Exact Software N. Am., Inc. v. DeMoisey

• Decision Date: 28 June 2013
• Docket Number: No. 12–3538.,12–3538.
• Citation: 718 F.3d 535
• Parties: EXACT SOFTWARE NORTH AMERICA, INC., f/k/a Macola, Inc., Plaintiff, Infocon Systems, Inc., Defendant–Appellant, v. J. Fox DeMOISEY, Intervenor–Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

718 F.3d 535

EXACT SOFTWARE NORTH AMERICA, INC., f/k/a Macola, Inc., Plaintiff,Infocon Systems, Inc., Defendant–Appellant,

v.J. Fox DeMOISEY, Intervenor–Appellee.

No. 12–3538.

United States Court of Appeals, Sixth Circuit.

Argued: April 24, 2013.

Decided and Filed: May 23, 2013.

Rehearing Denied June 28, 2013.

ARGUED:Kevin C. Burke, Louisville, Kentucky, for Appellant. Thomas E. Clay, Thomas E. Clay, P.S.C., Louisville, Kentucky, for Appellee. ON BRIEF:Kevin C. Burke, Louisville, Kentucky, Peter Ostermiller, Louisville, Kentucky, for Appellant. Thomas E. Clay, Thomas E. Clay, P.S.C., Louisville, Kentucky, for Appellee.

Before: GILMAN, ROGERS and SUTTON, Circuit Judges.

OPINION

SUTTON, Circuit Judge.

This software-licensing dispute became more intriguing after the parties settled it. On the eve of settlement, Infocon, a software distributor, fired its lawyer, J. Fox DeMoisey. Hoping to ensure that he got paid for his work, DeMoisey placed a charging lien on the settlement proceeds. Exact delivered the $4 million settlement to the district court, which distributed most of it to Infocon and placed the remaining $1.2 million in escrow pending resolution of the fee dispute. Nine months later, Infocon sued DeMoisey in Kentucky state court for malpractice. After that case ended with a summary judgment ruling in favor of the lawyer, the district court took on the fee dispute, held a bench trial and awarded DeMoisey $1.4 million in quantum meruit relief. Infocon complains that this was too much, that it had a right to a jury trial over the issue and, for the first time on appeal, that the district court lacked jurisdiction over the fee dispute because DeMoisey and Infocon both hail from Kentucky. We affirm.

I.

Since 1971, Exact, using this corporate name and one other, has developed software for small and mid-sized businesses. Infocon began distributing Exact's software in 1998. When Exact upgraded its software, Infocon also made money selling, installing and training users on the upgrades. A foreign company entered into talks to acquire Exact, and it suggested to distributors like Infocon that it would continue providing new versions of the software. But Exact abandoned its next upgrade, leaving distributors like Infocon out to dry.

Exact sued Infocon in Ohio state court in 2003. To hear Exact tell it, Infocon owed unpaid software maintenance fees it had collected from its customers and was supposed to pass on to Exact. Infocon stopped making those payments in December 2002, and they totaled $143,031.77.

To hear Infocon tell it, the company stopped making the payments because Exact misled Infocon about the plans to develop new upgrades. As a result, Infocon claimed, it had no obligation to turn over maintenance fees, indeed had already turned over more maintenance fees than it should have, and it had incurred a host of other expenses. Infocon removed the case to federal court on the basis of diversity jurisdiction, 28 U.S.C. § 1332, and filed counterclaims there. Exact is an Ohio corporation, and Infocon is a Kentucky corporation. At that point, DeMoisey and his law firm represented Infocon.

Before long, the case entered an intractable phase of discovery. Exact, says the district court, showed “persistent noncompliance with” the court's “ever more stringent” discovery orders. R.397 at 2. Those orders came to a head in August 2006, when the district court threatened Exact that it might allow Infocon to seek a default judgment. Exact continued to drag its feet, and Infocon moved for a default judgment. At that point, Exact apparently got the message: It fired its lawyer, hired new counsel and asked the court to hold off on ruling on the motion.

The parties entered settlement negotiations. Infocon's two owners, Robert Hughes and Deepak Nijhawan, and DeMoisey mediated the case with Exact. At a meeting on February 28, 2007, Hughes and an Exact representative agreed on a $4 million figure. DeMoisey urged Infocon to hold out for more—at least $5.3 million—apparently so that he, Hughes and Nijhawan could receive equal $1 million shares (after taxes).

