Smith v. Lenches
| Decision Date | 30 August 2001 |
| Docket Number | DEFENDANTS-COUNTER-CLAIMANTS-APPELLANTS,DEFENDANTS-APPELLANTS,No. 00-16582,PLAINTIFFS-COUNTER-DEFENDANTS-APPELLEES,00-16582 |
| Citation | 263 F.3d 972 |
| Parties | (9th Cir. 2001) JAMES C. SMITH; EFREN RIVERA; RICHARD A. BADER,v. JEFFREY LENCHES; FRED ROSENZWEIG; ERIC SALTZMAN,, ELECTRONICS FOR IMAGING, INC., A DELAWARE CORPORATION; DAN AVIDA, |
| Court | U.S. Court of Appeals — Ninth Circuit |
William S. Dato (argued), and William S. Lerach, Milberg, Weiss, Bershad, Hynes & Lerach Llp, San Diego, California, for the plaintiffs-appellees.
Boris Feldman (argued) and Douglas J. Clark, Wilson Sonsini Goodrich & Rosati, Palo Alto, California, for the defendants-appellants.
Appeal from the United States District Court for the Northern District of California Charles A. Legge, District Judge, Presiding D.C. No. CV-97-04739-CAL
Before: William C. Canby, Jr., Michael Daly Hawkins, and Ronald M. Gould, Circuit Judges.
This is a rare case. In the district court, defendants gained a dismissal with prejudice of all claims against them, which were based on federal law. Yet they complain that they were entitled to more: the right to proceed with their counterclaim seeking a declaration that their alleged conduct did not violate state law -an issue that was pending in state court. The district court dismissed the counterclaim without prejudice. Concluding that the district court's dismissal of the counterclaim meant to convey no opinion on its merits, we decline the invitation to allow a party achieving a complete victory in federal court to seek even more.
In this securities class action under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, Appellees denominated for purposes of this appeal by the name of the lead plaintiff ("Smith") filed a motion to dismiss voluntarily their federal claims under Federal Rule of Civil Procedure 41(a)(2). The district court granted the motion. Defendants -Appellants Lenches, Rosenzweig, Saltzman, Avida, and Electronics for Imagining (collectively "EFI") appeal contending that the district court abused its discretion by: (1) granting the dismissal under Rule 41(a)(2); (2) dismissing EFI's counterclaim; and (3) declining to award sanctions against Smith. We have jurisdiction pursuant to 28 U.S.C. §§ 1291. We reject EFI's contentions and affirm.
EFI markets and develops products and technologies that enable digital color printing over computer networks. EFI's stock price fell after the company warned on December 11, 1997, that its anticipated net revenue for the fourth quarter ending December 31, 1997, would not meet analysts' expectations.
Soon after this warning, on December 15, 1997, Smith filed an action in state court alleging that EFI had violated California Corporations Code Sections 25400 and 25500 by engaging in a scheme to manipulate the market price for EFI stock. The complaint alleges manipulation was accomplished by EFI disseminating false and misleading public statements about the company. 1
On December 31, 1997, Smith filed this class action in federal court, alleging similar claims based on the same facts, but asserting these claims as violations of federal law under §§ 10(b) and §§ 20(a).
In January 1999, the California Supreme Court resolved an important pending issue regarding California securities law. The California Supreme Court held that the California statutory remedy for acts of market manipulation occurring in California was intended to benefit all victims of securities fraud regardless of where they purchased the affected securities. Diamond Multimedia Sys., Inc. v. Superior Court, 19 Cal. 4th 1036, 1064, cert. denied, 527 U.S. 1003 (1999). In May 1999, the California Supreme Court held that the corporate defendant was a person "selling or offering for sale " a security when it maintained and administered employee stock option and stock purchase plans during the class period. StorMedia Inc. v. Superior Court, 20 Cal. 4th 449, 462 (1999).
On July 2, 1999, in this action, EFI filed an amended answer and asserted a counterclaim, acknowledging the parallel action the Steele case, in state court and seeking a declaration that "the facts as alleged in the complaint are not sufficient to plead violations of California Corporations Code Sections 25400 and 25500."
