the cause for
         appellant (Ansa Assuncao, LLP, attorneys;
         Mr. Assuncao, Steven F. Gooby, and Kenneth
         A. Burden, on the briefs).

         Brian J. Molloy argued the cause for
         respondent Phillips & Cohen, LLP (Wilentz,
         Goldman & Spitzer, P.A., attorneys; Mr.
         Molloy and Willard C. Shih, of counsel and
         on the brief; Corinne L. McCann, on the
         brief).

         John M. Falzone argued the cause for
         respondent John Hendrix (Parker Ibrahim &
         Berg LLC, attorneys; Mr. Falzone, on the
         brief).

     The opinion of the court was delivered by

ALVAREZ, P.J.A.D.
      Plaintiff J-M Manufacturing Company, Inc., (J-M) appeals

the dismissal, based on the entire controversy doctrine, of its

complaint.          For   the    reasons    that       follow,      we     affirm    the    Law

Division judge's conclusion that J-M should have pursued its

causes of action in the pending California whistleblower qui tam

proceeding filed under the False Claims Act (FCA), 31 U.S.C.A.

§§ 3729-3732, and not in New Jersey.

                                            I.

      Defendant John Hendrix, represented by defendant Phillips &

Cohen, LLP (Phillips), filed the qui tam action on January 17,

2006.         The     case      was   filed       in    California          because      J-M's

headquarters        are   there.        Hendrix        alleged      that    J-M     knowingly

perpetrated a fraud upon various government purchasers in the

sale of PVC pipe having only a fraction of its claimed strength.

      We summarize the circumstances Hendrix, the "relator" as

defined       in    the   FCA,    alleged     in       the    qui    tam    final     amended

complaint.          J-M hired Hendrix, an engineer, in July 2002, to

work in its Livingston, New Jersey products assurance division.

His     job    included      technical        oversight         responsibilities            and

customer interaction regarding "the tensile strength of J-M's

PVC pipe."         By 2004, Hendrix "became increasingly aware that J-

M's     tensile       strength        problems         were    not       the      result     of

                                              2                                       A-5867-13T2
inadvertence        [in    the      manufacturing           process],    but    rather    were

part of a larger scheme to defraud its customers . . . ."

    The       products        were    sold    to       numerous      federal,    state,     and

local governmental entities around the nation.                           In 2005, Hendrix

wrote     a    final      memorandum         to       his    superiors    expressing        his

concerns that the PVC pipe did not meet industry standards.                                  He

was terminated approximately a week later.

    Pursuant to the FCA process, the United States government

completed a years-long investigation after the qui tam complaint

was filed and placed under seal.                        31 U.S.C.A. § 3730(a).            Once

the federal government               decided not to assume control of the

case, Hendrix was permitted to proceed on his own.                              31 U.S.C.A.

§ 3730(c)(3).            The federal complaint was unsealed in February

2010.     Needless to say, the stakes are high for all parties,

because       of   the    potential        recovery         authorized    by    the    "bounty

provisions" of the FCA, 31 U.S.C.A. § 3730(d), potential damage

awards    payable        by   J-M    to    government          purchasers,      31    U.S.C.A.

§ 3729(a), and counsel fees payable to the prevailing parties.

31 U.S.C.A. § 3730(d).

    Following a bifurcated trial in California, a jury found

against J-M on forty-nine of forty-nine claims of fraud as to

five exemplar plaintiffs.                  The California action is currently

pending       resolution       of    the     second         phase,   which     will   address

                                                  3                                   A-5867-13T2
damages      and    include     non-exemplar        plaintiffs.             The     parties

disagree as to the meaning of the jury's verdict and the status

of the proceedings.           Suffice it to say that the federal jury's

verdict was rendered November 14, 2013, and J-M's New Jersey

complaint was filed shortly thereafter, on February 21, 2014.

       We    also   summarize     the    relevant        circumstances          alleged    in

J-M's       twenty-three-page        amended       complaint        in      this      case.

