Theis Research, Inc. v. Brown & Bain

Citation400 F.3d 659
Decision Date20 October 2004
Docket NumberNo. 02-16839.,02-16839.
PartiesTHEIS RESEARCH, INC., an Illinois corporation, Plaintiff-Appellant, v. BROWN & BAIN, a California and Arizona law firm, and such present and former Brown & Bain partners, associates, and other personnel responsible for the management and trial of all litigation involving Peter F. Theis and Theis Research, Inc., Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Paul R. Johnson, Oakland, CA, for the plaintiff-appellant.

Paul Renne, San Francisco, CA, for the defendant-appellee.

Appeal from the United States District Court for the Northern District of California; Ronald M. Whyte, District Judge, Presiding. D.C. No. CV-99-20645-RMW.

Before THOMPSON and TROTT, Circuit Judges, and WEINER,* Senior District Judge.

ORDER

The opinion in Theis Research, Inc. v. Brown & Bain, published at 386 F.3d 1180 (9th Cir.2004), is amended as follows:

1. At page 1184, the first sentence of the last beginning paragraph on that page is deleted. The deleted sentence reads:

Our conclusion that we measure the amount in controversy by the amount at stake in the underlying litigation is consistent not only with American Guaranty from this circuit, but with decisions from other circuits as well.

The deleted sentence is replaced by the following sentence:

Our decision to measure the amount in controversy in this case by the amount at stake in the underlying litigation is consistent not only with American Guaranty from this circuit, but with decisions from other circuits as well.

2. At page 1185, the first two sentences of the second paragraph under III MERITS are deleted. The deleted sentences read as follows:

Theis was required to submit to the arbitrator the issue whether B & B's alleged conflicts of interest rendered the Theis-B & B legal services agreement void ab initio. Three Valleys Mun. Water Dist. v.E.F. Hutton, 925 F.2d 1136, 1140 (9th Cir.1991) (federal court may consider a defense of fraud in the inducement of a contract only if the fraud relates specifically to the arbitration clause itself and not to the contract generally). The issue was actually submitted to the arbitrator, who rendered a decision adverse to Theis.

The two deleted sentences are replaced by the following two sentences:

Theis submitted to the arbitrator the issue whether B & B's alleged conflicts of interest rendered the Theis-B & B legal services agreement void ab initio. The arbitrator rendered a decision on this issue adverse to Theis.

With the foregoing amendments, the panel has voted unanimously to deny the petition for rehearing. Judge Trott has also voted to deny the petition for rehearing en banc, and Judges Thompson and Weiner recommend denial of that petition.

The full court was advised of the petition for rehearing en banc and no judge has requested a vote on the petition for en banc rehearing. Fed. R.App. P. 35.

The petition for rehearing and the petition for rehearing en banc are DENIED. No further petitions for panel or en banc rehearing will be entertained.

OPINION

DAVID R. THOMPSON, Senior Circuit Judge.

This appeal presents the primary question whether, in a case in which a party seeks to vacate an arbitration award, the amount in controversy for diversity jurisdiction under 28 U.S.C. § 1332(a) is measured by the amount of the award or by the amount in dispute in the underlying litigation between the parties. The arbitration award which Theis Research, Inc. ("Theis") moved to vacate was for zero dollars. Contemporaneously with that motion, Theis filed a complaint that sought damages from Brown & Bain ("B & B") in excess of $200 million. The claims Theis alleged in this complaint substantially mirrored the claims it had asserted in the arbitration proceeding, which claims the arbitrator had rejected.

If we measure the amount in controversy for purposes of 28 U.S.C. § 1332(a) by the amount of the arbitration award, the district court lacked subject matter jurisdiction. If we measure the amount in controversy by the amount in dispute in the underlying litigation, the district court had subject matter jurisdiction.

We conclude that the amount at stake in the underlying litigation, not the amount of the arbitration award, is the amount in controversy for purposes of diversity jurisdiction, and thus the district court had jurisdiction under 28 U.S.C. § 1332. The court denied Theis's motion to vacate the zero dollar arbitration award, granted B & B's motion to confirm the award, and granted summary judgment in favor of B & B and against Theis on the claims Theis asserted in its complaint. Theis appeals. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

I FACTS AND PROCEEDINGS

B & B was Theis's attorney in patent litigation that turned out badly. Theis demanded arbitration of claims against B & B for legal malpractice, breach of fiduciary duty, fraud and breach of contract. The ensuing arbitration resulted in a zero dollar award to each party. In commenting on the litigation that spawned the arbitration, the arbitrator stated:

Viewed as a whole, the litigation that is the subject of this arbitration was an almost unmitigated disaster both for [Theis] and for B & B. The hopes of [Theis] and its investors were dashed; years of work by Mr. Theis and others went unrequited; B & B got no return on millions of dollars of invested time, and had to chalk up a major loss on its results chart.

