Kaplan v. Reed Smith LLP
Kaplan v. Reed Smith LLP
Opinion of the Court
*156Appellant-Cross-Appellee Reed Smith LLP ("Reed Smith") appeals an order from the district court (Naomi R. Buchwald, J. ) enjoining its action for tortious interference and unjust enrichment in New York state court against Wohl & Fruchter LLP ("Wohl & Fruchter"), which dispute arose from the two firms' concurrent representation of the plaintiff class in the now-settled litigation Kaplan v. S.A.C. Capital Advisors, L.P. , No. 12-Civ.-9350 (S.D.N.Y.). The district court concluded, inter alia, that its decision during settlement proceedings that the fees that Wohl & Fruchter received were "fair and reasonable" decided an element of Reed Smith's tortious interference and unjust enrichment claims by resolving that Wohl & Fruchter had not "pocketed, at Reed Smith's expense, more fees than the amount to which it was entitled." Kaplan v. S.A.C. Capital Advisors, L.P. , No. 12-Civ.-9350,
BACKGROUND
Wohl & Fruchter served as co-class counsel in Kaplan v. S.A.C. Capital Advisors, L.P. , No. 12-cv-9350, a securities class action filed in December 2012 in the Southern District of New York. By June 2016, the class action was headed for trial, and Wohl & Fruchter sought and engaged trial counsel to assist in its representation of the class. Wohl & Fruchter recommended and the class's lead plaintiffs ("Lead Plaintiffs") originally engaged Quinn Emanuel Urquhart & Sullivan LLP ("Quinn Emanuel") as trial counsel. In September, however, less than four months before trial was scheduled to begin, Quinn Emanuel withdrew due to an alleged conflict of interest. In Quinn Emanuel's stead, Wohl & Fruchter recommended and the Lead Plaintiffs engaged Reed Smith on September 19, 2016. Wohl & Fruchter notified defense counsel of Reed Smith's engagement that day, and at a hearing on September 21, defense counsel alerted the court that Reed Smith might be conflicted. The next day, the class action defendants contacted class counsel (specifically, Wohl & Fruchter) about restarting settlement negotiations. On September 23, after obtaining Lead Plaintiffs' authorization to terminate Reed Smith's engagement, class counsel notified Reed Smith that the firm was terminated. Wohl & Fruchter did not involve Reed Smith in settlement negotiations.
The parties to the securities class action reached a settlement in late November, and the district court preliminarily approved the settlement on December 16, 2016. The district court's preliminary approval order called for any counsel that believed it was entitled to fees or expenses from the litigation to make an application to the court. Despite having notice of this order, Reed Smith did not make such an application.
*157The district court formally approved the settlement in May of 2017 and approved a fee and expense award to Wohl & Fruchter and an expense award to Quinn Emanuel (the "Fee Order"). The settlement approval order also instructed that "[e]xcept as approved hereby or by other Order of this Court, no person shall be entitled to attorneys' fees for the reimbursement of litigation expenses in connection with the representation of the Elan Class Plaintiffs or the Classes in this Action." Final Judgment & Order of Dismissal with Prejudice at 5, ¶ 8, Kaplan v. S.A.C. Capital Advisors, L.P. , No. 1:12-cv-9350 (JGK) (KNF) (S.D.N.Y. May 12, 2017), ECF No. 391. The district court retained exclusive jurisdiction to decide "any further applications for attorneys' fees or requests for reimbursement of litigation expenses in connection with the representation of the Elan Class Plaintiffs or the Classes in this Action, and over all parties to the Action in connection therewith." Id. at 5, ¶ 10.
About one month after the district court approved the settlement, Reed Smith filed a complaint against Wohl & Fruchter in the New York Supreme Court that alleged claims arising from the firms' co-representation of the class. Specifically, the complaint alleged that Wohl & Fruchter had tortiously interfered with Reed Smith's engagement contract with the Lead Plaintiffs and that Wohl & Fruchter had been unjustly enriched by its unlawful behavior in doing so. The complaint sought damages of $ 6,750,000, the amount Reed Smith allegedly would have been entitled to under the engagement agreement had it remained in force. On July 28, 2017, Wohl & Fruchter filed a motion in the District Court for the Southern District of New York requesting that the district court permanently enjoin the state-court proceedings and dismiss Reed Smith's state claims on the merits. The district court granted the motion to the extent it sought an injunction barring Reed Smith from pursuing the state-court proceeding but declined to make any ruling on the merits of Reed Smith's tortious interference and unjust enrichment claims.
