Quality Assocs., Inc. v. Procter & Gamble Distrib. LLC

• Decision Date: 10 February 2020
• Docket Number: No. 19-3137,19-3137
• Citation: 949 F.3d 283
• Parties: QUALITY ASSOCIATES, INC., Plaintiff-Appellant, v. THE PROCTER & GAMBLE DISTRIBUTING LLC; Yannis Skoufalos; Patrick Paolino; Elizabeth Radke; Michelle Eggers, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

949 F.3d 283

QUALITY ASSOCIATES, INC., Plaintiff-Appellant,

v.THE PROCTER & GAMBLE DISTRIBUTING LLC; Yannis Skoufalos; Patrick Paolino; Elizabeth Radke; Michelle Eggers, Defendants-Appellees.

No. 19-3137

United States Court of Appeals, Sixth Circuit.

Argued: October 17, 2019

Decided and Filed: February 10, 2020

KAREN NELSON MOORE, Circuit Judge.

In February 2018, Quality Associates, Inc. ("QAI") sued Procter & Gamble Distributing LLC ("P&G") in Ohio federal court for breaking a contract with it in a racially discriminatory manner. See 42 U.S.C. § 1981. But the problem was, P&G had already sued QAI in Ohio state court over the same contractual dispute underlying QAI’s § 1981 claim, and that litigation was still ongoing. So P&G moved to dismiss QAI’s federal suit, arguing that its § 1981 claim was a compulsory counterclaim to the state litigation, see Ohio Civ. R. 13(A), and thus needed to be brought in that proceeding. The district court agreed and accordingly dismissed QAI’s suit. We conclude, however, that a federal court cannot enforce a state compulsory-counterclaim rule against a federal litigant while the relevant state litigation is still pending. For this reason, we REVERSE the district court’s judgment and REMAND for further proceedings consistent with this opinion.

I. BACKGROUND

A. The Parties’ Longstanding Business Relationship Sours

QAI is a Cincinnati-based, minority-owned business that engages in a variety of commercial activities, ranging from designing manufacturing plants to assembling retail "point-of-sale displays." R. 1 (Federal Compl. ¶¶ 13–16) (Page ID #6). For decades, it had a "flourishing and rewarding relationship" with P&G. Id. (Page ID #2).

In 2015, however, P&G replaced its existing QAI liaisons with a new set of managers, specifically, individual defendants Yannis Skoufalos, Patrick Paolino, Elizabeth Radke, and Michelle Eggers. Id. ¶¶ 22–23 (Page ID #7). In the months following this change in management, QAI alleges, P&G engaged in demeaning and racially biased behavior toward QAI’s leadership and employees, such that QAI could not adequately perform its end of the then-existing contract between the companies, called the "Purchase Agreement." More specifically, QAI alleges, P&G’s new team "t[ook] over QAI’s business and operations" (and thereby "increased" QAI’s "costs"), treated non-minority competitors to QAI far better than it treated QAI, and even "allow[ed]" its employees "to make disparaging comments to and about QAI, its management and its employees." Id. ¶ 89 (Page ID #16).

Worse yet, QAI asserts, in February 2016 P&G "forced" QAI to enter into a "Termination Agreement" that essentially "terminated" the Purchase Agreement, and, by extension, the parties’ business relationship. Id. ¶¶ 37, 97 (Page ID #9, 18). Indeed, QAI continues, the Termination Agreement was "so unfavorable" to QAI that it resulted in QAI’s "liquidation." Id. And, again, according to QAI, P&G took this action against it for racially biased reasons.

B. The State-Court Litigation (Part One)

QAI, however, was not the only one who believed that the parties’ crumbling business relationship was tainted with illegality.

Rather, in early 2017, P&G accused QAI of breaching a contract related to the Termination Agreement, called the "M2K Agreement," allegedly in retaliation for P&G not paying QAI outstanding invoices owed under the Termination Agreement. Consequently, on January 25, 2017, P&G sued QAI in Ohio state court for breach of contract and injunctive relief.

QAI timely answered and asserted counterclaims. In its pleading, QAI raised many of the allegations detailed above, namely, that P&G’s "one-side[d] decisions and interference [with QAI’s business]" caused "QAI’s financial condition" "to deteriorate," and that, eventually, P&G’s actions "forced" QAI to sell its assets "well below what [those] assets were worth." QAI First State Court Counterclaim ¶¶ 15–17 (P&G App’x at 188). However, despite referencing some of P&G’s allegedly racist behavior, see, e.g. , id. ¶¶ 2, 6–7 (P&G App’x at 186–87), QAI did not include a § 1981 claim in its pleading, or any other claim based on racial discrimination. Rather, QAI asserted simply (1) a breach of contract claim under the Termination Agreement (with respect to approximately $2.5 million in allegedly unpaid invoices), and (2) a declaratory judgment claim under the M2K Agreement (with respect to the proper amount QAI was to be paid under that agreement).

