Court Opinion

ID: 9963193
Source: CourtListenerOpinion
Date Created: 2024-04-24 18:01:38.178351+00
Date Added: 2024-06-11T08:24:42.281149
License: Public Domain

In the

     United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 23-1415
GELAB COSMETICS LLC,
                                                  Plaintiff-Appellant,
                                 v.

ZHUHAI AOBO COSMETICS CO., LTD., et al.,
                                               Defendants-Appellees.
                     ____________________

         Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
          No. 1:22-cv-05475 — Thomas M. Durkin, Judge.
                     ____________________

     ARGUED JANUARY 8, 2024 — DECIDED APRIL 24, 2024
                ____________________

   Before WOOD, SCUDDER, and ST. EVE, Circuit Judges.
    WOOD, Circuit Judge. This case brought in Illinois federal
court is ostensibly about trade secrets, but lurking just be-
neath the surface is a corporate-ownership dispute. The latter
issue is also at center stage in an ongoing lawsuit in New Jer-
sey state court. The district court in the Illinois case stayed its
proceedings, citing the doctrine of Colorado River Water Con-
servation District v. United States, 424 U.S. 800 (1976). It rea-
soned that judicial economy favors waiting for the New Jersey
2                                                   No. 23-1415

court to determine who owns the company. At that point, it
will be in a position to turn to the trade-secrets claims. We see
no reversible error in that case-management plan, and so we
aﬃrm the order granting the stay.
                                I
    The parties present two vastly diﬀerent versions of events.
They agree only on one point: their identities. (We use the
shorthand the parties have adopted for themselves, though
we understand that some names are surnames and some are
given names.) GeLab Cosmetics LLC (“GeLab”), the named
plaintiﬀ, is a New Jersey limited liability company that sells
nail polish online. Xingwang Chen (“Chen”) has exclusive ac-
cess to GeLab’s online retail accounts. Chen and Shijian Li
(“Shijian”), both citizens of China, incorporated GeLab. Each
of them owns at least 10% of the company.
   The main defendant is Zhuhai Aobo Cosmetics, a China-
based manufacturer of nail polish. (Zhuhai Aobo is also
known as Zhuhai Abgel. We refer to it simply as “Zhuhai.”)
Zhuhai has three owners: Pingjun Li (“Pingjun”), Ximei Peng
(“Ximei”), and Pingyuan Li (“Pingyuan”). Pingjun and Ximei
are married and have a daughter, Benhong Li (“Benhong”).
Ximei and Benhong each owns a company aﬃliated with
Zhuhai.
    Most of the remaining facts are disputed. As Chen tells the
story, he and Shijian founded GeLab in 2016, with Chen re-
ceiving a 60% ownership interest and Shijian receiving 40%.
GeLab entered a joint venture with Zhuhai, under which
Zhuhai promised to invest approximately $618,000 in GeLab
in exchange for an 80% ownership interest in GeLab. But
Zhuhai never sent the money and so did not gain any
No. 23-1415                                                  3

ownership of GeLab. Zhuhai instead ﬁrst became a third-
party supplier of nail polish for GeLab, and then it plotted to
steal GeLab’s business. To that end, Zhuhai began using low-
quality materials to manufacture GeLab’s products, sold
knock-oﬀ versions of those products under its own brand,
and fraudulently conspired with Shijian to claim majority
ownership of GeLab.
    Zhuhai’s account is quite diﬀerent. It asserts that Chen
was one of its employees and that he was responsible for ex-
panding Zhuhai’s business to the United States. With author-
ization from Zhuhai, Chen traveled to the United States and
formed GeLab with Shijian. Chen and Shijian each retained a
10% ownership interest. The remaining 80% went to Zhuhai,
which contributed over $1.8 million to GeLab between 2016
and 2019. Everything ran smoothly until Chen got greedy and
began diverting GeLab’s sales proceeds to two companies he
had formed in China. Zhuhai called a meeting of GeLab’s
members to terminate Chen’s authority to manage GeLab and
to request that he return all misappropriated funds.
    The opening salvo in the litigation among the parties oc-
curred in China, where Shijian sued Chen on February 5, 2021,
for embezzling from GeLab. On February 22, 2021, Chen ﬁred
back by suing Shijian, Zhuhai, and Zhuhai’s three owners in
New Jersey state court; in that case, he alleged that he had a
60% and thus controlling interest in GeLab, that Zhuhai did
not have any ownership interest in GeLab, and that Shijian
owns the remaining 40%. He sought damages and a declara-
tory judgment. The state defendants counterclaimed, seeking
disgorgement of any embezzled funds and a declaratory
judgment that Zhuhai owns 80% of GeLab and that each of
Chen and Shijian owns 10%. GeLab itself then ﬁled a second
4                                                  No. 23-1415

