Hcc, Inc. v. R H & M Machine Co.

• Decision Date: 19 January 1999
• Docket Number: No. 96 CIV. 4920(PKL).,96 CIV. 4920(PKL).
• Parties: HCC, INC., Plaintiff, v. R H & M MACHINE CO. and Herbert David Edgell, Jr., Defendants.
• Court: U.S. District Court — Southern District of New York

39 F.Supp.2d 317

HCC, INC., Plaintiff, v. R H & M MACHINE CO. and Herbert David Edgell, Jr., Defendants.

No. 96 CIV. 4920(PKL).

United States District Court, S.D. New York.

January 19, 1999.

COPYRIGHT MATERIAL OMITTED

Morgan & Finnegan, L.L.P., NY (Harry C. Marcus, of counsel), for Plaintiff.

Martin R. Mann, Falls Church, VA, for Defendants.

OPINION AND ORDER

LEISURE, District Judge.

This action involves allegations that defendants have infringed plaintiff's patent regarding a hydraulic, towable backhoe. Before the Court are defendants' objections to a Report and Recommendation (the "Report") issued by the Honorable Ronald L. Ellis, United States Magistrate Judge, recommending denial of a motion by defendant R H & M Machine Co. ("R H & M") for leave to interpose an additional defense and counterclaim concerning the patent.

For the reasons stated in this Opinion and Order, the Report is rejected and defendant R H & M's motion for leave to amend is GRANTED.

BACKGROUND

The instant action is the second of three patent infringement suits between the parties in the past six years. In 1992, Spancrete Machinery Corp., the predecessor in interest of plaintiff HCC, Inc. ("HCC"), brought suit against R H & M in the United States District Court for the Eastern District of Virginia (the "Virginia Action"), alleging that R H & M's GO FOR DIGGER II backhoe infringes plaintiff's United States Patent No. 4,925,358 (the "'358 patent"). R H & M interposed a counterclaim requesting declaratory judgment that certain of the claims in the '358 patent are invalid. The case proceeded to trial, where a jury found claims 1 and 12 of the '358 patent not invalid and further found R H & M's GO FOR DIGGER II product infringed claim 12 of the patent. Following the trial court's entry of judgment for defendant notwithstanding the verdict, the United States Court of Appeals for the Federal Circuit reversed and reinstated the verdict in favor of plaintiff. See Spancrete Machinery Corp. v. R H & M Machine Co., No. 93-1415, slip op. at 9, 1994 WL 424620 (Fed.Cir. Aug. 15, 1994) (unreported).

On June 27, 1996, HCC filed the instant action, alleging that two other products manufactured by R H & M, the GO FOR DIGGER IV and GO FOR DIGGER V, also infringe the '358 patent. HCC subsequently amended its complaint, and R H & M answered and interposed counterclaims seeking declaratory judgment that the products do not infringe the '358 patent and that the patent is invalid. This Court referred the case to Judge Ellis on May 20, 1997, for general pre-trial management.

On June 11, 1997, HCC filed a Second Amended Complaint adding Herbert David Edgell, Jr., the President and a director and partial owner of R H & M, as a defendant and alleging additional claims for unfair competition and tortious interference with prospective business advantage. The Second Amended Complaint is substantially identical to the First Amended Complaint with respect to plaintiff's claim for patent infringement. Defendants jointly filed an answer to the Second Amended Complaint, which, in addition to the defenses and counterclaims previously raised, interposed a counterclaim of unenforceability and a defense of unclean hands, based on alleged inequitable conduct by the patent applicant before the Patent & Trademark Office ("PTO").

On August 6, 1997, in an Order with a caption listing R H & M as the sole defendant, Judge Ellis struck the counterclaim and defense raised by R H & M, and established a schedule for R H & M to seek leave to amend its answer to include the proposed counterclaim and defense.¹ In response to the Order, R H & M filed an amended answer omitting the contested counterclaim and defense and, in addition, moved for leave to add those claims.² Defendant Edgell separately filed an amended answer which included both the defense and the counterclaim.

On October 6, 1997, Judge Ellis issued a Report and Recommendation recommending denial of defendant R H & M's motion for leave to amend. Judge Ellis reasoned that the principle of collateral estoppel precluded R H & M from raising the defense and counterclaim because, according to the court, they are indistinguishable from R H & M's invalidity counterclaim raised in the Virginia Action and rejected by the jury in that case. See Report at 4. The Report further intimates that principles of claim preclusion bar assertion of the counterclaim and defense because, according to the court, the claims, even if not actually raised in the Virginia Action, could have been. See id. at 5-9. Finally, Judge Ellis found that, in any event, leave to amend would be inappropriate because the evidence submitted by R H & M in support of the claims is not sufficient actually to sustain them. See id.