Attorneys from Phillips, which has offices in California, met

with Hendrix in 2005.           As a result of "their concerted activity,

in furtherance of the litigation," J-M claims Hendrix, among

other       things,       wrongfully          removed      and      copied         numerous

confidential        documents     and    electronic        data,     including        trade

secrets,      proprietary       information,        and     "proprietary           customer

order   and     pricing     information[,]"         and    either     kept        notes    of

conversations with co-workers and/or secretly taped them.                                 J-M

contends      Hendrix     violated      the    specific     terms    of     his     written

"Employee Secrecy Agreement," breached his fiduciary duty to his

employer,      committed      computer        related    offenses,        and     committed

"trespass      to     chattels."         J-M      alleges        Phillips       tortiously

interfered         with   J-M's      contractual          rights     and        tortiously

interfered with J-M's prospective economic advantage, and that

both    defendants        conspired       to      harm     J-M      and     engaged        in

racketeering.

                                              4                                    A-5867-13T2
       Defendants' motions to dismiss pursuant to Rule 4:6-2(e)

were    granted    on      June    30,   2014.         During      oral   argument,       when

pressed    as    to   J-M's       reason    for     not     pursuing      a    counterclaim

against Hendrix and Phillips in the California proceeding, no

answer the court considered satisfactory was forthcoming.                                    The

judge found that the claims were compulsory counterclaims under

federal and California law that should have been raised in the

qui tam proceeding, and that in the alternative, the entire

controversy       doctrine        barred    the     New     Jersey    litigation.            For

those reasons, he dismissed as to Hendrix.

       Since     Phillips's         exposure      was       entirely      derivative         of

Hendrix's        liability,          arising        solely         from        the     firm's

representation        of    the    relator,       he   also     dismissed       the    counts

against the law firm.               The judge noted that any counterclaim

pursuant to federal law could be stayed if necessary in the

California case pending resolution of the qui tam matter.

       J-M raises several points on appeal.                        We only address one,

that the court erred in finding the entire controversy doctrine

barred J-M's pursuit of relief in New Jersey.                                 The remaining

issues are made moot by our decision.                        See Advanced Elec. Co.,

Inc. v. Montgomery Twp. Bd. of Educ., 351 N.J. Super. 160, 166

(App.    Div.)     ("A     case     is     mooted      if    the     disputed        issue   is

resolved . . . .           Thus, a court will not decide a case if the

                                              5                                       A-5867-13T2
issues are hypothetical, [or] a judgment cannot grant effective

relief[.]" (citations omitted)), certif. denied, 174 N.J. 364

(2002).

                                         II.

      In reviewing a Rule 4:6-2(e) dismissal, we employ the same

standard as that applied by the trial court.                     Donato v. Moldow,

374   N.J.     Super.    475,    483   (App.    Div.    2005).        Our   review   is

limited to the "legal sufficiency of the facts alleged in the

complaint."       Id. at 482.          We "assume the facts as asserted by

plaintiff are true[,]" and we give the plaintiff "the benefit of

all inferences that may be drawn[.]"                   Banco Popular N. Am. v.

Gandi, 184 N.J. 161, 166 (2005) (quoting Velantzas v. Colgate-

Palmolive      Co.,     109     N.J.   189,    192     (1988)).        Dismissal     is

appropriate only if "the complaint states no basis for relief

and discovery would not provide one."                Ibid.

      J-M makes two arguments in support of its contention that

the entire controversy doctrine does not apply to the New Jersey

action    despite       the   California      proceedings.        First,     that    the

cases    are    not     sufficiently     alike    in    fact     or   in    the   legal

theories relevant to each.             Secondly, that the doctrine does not

apply to simultaneous proceedings.

                                           6                                  A-5867-13T2
                                          III.

       J-M contends that its New Jersey complaint is not barred by

the entire controversy doctrine because it lacks the necessary

"commonality of facts" with the California case.                           See Alpha

Beauty Distribs., Inc. v. Winn Dixie Stores, Inc., 425 N.J.