Hughes and Nijhawan saw things differently and worried that DeMoisey was getting greedy. According to them, DeMoisey started demanding 50 percent of any settlement (a premium on an oral 33–percent contingency fee arrangement), which would include bonuses for his co-counsel. Hughes and Nijhawan were concerned that Exact might bring another lawsuit, that it might pull its $4 million offer and that DeMoisey was pushing too hard. That left the clients and their lawyer, in the words of the district court (and Strother Martin), with a “failure to communicate.” R.397 at 6.

Hughes and Nijhawan hired new counsel, Peter Ostermiller. They formalized the settlement with Exact on March 12, and two days later told DeMoisey about the settlement. The district court ordered the parties to file a notice of dismissal by August 31. The order said: “any dispute re. terms of settlement to be submitted to the [Court] for final adjudication.” R.207. On August 12, Infocon fired DeMoisey, who filed a motion for leave to withdraw on August 13. That same day, DeMoisey filed a “Notice of Charging Lien,” “hereby notify[ing] the Court and parties of the existence of an equitable charging lien in favor of himself and his law office for unpaid services, attaching to the settlement proceeds payable by Exact Software to Infocon Systems, Inc.” R.211. After a status conference, the district court postponed the deadline for the parties to file a stipulated dismissal. That order said that the “court [was] to retain jurisdiction re. charging lien.” R.214. The court ordered Exact and Infocon to pay the settlement proceeds into a court registry and transferred $2.5 million to Infocon and $200,000 to DeMoisey, leaving the balance subject to the fates of further litigation. Exact filed a joint stipulation of dismissal, and on September 21 the district court signed the stipulation under the heading “It is so ordered.” R.233.

DeMoisey and Infocon engaged in discovery over the fee dispute, after which they filed motions for summary judgment with the district court. On May 29, 2008, Infocon took things one step further and filed a legal malpractice action against DeMoisey in Kentucky state court. Concerned about the risk of claim preclusion, DeMoisey filed counterclaims for attorney's fees in the state action. He explained this to the district court in December and withdrew a number of his claims from the federal court—all of them in fact except his claim based on quantum meruit. Due to the state court action, DeMoisey asked the district court to “remand and reschedule the hearing now set for January 20, 2009” on his fee request. R.311. He “proposed that [the] Court continue to supervise the overall settlement or resolution of the pending Charging Lien matter,” id. at 2, and “preserve[ ]” the “status quo ... until all matters pending in the [state court] have been resolved,” id. at 7. The district court “vacated and continued” its trial date. R.332.

The state court granted summary judgment against Infocon based on the expiration of the statute of limitations. As for DeMoisey's counterclaims, the court ruled as a matter of law against him on all but the quantum meruit claim because there was never an enforceable contingency fee agreement. Before the state court could go to trial on the quantum meruit question, DeMoisey “moved to transfer the case back to” the federal district court, and the state court granted the motion. R.348–1. DeMoisey claimed that, in view of the state court's ruling, the district court “should now make its determination as to [the] quantum meruit value of [his] services.” R.348. In December 2011, the court presided over a three-day bench trial, at the end of which it awarded DeMoisey $1.4 million (inclusive of the $200,000 he received in 2007). Infocon appealed the fee award, and DeMoisey intervened on appeal to protect the award.

II.

We start as we must with jurisdiction. And we ignore as we must Infocon's failure to preserve the issue until it had lost in the district court. The jurisdiction of the federal courts is set by the Constitution and Congress, and may not be created by the consent (or forfeiture) of the parties, requiring us to police jurisdiction for ourselves, whether Infocon deserves the inquiry or not. Two potential jurisdictional defects exist.

A.

The first arises from the parties' stipulation of dismissal. It “stipulate[s] and give[s] notice that the within action and all claims and counterclaims therein are dismissed with prejudice, each party to bear its own costs.” R.225. The parties submitted the order under Civil Rule 41(a)(1)(A)(ii), which permits a plaintiff to “dismiss an action without a court order by filing ... a stipulation of dismissal signed by all parties who have appeared” and to do so with prejudice if the parties say so, as they did here. At first glance, this order looks like the kind of unconditional, with prejudice, final resolution of a case that precludes later involvement of the federal court. See Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994).

In Kokkonen, after the parties settled their dispute, they filed a “Stipulation and Order of Dismissal with Prejudice” and also did so under Civil Rule 41(a)(1)(A)(ii). Id. at 377–78, 114 S.Ct. 1673. The settlement agreement required one party to return some files, which it never did. The other party asked the district court for help, and the court ordered compliance with the settlement agreement. The Supreme Court held that the district court lost any authority to do so when the parties unconditionally dismissed the case. A court has “power to protect its proceedings and vindicate its authority” by investigating a potential “violation of a court's order.” Id. at 380, 114 S.Ct. 1673. But backing out of an agreement is not the same thing as violating a court...