Although the only motion before Judge Ellis was that of defendant R H & M for leave to amend, the Report also appears to recommend that defendant Edgell be denied the ability to assert the identical counterclaim and defense in his first responsive pleading. Judge Ellis found that because Edgell is "in privy to R H & M", Edgell is also "bound under the same preclusion principles" as those mentioned above and recommended that, therefore, his assertion of those claims should be disallowed. See id. at 4 n. 2.³

DISCUSSION

I. Standard of Review

Before assessing the merits of defendants' objections to the Report, the Court addresses a threshold issue regarding the appropriate standard of review. Pursuant to Rule 72 of the Federal Rules of Civil Procedure and its enabling statute, 28 U.S.C. § 636(b)(1), determination of the review standard turns on whether the recommendation by the Magistrate is dispositive of a claim or defense of a party. See Fed.R.Civ.P. 72. Defendant R H & M contends the Report concerns a dispositive matter and, thus, that this Court must review the Report de novo. See Fed. R.Civ.P. 72(b). Plaintiff, by contrast, argues the Report addresses nondispositive issues and is subject to deferential review only for "clear error". See Fed.R.Civ.P. 72(a).

The proper characterization of a denial of leave to amend a pleading is not settled in this Circuit. See C.V. Rao v. Envirodyne Enq'rs of New York, No. 94 Civ. 3368, 1996 WL 594054, at *2 (E.D.N.Y. Oct. 11, 1996). Several courts have held, with little explanation, that such a denial is nondispositive. See Coffey v. Dobbs Int'l Serv., Inc., 5 F.Supp.2d 79, 83 (N.D.N.Y. 1998); Smith v. Dakar Constr. Corp., No. 94 Civ. 7645, 1997 WL 711053, at *2 (S.D.N.Y. Nov. 13, 1997); Moss v. Stinnes Corp., No. 92 Civ. 3788, 1995 WL 338315, at *1 (S.D.N.Y. June 7, 1995); Aries Ventures Ltd. v. Axa Fin. S.A., 696 F.Supp. 965, 965 (S.D.N.Y.1988). Other courts have found such a denial to be dispositive, since the denial forecloses the party from asserting the claim or claims in the litigation. See Champion Titanium Horseshoe, Inc. v. Wyman-Gordon Inv. Castings, Inc., 925 F.Supp. 188, 190 (S.D.N.Y.1996); Mitchell v. Cronin, No. 92 Civ. 7360, 1993 WL 427441, at *1 (S.D.N.Y. Oct.19, 1993); see also Scally v. Daniluk, No. 96 Civ. 7548, 1997 WL 639036, at *1 (S.D.N.Y. Oct. 15, 1997) (dispositive where complaint would be dismissed absent leave to amend).

This Court is of the view that denial of leave to amend is a dispositive decision at least in situations where the denial is premised on futility. Assessment of futility arguments proceeds according to the standard applicable to a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, or, in some instances, pursuant to the standard for summary judgment under Rule 56. See Arbitron Co. v. Tropicana Prod. Sales, Inc., No. 91 Civ. 3697, 1993 WL 138965, at *3 (S.D.N.Y. Apr. 28, 1993) (listing cases); see also Azurite Corp. Ltd. v. Amster & Co., 52 F.3d 15, 19 (2d Cir.1995). Motions to dismiss and for summary judgment are clearly classified as dispositive motions by the enabling provision of Rule 72. See 28 U.S.C. § 636(b)(1)(A). The Court discerns no reason why denial of a motion for leave to amend based on futility should be classified differently than would decision of a substantive motion to dispose of those same claims when already pleaded. Accordingly, the Court reviews the Report de novo. In any event, classification of the Report as dispositive or not is unimportant in the instant matter because, applying either standard, the Court would reject the Report for the reasons that follow.

II. R H & M's Proposed Amendments

Pursuant to Rule 15 of the Federal Rules of Civil Procedure, leave to amend "shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). Leave to amend is not, however, automatic, and may be denied for good cause, "such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, futility of amendment, etc." Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962).

Judge Ellis denied defendant R H & M's motion for leave to amend on grounds of futility. Judge Ellis found that the doctrines of issue and claim preclusion bar assertion of the claims and, in addition, that the evidence submitted by defendant does not suffice to prove the claims sought to be added. The Court addresses the reasons proffered by Judge Ellis seriatim.

A. Issue Preclusion

The doctrine of issue preclusion, also known as collateral estoppel, provides that "once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation." Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979). Thus, a claim of issue preclusion consist of the following elements:

(1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and actually...