Super. 94, 105 (App. Div. 2012) (quoting DiTrolio v. Antiles,

142 N.J. 253, 258 (1995)).            J-M further contends that different

witnesses    and     evidence   are       required   and   that     any    liability

determination in the FCA case would have no impact on the New

Jersey proceedings.

       The   entire    controversy        doctrine    requires      that    a   party

"litigate     all    aspects    of    a    controversy     in   a   single      legal

proceeding."        Kaselaan & D'Angelo Assocs. v. Soffian, 290 N.J.

Super. 293, 298 (App. Div. 1996) (quoting Leisure Tech.-Ne.,

Inc. v. Klingbeil Holding Co., 137 N.J. Super. 353, 357 (App.

Div.    1975)).        "[A]ll    claims          arising   from     a     particular

transaction or series of transactions should be joined                           in a

single action."       Archbrook Laguna, LLC v. Marsh, 414 N.J. Super.

97, 105 (App. Div. 2010) (citing Brennan v. Orban, 145 N.J. 282,

290 (1996)).        "Non-joinder of claims required to be joined by

the entire controversy doctrine shall result in the preclusion

of the omitted claims . . . ."             R. 4:30A.

                                           7                                 A-5867-13T2
      The doctrine, important to our jurisprudence, was designed:

             (1) to encourage the comprehensive and
             conclusive   determination of a   legal
             controversy;

             (2) to achieve party fairness, including
             both parties before the court as well as
             prospective parties; and

             (3)   to   promote   judicial  economy  and
             efficiency by avoiding fragmented, multiple
             and duplicative litigation.

             [Mystic Isle Dev. Corp. v. Perskie & Nehmad,
             142 N.J. 310, 322 (1995).]

      The    doctrine,   however,    is   ultimately    "one   of    judicial

fairness and will be invoked in that spirit."            Archbrook, supra,

414 N.J. Super. at 104 (quoting Crispin v. Volkswagenwerk, A.G.,

96 N.J. 336, 343 (1984)).          Causes of action which arise out of

the   same     transaction    or     transactional      circumstances      are

considered duplicative if the "factual circumstances giving rise

to the controversy itself" are the same.               Brennan, supra, 145

N.J. at 290.

      Here, J-M's allegations against both Hendrix and Phillips

all stem from Hendrix's conduct in gathering information for the

qui   tam   complaint,   undertaken    because   of    Hendrix's    suspicion

that J-M was defrauding governmental entities by its production

of PVC pipe that did not meet industry standards.              Both the qui

tam action and this case arise out of J-M's alleged fraud and

Hendrix's     subsequent     investigation.       The     information      and

                                      8                              A-5867-13T2
documents in Hendrix's possession are the basis for the qui tam

action.   Even Hendrix's supposed breach of his "Employee Secrecy

Agreement,"     or    other    contractual          obligations     as    an    employee,

occurred in preparing for the qui tam action.                          Therefore, this

New Jersey complaint is clearly based on the same transaction or

series of transactions as the qui tam action.                            See Archbrook,

supra, 414 N.J. Super. at 105.

    Moreover, to allow the New Jersey action to proceed would

result in "fragmented, multiple and duplicative litigation" that

would not achieve fairness to the parties.                         See Mystic Isle,

supra, 142 N.J. at 322.             Counterclaims may be filed in qui tam

litigation, although ultimately subject to dismissal to avoid

indemnification or offset in light of the public policy behind

the implementation of the FCA.                     Madden v. Gen. Dynamics Corp.,

4 F.3d 827, 830-31 (9th Cir. 1993).

    The    federal         courts     have          long     distinguished        between

counterclaims        seeking   only   indemnification,             and    counterclaims

for independent damages which might nonetheless have the effect

of indemnifying a qui tam defendant.                       Madden, supra, 4 F.3d at