C. The Federal-Court Litigation

Then, on February 1, 2018, this hitherto-straightforward contract litigation took an odd procedural turn. That is, on that date, QAI (now represented by different counsel) filed a stand-alone § 1981 claim against P&G in Ohio federal court. And, notably, QAI’s federal complaint contained many of the same allegations set forth in its state-court counterclaim, albeit with a greater emphasis on P&G’s allegedly racist acts.

P&G promptly moved to dismiss QAI’s federal complaint, asserting that QAI’s suit failed either because QAI released and waived its § 1981 claim against P&G through the "release" and "final settlement" provisions of the Termination Agreement, or because QAI’s § 1981 claim was a "compulsory counterclaim" to the ongoing state-court litigation and thus needed to be resolved in that proceeding. See Ohio Civ. R. 13(A) ("A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim ...") (emphasis added); Rettig Enters., Inc. v. Koehler , 68 Ohio St.3d 274, 626 N.E.2d 99, 102–03 (1994) (holding that a claim "arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim" if it is "logically related to the opposing party’s claim") (citation omitted).

The district court agreed with P&G’s second ground for dismissal, i.e. , the compulsory-counterclaim argument, and accordingly granted P&G’s motion to dismiss. See Quality Assocs., Inc. v. Procter & Gamble Distrib., LLC , 2019 WL 340472, at *5 (S.D. Ohio Jan. 28, 2019) (finding that QAI’s § 1981 claim was "logically related to the claims in the State Court Litigation" because "the claims involve many of the same factual issues" and because "they will both require interpretation of the Purchase Agreement and the Termination Agreement"). As a result, the district court did not consider P&G’s other argument for dismissal, i.e. , the waiver-and-release argument. Id. at *6 n.6.

QAI timely appealed the district court’s judgment of dismissal.

D. The State-Court Litigation (Part Two)

In a yet another odd procedural twist, however, around the same time that QAI launched its appeal in this court, it requested permission to add a § 1981 claim to its state -court counterclaim; the claim was identical to QAI’s (then-dismissed) federal claim. See QAI Proposed Second Am. Counterclaim (QAI App’x at 116-34). P&G opposed the motion.

The state trial court entertained oral argument, and, on April 16, 2019, denied QAI’s request. See State Court Order (P&G App’x at 297). The state court reached this decision for two reasons: "(a) QAI’s claims under 42 U.S.C. § 1981 asserted in the proposed Second Amended Counterclaim were compulsory counterclaims that should not be added to the case at this stage," and (b), even if the claims could be added as a matter of procedure, "QAI released its claims ... by way of the release contained in the Termination Agreement between the parties." Id. Accordingly, the court ruled, "the filing of the Second Amended Counterclaim would be futile." Id.

Shortly thereafter, the parties filed their federal appellate briefs. Per the publicly accessible docket, the state litigation remains ongoing.¹

II. DISCUSSION

On appeal, QAI argues that the district court erred by construing its § 1981 claim as a compulsory counterclaim, subject to Ohio Rule of Civil Procedure 13(A), because the claim is purportedly not "logically related" to the contract claims at issue in the state-court proceeding. Appellant’s Br. at 13. In response, P&G claims that QAI’s appeal fails either because the state court’s April 16 order rejected QAI’s § 1981 claim on the merits—therefore precluding QAI from contending otherwise in this court—or because the claim is a compulsory counterclaim under Ohio law. P&G also raises the waiver-and-release defense it raised in the district court, and again (successfully) in the state trial court.

Although we agree with P&G and the district court that QAI’s § 1981 claim is analytically best classified as a compulsory counterclaim to the state-court proceeding, we disagree that that fact alone subjects QAI’s claim to dismissal. Rather, we hold, because a federal court cannot enforce a state compulsory-counterclaim rule against a federal litigant outside the preclusion context, and because QAI’s claim is not yet precluded here (because the state court has not yet entered a final judgment), the district court lacked authority to base its judgment of dismissal on this ground. Consequently, we reverse and remand.²

As an initial matter, we must explain why a federal court cannot enforce a state compulsory-counterclaim rule against a federal litigant unless it is part and parcel of a preclusion ruling. After all, one might ask, if a plaintiff files a claim in federal court that plainly should have been brought as a counterclaim in a state litigation, why should it matter whether the claim is precluded? The purpose of Ohio’s compulsory-counterclaim rule is "to avoid a multiplicity of actions and to achieve a just resolution by requiring in one lawsuit the litigation of all claims arising from common matters." Rettig , 626 N.E.2d at 103. Allowing a federal court to enforce the rule, irrespective of procedural posture, seems to advance that purpose. In fact, one might note, had the parties’ ongoing litigation been in federal court,...