action in New Jersey, naming only Shijian as a defendant and
seeking damages for Shijian’s alleged involvement in the
fraud. Shijian counterclaimed. The state court consolidated
the two cases in March 2022. In June it granted partial sum-
mary judgment to Shijian on his right to access GeLab’s rec-
ords, and in October it appointed a temporary ﬁscal agent to
audit GeLab, monitor its expenditures, and determine
whether Zhuhai ever invested in GeLab.
   Not content to await the results of the New Jersey proceed-
ings, on October 6, 2022, GeLab (presumably acting through
Chen) ﬁled the present action against Zhuhai, Pingjun, Ximei,
Benhong, and the Zhuhai-aﬃliated companies owned by Xi-
mei and Benhong, in the U.S. District Court for the Northern
District of Illinois.
    The federal complaint raises theories under the federal De-
fend Trade Secrets Act, 18 U.S.C. § 1836, the Illinois Trade Se-
crets Act, 765 ILCS 1065/1, and various common-law causes
of action. It alleges that Zhuhai stole GeLab’s supply-chain in-
formation and its process for creating best-selling nail polish.
Pingjun supposedly used those trade secrets to sell knock-oﬀ
products through Zhuhai, and Ximei and Benhong sold simi-
lar knockoﬀs through their own companies. The defendants
responded that Zhuhai owns GeLab and that it cannot steal
trade secrets from itself. The district court stayed the federal
case, concluding that it was parallel to the New Jersey case
and that extraordinary circumstances justiﬁed abstention un-
der Colorado River. GeLab appealed.
                               II
   First, a word on jurisdiction. Our appellate jurisdiction
under 28 U.S.C. § 1291 extends only to “ﬁnal decisions.”
No. 23-1415                                                      5

Although a stay is often entered on an interlocutory basis, it
can be a ﬁnal decision for purposes of appellate jurisdiction if
it puts the plaintiﬀ “eﬀectively out of court.” Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 10
(1983). The wrinkle here is that ﬁnal resolution will occur only
if the New Jersey court ﬁnds that Zhuhai does own GeLab. In
that case, all we would have is the left pocket “robbing” the
right pocket—and thus a failure to state a claim under any of
the approaches GeLab (from Chen’s standpoint, we
understand) is putting forward. If the New Jersey court ﬁnds
instead that Zhuhai does not own GeLab, the Illinois district
court will lift the stay and allow Chen to pursue his trade-
secrets claims. Despite this lack of symmetry, the Supreme
Court has held that appellate jurisdiction under 28 U.S.C.
§ 1291 exists over this class of abstention-like orders, because
they eﬀectively yield jurisdiction to the state court. See Moses
H. Cone, 460 U.S. at 10; Quackenbush v. Allstate Ins. Co., 517 U.S.
706, 713 (1996). This is so even though “there remains some
chance that the case will return to federal court to dispose of
residual issues.” Loughran v. Wells Fargo Bank, N.A., 2 F.4th
640, 646 (7th Cir. 2021).
    We now turn to the merits, which concern only whether
the district court properly stayed its own proceedings. The
Colorado River decision recognizes that a stay is one tool for
managing parallel state and federal judicial proceedings.
While there is no strict prohibition against parallel proceed-
ings, along the lines of the lis pendens doctrine that some juris-
dictions follow, the Supreme Court has recognized that there
will be occasions in which a federal district court should defer
to a state court. Although that is precisely what the Court did
in Colorado River itself (that is, it deferred to Colorado’s system
for adjudicating water rights), the Court there went out of its
6                                                            No. 23-1415

way to stress that such a stay should be entered only rarely.
That is because federal courts have a “virtually unﬂagging ob-
ligation … to exercise the jurisdiction given them.” 424 U.S. at
817. Only if “the presence of a concurrent state proceeding”
makes abstention a matter of “wise judicial administration”
may a federal court refrain from doing the job the Constitu-
tion and Congress assigned to it. Id. at 818.1
   The Colorado River analysis turns on two inquiries, both of
which put a thumb on the scale against abstention. The ﬁrst
question is whether the state and federal court proceedings
are actually parallel; if not, then the federal case must go for-
ward. If so, the second question is whether exceptional cir-
cumstances warrant abstention. Huon v. Johnson & Bell, Ltd.,
657 F.3d 641, 646–47 (7th Cir. 2011). The district court an-
swered yes to both. We evaluate its conclusion that the cases
are parallel de novo and its ﬁnding of extraordinary circum-
stances for abuse of discretion. Loughran, 2 F.4th at 647.