830-31.         Although      qui   tam    defendants        are   not    permitted     to

offset    their        liability          by       seeking     indemnification          or

contribution from the relator, "[c]ounterclaims for independent

damages   are    distinguishable,              however,      because     they    are   not

                                               9                                 A-5867-13T2
dependent on a qui tam defendant's liability."                     Ibid.     "If a qui

tam defendant is found liable the counterclaims [for independent

damages] can then be dismissed on the grounds that they will

have     the     effect       of    providing          for     indemnification       or

contribution." Id. at 831. "On the other hand, if a qui tam

defendant       is    found   not    liable,      the        counterclaims    can    be

addressed on the merits."             Ibid.      This "mechanism" is intended

"to insure [sic] that relators do not engage in wrongful conduct

in order to create the circumstances for qui tam suits and to

discourage relators from bringing frivolous actions."                          Id. at

831.    The causes of action against Hendrix and Phillips accrued,

and    became    known,     once    the   qui    tam    complaint    was     unsealed.

Simply stated, J-M has the right to pursue a counterclaim in the

federal proceeding, in nature no different than the complaint

filed in New Jersey.

       In fact in Madden, supra, 4 F.3d at 829, the defendant's

counterclaim for damages was strikingly similar to the one here.

It    included       "1)   breach   of    duty    of    loyalty     and    breach    of

fiduciary duty; 2) breach of implied covenant of good faith and

fair dealing; 3) violations of the California labor code; 4)

libel; 5) trade libel; 6) fraud; 7) interference with economic

relations; 8) and misappropriation of trade secrets."                      Ibid.

                                          10                                  A-5867-13T2
     To   allow    J-M's    New       Jersey   complaint   to   stand   would   be

unfair to Hendrix while sidestepping the public policy goals

behind the FCA.      The FCA is designed to protect a relator, and

encourage the very whistleblowing activities for which J-M seeks

recovery in New Jersey.1          Indeed, the law provides for not only a

significant   bounty       for    a    relator,   but   also    protection   from

employer retaliation.            Cell Therapeutics v. Lash Group, Inc.,

586 F.3d 1204, 1206 (9th Cir. 2010).

     J-M, the defendant in the California proceedings, should

not be able to effectively indemnify itself for any portion of

its qui tam liability by suing the relator and his lawyers in

this state.       Nor should J-M be able to sidestep the employee

protection the FCA gives Hendrix by filing its claim in New

Jersey.   Clearly, the New Jersey litigation is being pursued to

gain unfair advantage and to engage in the very forum shopping

1
  Prior to oral argument, J-M's counsel brought to our attention
the Supreme Court's decision in State v. Saavedra, 222 N.J. 39
(2015).     The   case   disallowed   self-help   in  employment
discrimination cases as an alternative to legal processes.    It
allowed the criminal prosecution for theft of documents to go
forward; however, the documents in that case were individual
student records removed from a school in violation of federal
and state confidentiality laws.         Furthermore, the Court
distinguished between criminal prosecutions and retaliatory
civil actions which may still be barred pursuant to a multi-
factor balancing test. See Quinlan v. Curtiss-Wright Corp, 204
N.J. 239 (2010).

                                          11                             A-5867-13T2
that the entire controversy doctrine is intended to avoid.                                    See

Archbrook, supra, 414 N.J. Super. at 107.

      It follows that we agree with the Law Division judge that

the complaint must be dismissed as to Phillips as well.                                       J-M

fails to assert a theory under which Phillips could be found

liable     other      than      for       assisting           or    directing       Hendrix's

investigation.

      If   Hendrix's         conduct        was        not   illegal       or    tortious,       a

question    dependent          on   the     outcome          of    the   qui     tam    action,

Phillips cannot be held accountable for assisting or directing

legal non-tortious conduct.                 In a civil conspiracy, the "gist of

the   claim      is   .    .    .     the    underlying            wrong,       which    absent

conspiracy,      would     give     a     right        of    action."       Banco       Popular,

supra, 184 N.J. at 177-78 (quoting Morgan v. Union Cty. Bd. of

Chosen Freeholders, 268 N.J. Super. 337, 364 (App. Div. 1993)).