Dissatisfied with the arbitrator's decision, Theis filed in the United States District Court a "COMPLAINT FOR BREACH OF PROFESSIONAL AND FIDUCIARY DUTY, LEGAL MALPRACTICE, AND FRAUD: APPLICATION AND NOTICE OF MOTION TO VACATE ARBITRATION AWARD." Theis also demanded a jury trial. The claims Theis set forth in its complaint sought compensatory damages of $200 million, plus "exemplary and punitive damages."

After court proceedings which are not relevant to the issues before us, B & B filed a motion to confirm the arbitrator's award. Theis responded with a renewed motion to vacate the award and a motion for partial summary judgment. The district court denied Theis's motion to vacate and its motion for partial summary judgment. The court granted B & B's motion to confirm the award. Thereafter, the district court granted summary judgment in favor of B & B, which judgment rejected all of the claims Theis asserted in its complaint. This appeal followed.

On December 16, 2003, we filed a memorandum disposition affirming the district court's summary judgment in favor of B & B. At the time our memorandum disposition was filed, there did not appear to be any reason to question the existence of the district court's subject matter jurisdiction; the parties were diverse, and neither party suggested, nor did it occur to us, that the amount in controversy might not meet the $75,000 monetary threshold requirement of 28 U.S.C. § 1332(a).

The question of subject matter jurisdiction was called to our attention by Luong v. Circuit City Stores, Inc., 356 F.3d 1188 (9th Cir.2004) (Luong I), an opinion now withdrawn, which was filed after we had filed our memorandum disposition. In the Luong I opinion, a panel of this court, with one member of the panel dissenting, held that the amount in controversy on a petition to vacate an arbitration award should be measured by the amount of the award rather than the amount of the claim in the underlying dispute. Id. at 1194. Applying this measure, Luong I determined that because no monetary damages had been awarded by the arbitrator, the amount in controversy requirement for diversity jurisdiction had not been met. Id. In view of what appeared to be similarities between Luong I and this case, we recalled our mandate and awaited finality of the Luong I decision.

The Luong I panel subsequently withdrew its opinion and replaced it with a new opinion, in which the panel unanimously held that the district court had subject matter jurisdiction predicated upon the existence of a federal question under 28 U.S.C. § 1331. Luong v. Circuit City Stores, Inc., 368 F.3d 1109, 1112 (9th Cir.2004) (Luong II). In the Luong II opinion, the panel did not address the question whether the amount in controversy in a proceeding to vacate an arbitration award should be determined by the amount of the award or by the amount at issue in the underlying dispute. This case presents that question. To resolve it, we ordered supplemental briefing limited to the issue whether the district court had subject matter jurisdiction. We now conclude that the district court had diversity jurisdiction pursuant to 28 U.S.C. § 1332. Our previously filed memorandum disposition is withdrawn, and we file this opinion affirming the district court's summary judgment in favor of B & B.

II JURISDICTION

In American Guaranty Co. v. Caldwell, 72 F.2d 209 (9th Cir.1934), we considered what was the appropriate measure of the amount in controversy for purposes of diversity jurisdiction under 28 U.S.C. § 1332(a) in the context of proceedings in the district court initially to confirm, and then after re-arbitration, to vacate an arbitration award. In that case, the district court had acquired subject matter jurisdiction when American Guaranty removed to federal court the petitioner's application to confirm a $32,500 award. At that time the monetary threshold for diversity jurisdiction under § 1332(a) was $3,000. The district court vacated the $32,500 award because the arbitrator was biased, directed the parties to arbitrate their dispute anew, and retained jurisdiction of the case pending that arbitration. In the renewed arbitration proceedings, the plaintiff was shut out with a zero dollar arbitration award which it then sought to vacate by a motion filed in the pending district court case.

Eventually, the district court in American Guaranty vacated the zero dollar arbitration award, and American Guaranty appealed. On appeal, American...

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