    1 We are assuming, without deciding, that any stay of federal proceed-

ings in favor of parallel state proceedings is properly analyzed under Col-
orado River. That may not be true. Many such cases—this one included—
present only a question of sensible case management for the federal court.
The federal court’s decision to stay its hand until some other event occurs
could be seen as a simple case-management measure, reviewed only for
abuse of discretion. Under this understanding, the analysis called for by
Colorado River is necessary only in situations in which the federal court is
attempting to avoid interference with a complex state administrative ap-
paratus. The outcome of the present case is the same either way we ap-
proach the question. As the district court and the parties have done, there-
fore, we use the more demanding Colorado River framework.
No. 23-1415                                                     7

                                A
     Cases are parallel if there is “a substantial likelihood that
the state litigation will dispose of all claims presented in the
federal case.” Freed v. J.P. Morgan Chase Bank, N.A., 756 F.3d
1013, 1018 (7th Cir. 2014) (quoting Lumen Construction, Inc. v.
Brant Construction Co., 780 F.2d 691, 695 (7th Cir. 1985)). Two
cases need not be identical to be parallel, but they must in-
volve “substantially the same parties [] contemporaneously
litigating substantially the same issues.” Id. at 1019 (quoting
Interstate Material Corp. v. City of Chicago, 847 F.2d 1285, 1288
(7th Cir. 1988)).
    Here, the named parties in the federal and state proceed-
ings are not identical. Chen is the named plaintiﬀ in the state
case, while the company GeLab is listed as the plaintiﬀ in the
federal case. While Zhuhai and two of Zhuhai’s owners
(Pingjun and Ximei) are defendants in both cases, each suit
has other defendants unique to that suit—Shijian and
Zhuhai’s third owner (Pingyuan) in the state suit, and
Benhong and the two Zhuhai-aﬃliated companies in the fed-
eral suit. These diﬀerences may be more than an attempt by
Chen to “simply tack[] on a few more defendants” to try to
circumvent Colorado River. Clark v. Lacy, 376 F.3d 682, 686–87
(7th Cir. 2004). Chen had a logical reason not to sue Benhong
and the Zhuhai-aﬃliated companies in the state suit: he ac-
cuses them only of selling knockoﬀ products, not of helping
Zhuhai falsely claim ownership of GeLab. Only the owner-
ship assertion is at issue in the state case. The same is true of
Chen’s decision to sue Shijian and Pingyuan in the state suit
but not in the federal suit: Chen says that Shijian and Ping-
yuan helped Zhuhai falsely claim ownership of GeLab, but he
does not accuse them of stealing GeLab’s trade secrets.
8                                                   No. 23-1415

    But “[p]recisely formal symmetry is unnecessary.” Adkins
v. VIM Recycling, Inc., 644 F.3d 483, 499 (7th Cir. 2011). Cases
involve substantially the same parties so long as the parties
“have nearly identical interests.” Freed, 756 F.3d at 1019 (quot-
ing Caminiti & Iatarola v. Behnke Warehousing, 962 F.2d 698, 700
(7th Cir. 1992)). That is the situation here, because the parties
are seeking the same relief in both cases. Chen wants the New
Jersey court to ﬁnd that he owns a majority of GeLab and that
Zhuhai owns none of it—the same thing he hopes to show in
federal court in order to prevail on his trade-secrets claims.
The same is true of the defendants. They want the federal
court to ﬁnd that Zhuhai owns a majority of GeLab. If that
were true, then the federal suit would be a senseless action by
Zhuhai against itself. This relief is exactly what Zhuhai and
the other defendants are pursuing in New Jersey: a declara-
tion that Zhuhai owns 80% of GeLab and that Shijian and
Chen own the remaining 20%.
    The federal and state cases also “arise from the same set of
facts.” Freed, 756 F.3d at 1019 (citing Tyrer v. City of South
Beloit, 456 F.3d 744, 752 (7th Cir. 2006)). The characterization
of Zhuhai’s interactions with GeLab—as owner or manufac-
turer—is central to both. And because the ownership dispute
at the heart of both cases “is predicated on the same facts,” it
“will be resolved largely by reference to the same evidence,”
Tyrer, 456 F.3d at 756: GeLab’s documents of incorporation,
its meeting minutes, its ﬁnancial records, and its communica-
tions with Zhuhai. Chen argues that the federal case will re-
quire evidence about GeLab’s trade secrets, but that evidence
will become relevant only if the state court ﬁrst concludes that
Zhuhai does not own GeLab.
No. 23-1415                                                     9

