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In today’s global economy, companies are not bound by geographical limits. When disputes arise between companies from different states, a thorny issue must be addressed — where should the litigation be filed? This question is more easily answered when your client is the putative claimant seeking damages. The question becomes more difficult when your client is the one accused of some wrongdoing. How can a would-be defendant who knows that litigation is imminent select a convenient forum in which the dispute may be heard? The short answer is: by being the “first to file.” This can be accomplished by filing a declaratory judgment action seeking a declaration that the client did not do the wrongful act that it is being accused of. If done correctly, being the first to file should ensure that the litigation goes forward in the forum that your client has selected — provided there are no jurisdictional infirmities. However, the first-filed rule is not absolute and courts have the discretion to decline to exercise jurisdiction over declaratory judgment actions for a variety of reasons. It is helpful to explore the filing of declaratory judgment actions, particularly in federal court, as a mechanism for being the first to file; the circumstances in which courts are inclined to depart from the first filed rule; and the ways attorneys can avoid these pitfalls and ensure that cases are not dismissed or transferred to a foreign jurisdiction. A TYPICAL SCENARIO There are a number of different ways this issue can arise in commercial litigation. Clients may seek declarations about: (1) the infringement or validity of trademarks and patents; (2) the effect of indemnification provisions in insurance agreements; (3) whether certain conduct constitutes a breach of contract; (4) ownership of stocks and securities; or (5) whether an offer and proposed merger comply with applicable laws. A recent decision from Delaware sets forth the typical scenario where, after a dispute has arisen, both parties sought to be the first to file and one of the parties used the Declaratory Judgment Act to accomplish that goal. Miteq, Inc. v. Comtech Telecommunications Corp., 2003 WL 179991 (D. Del. Jan. 23, 2003). In Miteq, plaintiff Miteq Inc., defendant Comtech Telecommunications Corp. and its subsidiary, Comtech EF Data, were all designers and manufacturers of satellite communications equipment. EF Data is the assignee of U.S. Patent No. 5,666,646 entitled “Radio Frequency (RF) Converter System with Distributed Protection Switching and Method Transfer.” Both Comtech and EF Data used the technology of the patent in their design and manufacture of satellite communications equipment. A dispute arose between Miteq and Comtech with regard to the patent. On April 10, 2002, Comtech filed suit against Miteq in the U.S. District Court for the District of Arizona, alleging infringement of the patent. However, “in order to ‘permit a dialogue between the parties,’” Comtech did not immediately serve Miteq. Meanwhile, Miteq had filed its own suit against Comtech in the U.S. District Court for the District of Delaware seeking a declaratory judgment that it did not infringe on EF Data’s patent or that the patent was invalid. Miteq served Comtech on July 29, 2002. Comtech served Miteq three days later on Aug. 1, 2002. THE FIRST-FILED RULE More than 60 years ago, the 3rd U.S. Circuit Court of Appeals adopted the first-filed rule which provides that “in all cases of federal concurrent jurisdiction the court which first has possession of the subject must decide it.” EEOC v. University of Pennsylvania, 850 F.2d 969 (3d Cir.), cert. granted in part, 488 U.S. 992 (1988), aff’d, 493 U.S. 182 (1990). The rule enables trial courts “to enjoin the subsequent prosecution of proceedings involving the same parties and the same issues already before another district court.” While invocation of the rule will usually be the norm, as the court in EEOCput it, that power “is not a mandate directing wooden application of the rule without regard to rare or extraordinary circumstances.” Rather, given the appropriate circumstances, a trial court has the discretion to depart from the rule and retain jurisdiction over a second-filed action. Given the equitable nature of the first-filed rule, and the trial court’s ability to depart from it given the appropriate set of circumstances, when preparing to file suit, it is crucial to keep in mind how the court will perceive a newly filed action, particularly where a declaratory judgment action is the only choice. Although the first-filed rule has “routinely been applied to cases where the first-filed case is an action for declaratory judgment,” such actions can — and do — invite questions about the timing and circumstances surrounding the filing. See UTI Corp. v. Plating Resources, Inc., 1999 WL 286441 at *8 (E.D. Pa. May, 7, 1999). Failure to address these questions may result in a dismissal of the declaratory judgment action and an order to litigate in a foreign jurisdiction. DECLARATORY JUDGMENT ACTIONS In Crown Work & Seal Co., Inc. v. Pennsylvania Human Relations Comm’n, 463 F. Supp. 120 (E.D. Pa. 1979), the court stated that “the Declaratory Judgment Act allows one who would otherwise be a defendant to obtain a determination of his rights before anyone has instituted an action against him.” The Declaratory Judgment Act provides, in relevant part, that “[i]n