Microsoftware Computer Systems, Inc. v. Ontel Corp.

• Decision Date: 12 August 1982
• Docket Number: No. 81-2216,81-2216
• Citation: 686 F.2d 531
• Parties: MICROSOFTWARE COMPUTER SYSTEMS, INC., Plaintiff-Appellee, v. ONTEL CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 531

686 F.2d 531

MICROSOFTWARE COMPUTER SYSTEMS, INC., Plaintiff-Appellee, v. ONTEL CORPORATION, Defendant-Appellant.

No. 81-2216.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 18, 1982.

Decided Aug. 12, 1982.

Michael W. Pinsof, Wolfe & Polovin, Chicago, Ill., for defendant-appellant.

John P. Scotellaro, Bell, Boyd & Lloyd, Chicago, Ill., for plaintiff-appellee.

Before CUMMINGS, Chief Judge, BAUER, Circuit Judge, and DOYLE *, Senior District Judge.

CUMMINGS, Chief Judge.

This case of first impression requires us to decide whether a district court is ever required to stay its proceedings pending the resolution of identical proceedings in a state court.

On December 15, 1980, Ontel, a New York corporation, filed an action in the Supreme Court of Nassau County, New York, alleging that Microsoftware Computer Systems (MCS), an Illinois corporation, owed it money for goods it had delivered pursuant to a contract. The contract did not provide for arbitration of disputes, but did provide that "(t)he laws of the State of New York * * * shall govern this Agreement." Art. X, P 6. Process was served on a secretary at MCS's Lombard, Illinois, offices on December 23, 1980. MCS claimed that service of process was ineffective but on May 26, 1981, the Supreme Court of Nassau County held that service of process was effective and at the time of the oral argument here that issue was still on appeal in the New York state courts. MCS has answered Ontel's complaint and filed a counterclaim, and there has been some discovery taken.

On February 25, 1981, MCS filed this action in the district court based on diversity of citizenship, alleging breach of warranty, fraudulent misrepresentations, breach of contract, and violation of the Illinois Consumer Fraud and Deceptive Practices Act (Ill.Rev.Stat. ch. 121 1/2, §§ 261 et seq. )-all in connection with the sale of goods that is the subject of the New York state action. Although our record on appeal lacks the New York pleadings, MCS has not disputed that the claims filed in the Illinois district court have also been asserted in its answer and counterclaim in the New York state action. The district court too stated that it "was aware of the fact that the two cases are substantially identical." Transcript of Denial of Motion for Reconsideration p. 4. Thus the only difference between the state and federal court actions is that in New York, Ontel is the plaintiff, while in Chicago, MCS is the plaintiff.

On March 23, 1981, Ontel filed a motion requesting that the district court proceedings be stayed pending a final disposition of the New York state court action. The district court denied the motion and Ontel's subsequent motion for reconsideration, and ordered Ontel to answer the complaint. Ontel now appeals the district court's denial of the stay.

I

As a preliminary matter, this Court must have jurisdiction to hear an appeal from the denial of a stay. We have held that the granting of a stay pending litigation in the state courts may be appealable as a final decision under 28 U.S.C. § 1291, Drexler v. Southwest Dubois School Corp., 504 F.2d 836, 838 (7th Cir. 1974) (en banc), ¹ but the denial of such a stay is hardly a final decision in the sense of "end(ing) the litigation on the merits and leav(ing) nothing for the court to do but execute the judgment." Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 633, 89 L.Ed. 911. On the contrary, the district court's order denying the requested stay signaled the parties to begin litigating the merits of their dispute.

Likewise, the collateral order exception to finality does not allow an appeal under Section 1291, although arguably two of its three prerequisites are satisfied by the denial of a stay here. The district court's decision to deny the stay (1) "resolve(d) an important issue completely separate from the merits of the action, and ( (2) would be) effectively unreviewable on appeal from a final judgment" because by then the extra resources needed to prosecute and decide two identical lawsuits will already have been spent. Coopers & Lybrand v. Livesay, 437 U.S. 463, 468, 98 S.Ct. 2454, 2457, 57 L.Ed.2d 351 (setting out tests for collateral order exception). However, the third prerequisite to immediate appeal under the collateral order doctrine-that the order "conclusively determine the disputed question," id.-is not met because the district court is free to reconsider its denial of the stay throughout the course of the litigation. Cf. Hastings v. Maine-Endwell Central School District, 676 F.2d 893, 896 (2d Cir. 1982) (order awarding interim attorneys' fees not appealable in part because district court may award more or fewer fees as action progresses). Therefore we have no appellate jurisdiction under 28 U.S.C. § 1291.