   Overall, there is “a substantial likelihood that the state lit-
igation will dispose of all claims presented in the federal
case.” Lumen Construction, 780 F.2d at 695. If the state court
ﬁnds that Zhuhai (through its members) owns 80% of GeLab,
Zhuhai will promptly dismiss the federal lawsuit; it will not
maintain a case against itself.
    Chen argues that even if he loses the ownership dispute,
he still would own 10% of GeLab and could, as a minority
member, sue GeLab and Zhuhai for diverting GeLab’s sales
to Zhuhai and the Zhuhai-aﬃliated companies. But that
would be a diﬀerent suit entirely—one bringing claims for
breach of duty and corporate waste, not for violations of
trade-secrets laws. Moreover, even if Chen’s federal
complaint could support those claims, the critical issue would
shift from the propriety of abstention to the existence of
subject-matter jurisdiction. All parties agree that Chen owns
at least part of GeLab. GeLab is a limited-liability company,
and so it takes on Chen’s Chinese citizenship. Wise v. Wachovia
Sec., LLC, 450 F.3d 265, 267 (7th Cir. 2006). That means that all
parties involved in Chen’s hypothetical lawsuit against
GeLab and Zhuhai are foreign citizens, and so diversity (and
alienage) jurisdiction would be lacking. See 28 U.S.C.
§ 1332(a). And Chen could no longer rely on his claim under
the Defend Trade Secrets Act to support federal-question
jurisdiction over his case. See 28 U.S.C. § 1331. He would need
to tether his state-law claims to some other federal claim, and
none comes readily to mind.
   One obvious question remains: What happens if the state
court ﬁnds that Zhuhai does not own GeLab? Chen argues
that there will then “be more work for the federal court to do,”
Loughran, 2 F.4th at 649, in that the court would have to reach
10                                                   No. 23-1415

Chen’s trade-secrets claims. But “this one-sidedness is neither
unusual nor fatal to a ﬁnding that the two cases are parallel.”
Id. The case might well get past the ownership dispute, but
because that dispute must be resolved before the district court
can reach the trade-secrets issues, “it was rational for the dis-
trict court to determine that ‘the state court litigation will be
an adequate vehicle for the complete and prompt resolution’
of the larger dispute.” Freed, 756 F.3d at 1021. But see Ernest
Bock, LLC v. Steelman, 76 F.4th 827, 841 (9th Cir. 2023) (disa-
greeing with our circuit’s approach and holding that cases are
parallel only if all possible outcomes of the state case will nec-
essarily dispose of the federal case).
                                B
    Our inquiry does not end there. A court may stay a federal
case pending a parallel state proceeding only if abstention is
justiﬁed by exceptional circumstances. We have identiﬁed ten
non-exhaustive factors relevant to this question. These are not
a rigid or exclusive set of criteria; they are instead guideposts
for the ultimate inquiry: Was a decision to abstain an abuse of
discretion? We ﬁnd that at least seven factors support the dis-
trict court’s decision, and that it was reasonable for the court
to rely on them. We summarize the factors brieﬂy, indicating
which favor abstention (“yes”), which do not (“no”), and
which are up in the air.
        [1—no] Whether the state has assumed jurisdiction
     over property. The district court reasoned that this fac-
     tor favored abstention because the state court ap-
     pointed a ﬁscal agent to control GeLab’s assets until the
     ownership dispute is resolved. But Chen counters with
     a good point: the federal case seeks to recover the al-
     legedly ill-gotten gains of Zhuhai, Zhuhai’s owners,
No. 23-1415                                                      11