On July 20, 1999, Smith filed a notice of voluntary dismissal pursuant to Rule 41(a)(2).2 Smith's motion to dismiss its federal securities law claims was granted, with prejudice.3 At the same time, over EFI's objection, the court dismissed without prejudice EFI's counterclaim for declaratory relief on state law claims. After the order dismissing these claims, EFI also sought sanctions under 15 U.S.C. §§ 78u-4(c)(1); Federal Rule of Civil Procedure 11(b) ("Rule 11"); and Northern District of California Civil Local Rule 58-1 for "fees and costs for services performed solely as a result of the federal suit." The district court denied EFI's request for sanctions. EFI appeals the dismissal of claims and denial of sanctions.
After determinations of California state law favorable to plaintiffs, Smith requested voluntary dismissal of the federal claims in this case, electing then to pursue the pending parallel state action. The alleged wrongs in the state case are the same as the alleged wrongs here, but the claims in the state case are based entirely on state law.
EFI argued to the district court that it would suffer legal prejudice because Smith brought this action under§§ 10(b) and §§ 20 which are subject to the federal Private Securities Litigation Reform Act ("PSLRA"), which affords defendants certain procedural protections. EFI argued that it would lose the protections of the PSLRA if the court granted Smith's motion. The district court rejected this argument and granted Smith's motion to dismiss under Rule 41(a)(2) because it determined that EFI would not suffer legal prejudice.
We review whether the district court abused its discretion by granting Smith's request for voluntary dismissal under Rule 41(a)(2). Westlands Water Dist. v. United States, 100 F.3d 94, 96 (9th Cir. 1996). A district court should grant a motion for voluntary dismissal under Rule 41(a)(2) 4 unless a defendant can show that it will suffer some plain legal prejudice as a result. Waller v. Fin. Corp. of Am. , 828 F.2d 579, 583 (9th Cir. 1987); see also Hamilton v. Firestone Tire & Rubber Co., 679 F.2d 143, 145-46 (9th Cir. 1982).
The issue we consider is whether the district court abused its discretion in concluding that EFI suffered no"plain legal prejudice" from the dismissal.
We have previously held that "legal prejudice" means "prejudice to some legal interest, some legal claim, some legal argument." Westlands, 100 F.3d at 97. In so holding, we also explained that "[u]ncertainty because a dispute remains unresolved" or because "the threat of future litigation . . . causes uncertainty" does not result in plain legal prejudice. Id. at 96-97. Also, plain legal prejudice does not result merely because the defendant will be inconvenienced by having to defend in another forum or where a plaintiff would gain a tactical advantage by that dismissal. Hamilton, 679 F.2d at 145.
Here, the district court reasoned that while a change from federal to state court might create a tactical disadvantage to EFI, that was not legal prejudice. The district court noted that the prospect of litigating the first lawsuit in state court "does not amount to plain legal prejudice" and stressed that EFI could not argue high litigation costs because discovery had not begun, it had not commenced trial preparations, and no motions challenging the merits of this case had come before the court.
We find no fault with the district court's reasoning. While EFI will be obliged to defend the state court action, this does not add an extra burden to EFI because it was already engaged in defending the state court case. In any event, the need to defend against state law claims in state court is not "plain legal prejudice" arising from voluntary dismissal of the federal claims in the district court.
Smith was entitled to abandon the federal class action and federal claims after deciding that litigation on state law claims in state court was preferable for the interests of the class.5 EFI's asserted loss of certain procedural protections under the PSLRA on federal claims that were dismissed with prejudice is not sufficient to constitute plain legal prejudice to EFI in defense of state law claims. The PSLRA affects the procedural aspects, but not the substantive elements of a securities fraud action. In re Silicon Graphics Inc., 183 F.3d 970, 977 (9th Cir. 1999). The dismissal of the federal claims meant Smith lost federal procedural protections relating to those claims. Because those claims were dismissed and are not continuing, the loss of procedural protections relating to them is not legal prejudice.
The district court did not abuse its discretion in dismissing Smith's federal law causes of action with prejudice on Smith's motion for voluntary dismissal under Rule 41(a)(2). A dismissal under Rule 41(a)(2) normally is without prejudice, as explicitly stated in that rule. That the district court here dismissed, with prejudice, the federal claims so they cannot be reasserted in another federal suit only strengthens our conclusion that the dismissal caused no legal prejudice and was not an abuse of discretion.6
EFI's counterclaim in this federal court action was one for declaratory relief on the state law claims. It sought a determination that EFI had no liability under state law. To support its position that the district court should not have dismissed the counterclaim, EFI makes several arguments. EFI asserts that for the federal court to determine whether EFI violated state security laws...
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