Ontel argues that this particular order denying a stay should be deemed equivalent to an order refusing to grant an injunction, and therefore immediately appealable under 28 U.S.C. § 1292(a)(1). For a number of practical and historical reasons, we agree. ²

The primary practical reason for allowing an appeal from this order is that the decision not to stay is effectively unreviewable on appeal from a final judgment. There is simply no remedy for the wasting of time and resources once it has occurred. We are mindful that a district court cannot slough off its cases in order to reduce the crowdedness of its docket, Thermtron Products, Inc. v. Hermansdorfer, 423 U.S. 336, 344-345, 96 S.Ct. 584, 589-90, 46 L.Ed.2d 542; McClellan v. Carland, 217 U.S. 268, 30 S.Ct. 501, 54 L.Ed. 762, but the "unjustified wast(ing) of scarce judicial resources" has often been an important factor in deciding whether to allow interlocutory appeals. Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 378, 101 S.Ct. 669, 675, 66 L.Ed.2d 571; see also Randle v. Victor Welding Supply Co., 664 F.2d 1064 (7th Cir. 1981). In this case, if the district court decision to deny a stay is not reviewed, the federal courts in Chicago and state courts in New York will march through an identical sequence of pre-trial discovery and motions, trials, and appeals, until the judgment of one set of courts becomes final and binding on the other by res judicata. The district court and MCS have stated that discovery in the two cases could be shared, and that other economies of scale may alleviate some of the wasteful duplication. But the economies of scale benefit only the parties (if anyone), not the judges and their staffs. The latter see each case uniquely and must hear evidence and arguments on each point raised throughout the course of the litigation, no matter how routine it becomes for counsel. Our own estimate is that the unjustified waste could be tremendous and certainly more than offsets the inconveniences of allowing an interlocutory appeal. ³

Another practical matter that counsels in favor of allowing the appeal is that there has been considerable disagreement among the district courts of this Circuit regarding when proceedings should be stayed in deference to parallel state proceedings. Compare the district court decision below, Browning v. United States Movidyn Corp., 83 F.R.D. 211 (E.D.Wis.1979), and Gentron Corp. v. H. C. Johnson Agencies, Inc., 79 F.R.D. 415 (E.D.Wis.1978) with Evans Transportation Co. v. Scullin Steel Co., 530 F.Supp. 787 (N.D.Ill.1982) and Burrows v. Sebastian, 448 F.Supp. 51 (N.D.Ill.1978). Presumably the confusion stems from this Court's failure previously to supply any guidance on the subject.

Historically, depending on the character of the underlying dispute and the putative basis for the stay, an order granting or denying a stay could be appealed as an order granting or denying an injunction. "The power to stay proceedings in another court appertains distinctively to equity in the enforcement of equitable principles, and the grant or refusal of such a stay by a court of equity of proceedings at law is a grant or refusal of an injunction within the meaning of § 129 (the predecessor to Section 1292(a)(1) ). And, in this aspect, it makes no difference that the two cases, the suit in equity for an injunction and the action at law in which proceedings are stayed, are both pending in the same court * * *." Enelow v. New York Life Ins. Co., 293 U.S. 379, 382, 55 S.Ct. 310, 311, 79 L.Ed. 440. The historical "Enelow-Ettelson" rule has outlived the fine distinctions between law and equity, but has been retained nevertheless and used, for example, to decide appealability from the grant or denial of a stay pending arbitration. Whyte v. THinc Consulting Group Int'l, 659 F.2d 817 (7th Cir. 1981).

Under the so-called "Enelow-Ettelson" rule, the question whether an order granting or refusing a stay of judicial proceedings pending arbitration is one "granting or refusing * * * an injunction" within the meaning of 28 U.S.C. § 1292(a)(1) turns on whether the underlying cause of action is one which before the merger of law and equity was by its nature at law or in equity. * * * If the underlying action is at law, the order is appealable on the reasoning that it is analogous to an equitable restraint of legal proceedings. * * * Where, however, * * * the underlying action is itself equitable, the order is not appealable because it is merely an order by a court of equity concerning the management of its own proceedings.

Id. at 818-819 (citations and footnotes omitted); see also Ceres Marine Terminals, Inc. v. International Longshoremen's Association, 683 F.2d 242 (7th Cir. 1982).

When the rule is stated in its most general form, there is also a second requirement for appellate jurisdiction. Not only (1) must "the litigation in which the order is entered * * * be legal rather than equitable in character," but also (2) "the stay must have been sought to enable the prior determination of an equitable defense." Lee v. Ply*Gem Industries, Inc., 593 F.2d 1266, 1268 (D.C.Cir.1979) (footnotes omitted), certiorari...