To impose liability for "aiding and abetting" it is "essential

that the conduct of the actor be in itself tortious[.]"                                   State,

Dep't. of Treasury v. Qwest Commc's Int'l, Inc., 387 N.J. Super.

469, 482 (App. Div. 2006) (quoting §876(b) of the Restatement

(Second)    of     Torts     (1979)).             If    Hendrix      did    nothing      wrong,

Phillips's representation cannot be considered conduct amounting

to a civil conspiracy.

                                              12                                        A-5867-13T2
       The same analysis applies to J-M's other allegations of

wrongdoing by Phillips.                  We cannot imagine a scenario, and J-M

does    not    suggest            one,     in     which     Phillips    could     be    held

individually responsible for damages without Hendrix being first

found to have been a wrongdoer.                         Any liability on Phillips is

derivative         of    Hendrix's         liability.        We   agree   with    the     Law

Division judge on the point.

       Additionally,              the    entire        controversy   doctrine     mandates

dismissal      as       to    Phillips       when       applied   directly.       Although

Phillips      is    not       a    party    to    the     California    litigation,       the

complaint against Phillips arises out of the same transaction.

       J-M argues it must separately sue Phillips because the law

firm   could       not       be   joined    in    a     counterclaim    while    acting    as

counsel in the qui tam action.                     Procedurally, however, as is the

practice      with       counterclaims           against    relators,     the   causes     of

action against Phillips could be held in abeyance pending the

final outcome of the qui tam action.                           See Cell Therapeutics,

supra, 586 F.3d at 1208-09.                       Thereby the court most familiar

with the federal proceedings and the parties could separately

deal with any claims against Phillips after J-M's liability has

been determined.

                                                  13                               A-5867-13T2
                                         IV.

      Alternatively, J-M contends that this action falls outside

the scope of the entire controversy doctrine because it does not

apply    to   litigation       conducted     simultaneously.              In   response,

Hendrix and Phillips point out that this argument is raised for

the first time on appeal.              They therefore argue that we should

not   consider     the   issue    as    it    was     not    plain    error,     is   not

jurisdictional in nature, nor does it involve important issues

of public interest.            See Nieder v. Royal Indem. Ins. Co., 62

N.J. 229, 234 (1973).

      Under the plain error standard, where an error is "clearly

capable of producing an unjust result," Rule 2:10-2, an order or

judgment will be reversed.             First, however, a determination must

be made that an error occurred.                Ibid.      Since we find the judge

did not err at all, his decision was not plain error.                          The issue

is not jurisdictional in nature.                    However, we do consider the

question to be one of sufficient importance to merit discussion.

      J-M relies on Kaselaan as support for the argument that the

entire    controversy      doctrine      does       not     apply    to   simultaneous

proceedings.       In Kaselaan, the plaintiff filed an action in the

Law Division when he already had a case arising out of the "same

sequence      of   events"       pending       in     federal       district      court.

Kaselaan,     supra,     290   N.J.    Super.       at    296.      In    Kaselaan,    we

                                         14                                     A-5867-13T2
concluded that the entire controversy doctrine did not require

dismissal where multiple actions involving the same or related

claims were pending simultaneously.                      Id. at 299.           Instead, we

suggested other procedural tools to prevent any unfairness to

litigants or the waste of judicial resources, such as a stay of

our proceedings until the disposition of the case in federal

court.     Id. at 300.

     But     in    Kaselaan,       we   also        said:      "where     it        would     be

inappropriate      for     both    cases   to      proceed      simultaneously,             'the

general     rule     [is]     that      the     court         which     first        acquires

jurisdiction       has      precedence        in        the    absence         of     special

equities.'"        Ibid. (alteration in original) (quoting Yancoskie

v.   Delaware      River    Port     Auth.,        78    N.J.     321,    324        (1978)).

