Quality King Distributors, Inc. v. Kms Research, Inc.

• Decision Date: 16 November 1996
• Docket Number: No. CV 96-4774 (ADS).,CV 96-4774 (ADS).
• Citation: 946 F.Supp. 233
• Parties: QUALITY KING DISTRIBUTORS, INC., Plaintiff, v. KMS RESEARCH, INC., Defendant.
• Court: U.S. District Court — Eastern District of New York

946 F.Supp. 233

QUALITY KING DISTRIBUTORS, INC., Plaintiff, v. KMS RESEARCH, INC., Defendant.

No. CV 96-4774 (ADS).

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

November 16, 1996.

Edwards & Angell, New York City (Alfred R. Paliani, Robert J. Brener, of counsel), New York City, for Plaintiff.

Latorraca and Goettsch by Raymond H. Goettsch, Long Beach, CA, Nagel Rice & Bravman, New York City, for Defendant.

MEMORANDUM OF DECISION AND ORDER

SPATT, District Judge:

This declaratory judgment action arises from the claims of the plaintiff, Quality King Distributors, Inc. ("Quality King" or the "plaintiff"), that the defendant, KMS Research, Inc. ("KMS" or the "defendant"), is posturing itself to commence a lawsuit for intentional interference with the defendants' contractual relationships with unspecified third parties. The plaintiff seeks a judgment declaring that its business activities are lawful and not in violation of any common law tort theories. KMS moves to dismiss the Complaint, or in the alternative to stay this litigation, pursuant to 28 U.S.C. § 2201 governing declaratory judgment actions, based on an ongoing related lawsuit in California. The plaintiff opposes the defendant's motion arguing that this Court is an appropriate forum in which to litigate its claim.

I. Background

The following facts are taken from the Complaint. Quality King is a New York corporation with its principal place of business in Suffolk County. The plaintiff is a wholesale distributor of consumer goods of, among other things, pharmaceuticals and health and beauty aids. Quality King pleads upon information and belief, that KMS is a California corporation with its principal place of business in Redding, California. The defendant is a manufacturer and distributor of professional hair care products including shampoos, conditioners and hair sprays, a portion of which it sells in the state of New York.

As part of its operation, Quality King purchases hair care products, including those manufactured by KMS, from certain unspecified "reputable supply sources" which it then "resells ... to reputable customers including large well-known retail chains." According to the Complaint, KMS prefers to sell its products through the "limited salon market" in order to maintain higher prices.

On August 22, 1996, as the result of Quality King's practice of selling KMS products at lower prices, KMS sent a "demand letter" to Quality King claiming that the plaintiff "`has diverted KMS products from the authorized channels of distribution and sold those KMS products' in unauthorized retail outlets." The demand letter further advises that KMS "prohibits its authorized distributors from reselling to anyone other than `hair salons, barber shops, beuauty [sic] schools and barber schools for resale'" and quotes from a form agreement which the defendant has entered into with its authorized distributors. According to the Complaint however, Quality King is not a party to any such agreement, and as a result, is not bound by its terms. Notwithstanding the absence of a contractual relationship, the letter accuses the plaintiff of "interfering with KMS' contractual rights with its distributors and salon customers by selling KMS products" and demands that Quality King "`cease and desist'" its purchase and resale of KMS products on or before September 13, 1996. The demand letter further seeks a written response agreeing to these terms.

As a result of the foregoing, the plaintiff alleges that it is in the position of "continuing its lawful business of purchasing and selling KMS [products] under the cloud and threat of a lawsuit from KMS, notwithstanding that Quality King's continued purchase and sale of such products is lawful and not restricted either by contract or at common law." According to the plaintiff, the demand letter was sent to put Quality King on notice of the defendant's distribution policy so that KMS can maintain a cause of action for intentional interference with contract, and prohibit the plaintiff from further distribution of its products.

Quality King filed its Complaint in New York Supreme Court, Suffolk County on August 29, 1996. Quality King Distributors, Inc. v. KMS Research, Inc., Index No. 96-22135 (Sup.Ct. Suffolk Cty., August 28, 1996). The case was then removed by the defendant pursuant to this Court's diversity jurisdiction. The notice of removal was filed on September 27, 1996. The Complaint contains a single cause of action for a judgment:

declaring that Quality King is entitled to continue to purchase and sell KMS products, notwithstanding that KMS has notified Quality King that it has a corporate policy that restricts its authorized distributors from selling to anyone other than hair salons, barber shops, beauty schools and barber schools for resale and that some of such salons may have arrangements with their distributors restricting resale only to salon customers for personal use.