a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” See28 U.S.C. �2201 and Fed. R. Civ. P. 57. The purpose of a declaratory judgment action is “to enable a person caught in controversy to obtain resolution of the dispute, instead of being forced to await the initiative of the antagonist.” National Foam, Inc. v. Williams Fire & Hazard Control, Inc., 1997 WL 700496 at *7 (E.D. Pa. Oct. 29, 1997). Hence, the controversy must be actual. The court in Moore Corp. Ltd. v. Wallace Computer Servs, Inc., 898 F. Supp. 1089 (D. Del. 1995) stated that “in order for a case or controversy to exist for the purposes of a declaratory judgment, three requirements must be satisfied: (1) adversity of interest of the parties; (2) conclusivity of the judicial judgment; and (3) the practical help, or utility, of that judgment.” Generally, trial courts have “limited discretion to refuse to entertain a first-filed declaratory judgment action.” Fundamental Too, Ltd. v. Universal Music Group, Inc., 1997 WL 181255 at *4 (E.D. Pa. April 10, 1997). In determining whether to exercise their discretion, courts in the 3rd Circuit consider a variety of factors, including: 1) bad faith on the part of plaintiff in the first-filed action; 2) forum shopping being a motivation for the filing of the first action; 3) the second filed action being further developed than the first at the time the motion is made; and 4) the filing of the first suit in one forum to preempt the opponent’s imminent filing of a suit in a different, less favorable forum. Stone Creek Mech, Inc. v. Carnes Co., Inc., 2002 WL 31424390 at *2 (E.D. Pa. Oct. 25, 2002). PRE-EMPTING TORT CLAIMS Remember, as the court noted in Sun Oil Co. v. Transcontinental Gas Pipe Line Corp., 108 F. Supp. 280 (E.D. Pa. 1952), aff’d, 203 F.2d 957 (3d Cir. 1953), the Declaratory Judgment Act was not created to enable a prospective negligence action defendant to obtain a declaration of nonliability. Consequently, a potential tort defendant cannot, merely by framing the case as a contract dispute, use a declaratory judgment action to determine potential tort liability. See Great-West Life & Annuity Co. v. Petro Stopping Ctrs, L.P., 2001 WL 1636413 at *1 (N.D. Tex. Dec. 18, 2001). That being said, declaratory judgment actions can be filed seeking declarations about myriad civil issues. Those actions should stand, unless one of the exceptions outlined below cause the court to depart from the first-filed rule — and dismiss. BAD FAITH In the example set forth above based on Miteq, there were no allegations of bad faith. However, one can easily see how such allegations could have arisen had the facts been different. Suppose that, after the dispute arose between Miteq and Comtech, Comtech had sent Miteq a letter demanding that Miteq cease and desist using the technology of the patent and threatening to sue Miteq if Miteq did not comply within a certain number of days. Suppose then that Miteq, having been threatened with imminent litigation, made a strategic decision to engage Comtech in negotiations to resolve the dispute and seek a litigation moratorium, whether expressly or implicitly, while at the same time preparing to commence litigation in its home forum prior to the deadline set by Comtech. Suppose finally that before or within hours of the “negotiations” breaking down, Miteq filed suit against Comtech and its subsidiary in Miteq’s home forum seeking a declaratory judgment that Miteq had not infringed on the patent or that the patent itself was invalid. This type of maneuvering is indicative of bad faith on behalf of the declaratory judgment plaintiff and is grounds for dismissal of the first filed action. Indeed, courts will not hesitate to dismiss a first-filed action when they perceive that the action was filed solely because a “declaratory-judgment plaintiff knew that the defendants had a complaint prepared to be filed, and engaged in settlement negotiations in order to forestall the filing of that complaint, all the while stealthily preparing their own declaratory judgment suit that they rushed over to the courthouse.” Fundamental Too, Ltd., 1997 WL 181255 at *5. Stated differently, the effect of a second-filed action on a district court’s decision as to whether it should exercise jurisdiction over a first-filed declaratory judgment action often depends on whether the declaratory judgment plaintiff “misled the defendant into believing that their dispute could be resolved amicably so that the plaintiff could win the race to the courthouse and therefore choose the forum for the dispute.” HPF, LLC v. Nu Skin Enters, Inc., 1999 WL 782573 at *3 (E.D. Pa. Sept. 28, 1999). When the element of deceit is removed, district courts in the 3rd Circuit have consistently found that a party did not act in bad faith when it filed suit while still discussing settlement. In Zelenkofske Axlerod Consulting, L.L.C. v. Stevenson, 1999 WL 592399 at *3 (E.D. Pa. Aug. 5, 1999), the court declared: That defendants engaged in settlement negotiations until filing suit … does not demonstrate bad faith. The settlement of disputes is encouraged, but parties frequently engage in settlement discussions while preparing to litigate. A party does not relinquish its right ultimately to decide to sue in its forum of choice by engaging in settlement discussions. A party by virtue of engaging in settlement discussions is not obligated to provide notice to his adversary that he has decided to sue to allow