Clearly, the California court was not only the first, but was

for several years, the only court dealing with these parties.

     Kaselaan       makes    the     point      that      there       should    not     be     a

mechanistic       application      of   the     entire        controversy           doctrine.

Rather, courts should carefully examine the interests of the

parties, expenditure of judicial resources, and any procedural

mechanisms    available      to     achieve     a    just      result.         See    id.     at

300-01.

     Since Kaselaan, we have restated those principles.                                      The

decision whether to apply the entire controversy doctrine is

                                           15                                        A-5867-13T2
"ultimately 'one of judicial fairness and will be invoked in

that    spirit.'"        Archbrook,          supra,        414    N.J.   Super.      at    104

(quoting     Crispin,     supra,        96    N.J.     at    343).        It   is    not     an

artificial bright line rule.                 See id. at 104-05.

       In    Archbrook,      the    New       Jersey        plaintiff     dismissed        its

counterclaim in the Georgia case, where it was the defendant,

and filed suit here based on "the same transaction or series of

transactions."       Supra, 414 N.J. Super. at 103, 106.                         There was

no     showing    that    the      Georgia         court    would      have    barred      the

counterclaim,      which     was     equivalent        to        the   complaint     in    New

Jersey.       Id. at 107.           The Georgia case was tried, and the

plaintiff there, defendant here, recovered a total judgment in

excess of two million dollars, id. at 104, while the New Jersey

action      was   pending.         In    Archbrook,          we    applied     the    entire

controversy doctrine to affirm the summary judgment dismissal of

the New Jersey proceedings because the case was filed to gain

unfair advantage in this state, as opposed to disposing of all

the claims on the merits in the Georgia proceeding.

       The New Jersey plaintiff's dismissal of its counterclaim in

Georgia, and attempt to litigate in New Jersey, was precisely

the kind of deliberate manipulation and forum shopping that the

entire controversy doctrine is intended to avoid.                              Id. at 110.

We even expressed concern that the New Jersey defendant failed

                                              16                                     A-5867-13T2
to earlier move for summary judgment, possibly to gain some

procedural advantage in the Georgia proceeding.                  Id. at 110.    As

we observed, equitable considerations might result in a court's

refusal    to     apply   the    entire       controversy   doctrine     because

although    the   "parties      are   entitled    to   zealously    litigate   in

their own best interests, they also owe the judicial system a

further duty."       Ibid.

       Since a defendant in a qui tam proceeding has the right to

pursue a counterclaim against the relator seeking money damages,

and even to pursue an independent claim against third parties, 2

the circumstances approximate those in Archbrook, not Kaselaan.

The concern in Kaselaan was that the plaintiff would lose his

ability to have his dispute adjudicated at all.                  The concern in

Archbrook was that the complaint was filed in New Jersey by the

Georgia defendant in an effort to double the litigation expense

for the Georgia plaintiff and avoid a possible negative outcome

in Georgia.

       Hence    we    conclude        that    J-M's    reading     of   Kaselaan

misinterprets the holding in that case.                The thrust of Kaselaan,

followed in Archbrook, is that the entire controversy doctrine

must be applied in order to achieve fairness.                    The substantive

question is whether application of the doctrine meets the goals

2
    See Cell Therapeutics, supra, 586 F.3d at 1213.

                                         17                             A-5867-13T2
of fairness to the parties while allowing for judicial economy

and efficiency.

    Having assumed that the facts as asserted by J-M are true,

and drawing all inferences in its favor, we nonetheless conclude

dismissal is mandated by the entire controversy doctrine.          The

issues   are   properly   adjudicated   in   conjunction   with    the

California qui tam proceeding.    We do not reach J-M's remaining

points of error.

    Affirmed.

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