Also on September 27, 1996, the defendant filed a related action in the California Superior Court captioned KMS Research, Inc. v. Quality King Distributors, Inc., No. BC 158155 (Cal.Sup.Ct. Sept. 27, 1996). The complaint in that action alleges claims against Quality King and other named defendants, seeking damages and injunctive relief for: (1) intentional interference with contract and conspiracy; (2) intentional interference with prospective business advantage and conspiracy; (3) inducing breach of contract and conspiracy; (4) negligent interference with prospective economic advantage and conspiracy; and (5) unfair competition and conspiracy.

The defendant moves to dismiss the Complaint or stay this action pursuant to 28 U.S.C. § 2201 based on the ongoing California lawsuit.

II. Discussion

A. Declaratory Judgment Act

At the outset, the Court finds that this lawsuit is governed by federal rather than state law because the Declaratory Judgment Act addresses procedural as opposed to substantive rights. See Haagen-Dazs Shoppe Co. v. Born, 897 F.Supp. 122, 126 & n. 2 (S.D.N.Y.1995) (holding that the Declaratory Judgment Act, as opposed to state law, governs cases removed on the basis of diversity jurisdiction under an Erie analysis); DeFeo v. Procter & Gamble Co., 831 F.Supp. 776, 779 (N.D.Cal.1993) (same); see also Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, 70 S.Ct. 876, 878-79, 94 L.Ed. 1194 (1950) (recognizing that the Declaratory Judgment Act is procedural in nature and not an extension of federal court jurisdiction).

Declaratory judgment actions in the federal courts are governed by 28 U.S.C. § 2201, which provides in relevant part:

(a) In a case of actual controversy within its jurisdiction ... any court of the United States, upon the filing of the 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. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

"Since its inception, the Declaratory Judgment Act has been understood to confer on federal courts unique and substantial discretion in deciding whether to declare the rights of litigants." Wilton v. Seven Falls Co., ___ U.S. ___, ___, 115 S.Ct. 2137, 2142, 132 L.Ed.2d 214 (1995), citing, 28 U.S.C. § 2201 (stating that a district court may declare the rights and other legal relations of any interested party); Brillhart v. Excess Ins. Co., 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942); Youell v. Exxon Corp., 74 F.3d 373, 375 (2d Cir.), cert. denied, ___ U.S. ___, 116 S.Ct. 2514, 135 L.Ed.2d 203 (1996); see generally E. Borchard, Declaratory Judgments 312-14 (2d ed.1941); E. Borchard, Discretion to Refuse Jurisdiction of Actions for Declaratory Judgments, 26 Minn.L.Rev. 677 (1942). The Supreme Court has repeatedly recognized the Declaratory Judgment Act as "an enabling Act" which grants discretion to the district courts rather than an "absolute right" to the litigant. Wilton, ___ U.S. at ___, 115 S.Ct. at 2143, quoting, Public Serv. Comm'n v. Wycoff Co., 344 U.S. 237, 241, 73 S.Ct. 236, 239, 97 L.Ed. 291 (1952). Accordingly, where the district court, in an exercise of discretion, determines that a declaratory judgment action will serve no useful purpose, it is not incumbent upon the court to reach the merits of the case. Id. As the Supreme Court aptly recognized, quoting the language of Professor Borchard, "[b]y the Declaratory Judgment Act, Congress sought to place a remedial arrow in the district court's quiver; it created an opportunity, rather than a duty, to grant a new form of relief to qualifying litigants." Id. Further, in the seminal case of Brillhart v. Excess Ins. Co., the court noted that:

[o]rdinarily it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties. Gratuitous interference with the orderly and comprehensive disposition of a state court litigation should be avoided.

Brillhart, 316 U.S. at 495, 62 S.Ct. at 1175-76. When considering whether to proceed, Brillhart instructs the district courts to determine "whether the questions in controversy between the parties to the federal suit, and which are not foreclosed under the applicable substantive law, can better be settled in the proceeding pending in the state court." Id. As the Supreme Court further explained,

[t]his may entail inquiry into the scope of the pending state court proceeding and the nature of defenses open there ...[,] whether the claims of all parties in interest can satisfactorily be adjudicated in that proceeding, whether necessary parties have been joined, [and] whether such parties are amenable to process in that proceeding....

Id.

B. The defendant's motion

1. "First filed" rule

In general, where an action is...