the adversary to commence suit first. This is not a case where one party lulled another into sacrificing some substantive advantage. In Stone Creek, the district court found that the defendant “acted within its right when it filed suit against Plaintiff while still engaged in settlement negotiations.” In that case, a dispute arose between a Pennsylvania contractor that performed heating, ventilation and air conditioning construction work and a Wisconsin manufacturer of HVAC equipment. The parties communicated through counsel for several months in an effort to resolve their dispute. Things came to a head when “plaintiff advised defendant that plaintiff would commence litigation against defendant if the dispute was not resolved within the week.” However, before the plaintiff could carry out its warning, the defendant sued the plaintiff in Wisconsin. The district court declined to dismiss the first-filed action finding that bad faith was not present. The lesson to be learned here is that, if you or your client is negotiating with a potential adversary to resolve the dispute, you must be very careful about how you proceed with the negotiations, what representations you make and how you communicate your intentions. The balance lies between maintaining your ability to sue if settlement discussions are not fruitful and lulling your adversary into sacrificing some tactical advantage based on your representations. Keep these ultimate questions in mind: Did you induce the defendant into delaying filing its own lawsuit? What did you say during the negotiations leading up to the filing of your suit? How quickly did you advise the other side that suit had been filed? ANTICIPATORY FILING AND FORUM SHOPPING It is natural for a company to want to secure its home state as the forum for suit. However, as the U.S. Supreme Court stated in Perez v. Ledesma, 401 U.S. 82, 119 n.12 (1971), “the federal declaratory judgment is not a prize to the winner of a race to the courthouse,” and using the declaratory judgment device solely for the purpose of securing the most attractive forum can get your case dismissed. In EEOC, the University of Pennsylvania sought to dismiss an action brought by the EEOC in the Eastern District of Pennsylvania on the grounds that the University had previously filed similar proceedings against the EEOC in the District of Colombia. In response to a complaint received from an Asian female professor who was denied tenure, the EEOC subpoenaed the University’s confidential tenure peer review files and advised the University that it had 20 days to respond to the subpoena. The EEOC further advised the University that, if it did not respond to the subpoena within 20 days, then the EEOC would institute subpoena enforcement proceedings. Three days before the 20-day deadline expired, the University filed suit in the District of Columbia. The district court determined that the University had filed a bad faith, pre-emptive suit in the District of Columbia in an effort to avoid unfavorable law in the 3rd Circuit which declined to recognize a privilege that would prevent disclosure of confidential peer review files — the precise relief the University was seeking. Given these findings, the district court declined to exercise its discretion and dismiss the Pennsylvania action in favor of the first-filed District of Columbia action. The 3rd Circuit affirmed the district court’s decision, finding that the case presented a scenario that warranted departure from the first-filed rule inasmuch as it was filed solely for the purposes of obtaining a favorable forum. Obviously, the key word in this analysis is solely; if a party can show that there were other reasons for filing in suit in the home forum, then there is no need to depart from the first-filed rule and dismiss the complaint. Accordingly, to survive allegations of forum shopping, you must be able to show the court that your client had other legitimate reasons for filing in its home forum. Some legitimate reasons for filing in a home forum are that (1) your client is incorporated in that state; (2) the parties’ agreement (if there is one) contains a forum selection clause mandating that the parties bring suit in your client’s home forum; (3) the events giving rise to your client’s causes of action occurred in the home state; (4) other parties are located in the home state; or (5) witnesses, documents, etc. are located in the home state. If you can show the court that your client’s home forum was a logical and appropriate choice of situs for litigation, resulting forum shopping arguments should not be persuasive. Lastly, courts take into account considerations of judicial and litigant economy through an analysis of the traditional factors influencing a transfer for forum non conveniens: relative ease of access to sources of proof; the availability of compulsory process for attendance of witnesses; the cost of obtaining attendance by willing witnesses; and other issues that relate to making the trial as easy, expeditious and inexpensive as possible. ( See National Foam, Inc.) Your position will therefore be strengthened if you can show the court that these factors weigh in favor of maintaining your client’s suit. Zachary D. Rosenbaum is a partner in the litigation department at Lowenstein Sandler ( www.lowenstein.com)of Roseland, N.J., and Kara Kantor Lewis is an associate in the department. 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