   and the Zhuhai-aﬃliated companies, not any assets
   held by GeLab. It is the defendants’ assets that are rel-
   evant in the federal case, and the state court has not
   assumed jurisdiction over those assets.
        [2—yes] The inconvenience of the federal forum.
   The parties already are litigating in New Jersey, and
   litigating in two distant fora is less convenient than lit-
   igating in one.
       [3—yes] The desirability of avoiding piecemeal liti-
   gation. The ownership dispute at the heart of both
   cases will be resolved largely by sifting through meet-
   ing minutes and communications between GeLab and
   Zhuhai, many of which will have to be translated from
   Mandarin. Lifting the stay would require that task to
   be done by two courts, “duplicating the amount of ju-
   dicial resources required to reach a resolution.” Clark,
   376 F.3d at 687.
       [4—yes] The order in which jurisdiction was ob-
   tained by the concurrent fora. The federal complaint
   was ﬁled nearly 20 months after the state complaint.
       [5—yes] The source of governing law. Chen’s
   claims in the federal suit arise under both state law and
   the federal Defend Trade Secrets Act. Although “the
   presence of federal-law issues must always be a major
   consideration weighing against surrender,” Moses H.
   Cone, 460 U.S. at 26, the district court wisely stayed the
   federal case rather than dismissing it. In doing so, the
   court did not surrender the federal issues to the state
   court; the state court will resolve only the ownership
   dispute, which turns on New Jersey law and is
12                                                    No. 23-1415

     therefore better left to the New Jersey courts. See Clark,
     376 F.3d at 688. If any federal issues remain after the
     state court resolves the ownership dispute, the district
     court can lift the stay and adjudicate those issues. The
     stay thus does not deny Chen his “right to a federal fo-
     rum” to adjudicate his federal claims. Tyrer, 456 F3d at
     757.
         [6—yes] The adequacy of state-court action to pro-
     tect the federal plaintiﬀ’s rights. We see no reason think
     the New Jersey court might be biased against Chen,
     who, like all the defendants, is a citizen of China. If
     New Jersey has an interest in these cases, it is an inter-
     est in ﬁnding the true owner of GeLab, the only party
     in the ownership dispute that has any connection to
     New Jersey.
         [7—yes] The relative progress of state and federal
     proceedings. When the district court ruled on the de-
     fendants’ motion for a stay in March 2023, the state
     court had ﬁxed late April as the cut-oﬀ date for discov-
     ery. Thus, when the district court entered a stay, “the
     controversy appeared to be closer to a resolution in the
     state proceedings than in the federal.” Caminiti &
     Iatarola, 962 F.2d at 702. Granted, the state court has
     since repeatedly extended the time for discovery. Even
     so, the state court has progressed further toward a ﬁnal
     resolution than the district court. See Huon, 657 F.3d at
     648.
         [8—yes] The presence or absence of concurrent ju-
     risdiction. Either court could hear all claims in both
     lawsuits, and “the availability of concurrent jurisdic-
     tion weigh[s] in favor of a stay.” Clark, 376 F.3d at 688.
No. 23-1415                                                     13

       [9—no] The availability of removal. State-court de-
   fendants who are unable to remove state-law claims
   against them sometimes try to repackage those claims
   into a federal case against the state-court plaintiﬀ. See,
   e.g., Loughran, 2 F.4th at 644–45. In those cases, “[t]he
   unavailability of removal favors a stay, because the pur-
   pose of this factor is to prevent litigants from circum-
   venting the removal statute.” Id. at 650 (emphasis in
   original). This is not such a case. Chen brought both
   lawsuits, and if all he wanted was to be in federal court,
   he could simply have brought all his claims there. This
   factor is therefore irrelevant, but “because of the pre-
   sumption against abstention, absent or neutral factors
   weigh” against abstention. Huon, 657 F.3d at 648.
       [10—not addressed] The vexatious or contrived na-
   ture of the federal claim. Chen has not explained why
   he brought these claims in the Illinois federal court ra-
   ther than adding them to his state case. That raises a
   potential concern about forum-shopping or delay. See
   Freed, 756 F.3d at 1024. But the district court did not
   make a ﬁnding on this, nor will we. Even if we were to
   count this factor as something disfavoring abstention,
   it would not tip the balance given the strength of the
   other points.
    Chen argues that the district court erred by blending some
of the factors and omitting some factors altogether. He points
to Huon, where we determined that a district court had
abused its discretion when it relied on only three factors and
gave only an abbreviated explanation for its choices. 657 F.3d
at 648–49. This case is a far cry from Huon. Here, the court
carefully analyzed which factors favored abstention and
14                                                No. 23-1415

which did not. All that is needed is a “careful weighing of the
factors pertinent to the case at hand,” Sverdrup Corp. v. Ed-
wardsville Community Unit School Dist. No. 7, 125 F.3d 546, 550
(7th Cir. 1997), and the district court met that bar.
                              III
   We AFFIRM the district court’s order staying its proceed-
ings pending the outcome of the New Jersey litigation.