Theis Research, Inc. v. Brown & Bain

• Decision Date: 20 October 2004
• Docket Number: No. 02-16839.,02-16839.
• Citation: 386 F.3d 1180
• Parties: THEIS RESEARCH, INC., an Illinois corporation, Plaintiff-Appelant, 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.
• Court: U.S. Court of Appeals — Ninth Circuit

386 F.3d 1180

THEIS RESEARCH, INC., an Illinois corporation, Plaintiff-Appelant, 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.

No. 02-16839.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 5, 2003.

Filed October 20, 2004.

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

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

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

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 Guaranty challenged the district court's subject matter jurisdiction, contending that the zero dollar award that resulted from the re-arbitration was insufficient to satisfy the then $3,000 threshold for diversity jurisdiction under 28 U.S.C. § 1332(a). The American Guaranty court rejected that argument, and held that the district court had not lost the subject matter jurisdiction it acquired when the case was first removed to federal court on what was then the petitioner's application to confirm the $32,500 award. The court stated "it is the amount in controversy which determines jurisdiction, not the amount of the award." Id. at 211.

It is unclear whether in making this statement the American Guaranty court was referring to the zero dollar arbitration award the petitioner eventually sought to vacate, or the $32,500 arbitration award the petitioner initially sought to confirm. However, the court's statement makes sense only if the court was referring to the zero dollar award—the one which had the potential of defeating subject matter jurisdiction. That the American Guaranty court measured the "amount in controversy" by the amount involved in the underlying dispute is made clear by the court's statement:

In addition to the record showing this original award of $32,500, it further discloses that evidence had been offered showing petitioner had suffered damages in excess of $100,000, and in one of its answers American Guaranty claims an indebtedness by way of offset of $5,525. It is the amount in controversy which determines jurisdiction, not the amount of the award.

Id. at 211 (emphasis added).

There is an important difference, however, between the present case and American Guaranty. In American Guaranty, the district court initially acquired jurisdiction by the filing of a motion to confirm the arbitration award of $32,500.

In the present case, the arbitration award was for zero dollars. Theis initially filed in the district court a motion to vacate that award, coupling that motion with a complaint that alleged substantially the same claims Theis had asserted in the arbitration. Theis's prayer for relief in its district court complaint was for $200 million plus "exemplary and punitive damages," which on the face of the complaint satisfied the $75,000 monetary threshold for diversity jurisdiction.

Theis argues, however, that we should ignore the claims it asserted in its district court complaint because those claims were "non-substantial" as...