DISCUSSION
I. The District Court Had Ancillary Jurisdiction over the Motion to Stay
Reed Smith argues that the district court did not have jurisdiction to decide Wohl & Fruchter's motion to stay the state-court proceedings. We review the district court's decision on subject matter jurisdiction for clear error as to factual findings and de novo as to its legal conclusions. Lyndonville Sav. Bank & Tr. Co. v. Lussier ,
Where a district court has original jurisdiction over a civil action, "it retains ancillary jurisdiction after dismissal to adjudicate collateral matters such as attorney's fees." In re Austrian & German Bank Holocaust Litig. ,
*158The district court, construing its ancillary jurisdiction as supplemental jurisdiction, properly exercised jurisdiction over Wohl & Fruchter's motion to stay the state-court proceedings because the motion implicates the district court's ability to effectuate its decrees. In its motion to stay, Wohl & Fruchter claims that Reed Smith is attempting to circumvent the district court's Fee Order by bringing its claims in state court. In other words, Wohl & Fruchter's motion raises an issue regarding the continued integrity of the district court's decision on attorneys' fees. Thus, in deciding the motion to stay, the district court exercised its power to effectuate its decrees, and therefore the district court had ancillary jurisdiction over the motion to stay.
II. The District Court Properly Declined to Abstain from Exercising Jurisdiction
Reed Smith next argues that even if the district court had jurisdiction over Wohl & Fruchter's motion, it should have abstained from exercising its jurisdiction. We disagree. A district court should abstain from deciding cases over which it has jurisdiction "only in the exceptional circumstances where the order to the parties to repair to the state court would clearly serve an important countervailing interest." Colo. River Water Conservation Dist. v. United States ,
(1) whether the controversy involves a res over which one of the courts has assumed jurisdiction; (2) whether the federal forum is less inconvenient than the other for the parties; (3) whether staying or dismissing the federal action will avoid piecemeal litigation; (4) the order in which the actions were filed and whether proceedings have advanced more in one forum than in the other; (5) whether federal law provides the rule of decision; and (6) whether the state procedures are adequate to protect the plaintiff's federal rights.
Woodford v. Cmty. Action Agency of Greene Cty., Inc. ,
The parties do not contest factors one or two, which we agree are neutral and thus favor the district court retaining jurisdiction. See id . As to factor three, there is no risk of inconsistent judgments. Woodford ,
III. The Injunction was Proper Under the Anti-Injunction Act
The Anti-Injunction Act limits a court's usually expansive power to issue writs, providing: "A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments."
The relitigation exception "is designed to implement well-recognized concepts of claim and issue preclusion." Smith v. Bayer Corp. ,
In Wyly v. Weiss , we held that issue preclusion could support an injunction where members of a class action brought a state-court action alleging that class counsel had committed legal malpractice.
It is clear that like the claims brought by the dissatisfied appellants in Wyly , Reed Smith's state-court action for tortious interference and unjust enrichment is an impermissible end run around the district court's binding Fee Order. Despite Reed Smith's representations to the contrary, Reed Smith is seeking a fee award in state court based on a provision in Reed Smith's engagement letter that calls for *160the firm to be compensated, inter alia, "for a share of any recovery obtained by the Class." App'x at A-443, ¶ 33. Indeed, Reed Smith's state-court complaint charges that by not "making an application for attorneys' fees or reimbursement of expenses on behalf of Reed Smith," Wohl & Fruchter was acting "in direct contravention of the terms [Wohl & Fruchter] knew Reed Smith's former clients agreed to when Wohl negotiated the Engagement Agreement." App'x at A-447-48, ¶ 52. In Reed Smith's own words, "Reed Smith continues to be entitled to its bargained-for contingent fee, based on the amount of the Settlement, under the terms of the Engagement Agreement." App'x at A-448, ¶ 52; see also App'x at A-449, ¶ 57 ("Therefore, pursuant to the formula in the Engagement Agreement, Reed Smith is entitled to at least $ 6,750,000.00 in fees alone."). Reed Smith attempts to style the state-court action as something other than a request for fees, but the allegations in the state-court complaint belie this sleight of hand.
As in Wyly , the district court's fee award necessarily resolved elements of Reed Smith's state-court tortious interference and unjust enrichment claims. First, for Reed Smith's tortious interference claim to succeed under New York law, Reed Smith must show "(1) the existence of a valid contract between the plaintiff and a third party, (2) the defendant's knowledge of that contract, (3) the defendant's intentional procurement of a third-party's breach of contract without justification, and (4) damages." Tri-Star Lighting Corp. v. Goldstein ,
Second, under New York law, Reed Smith must show that "(1) defendant was enriched (2) at plaintiff's expense, and (3) that it is against equity and good conscience to permit defendant to retain what is sought to be recovered." Clark v. Daby ,
IV. Wohl & Fruchter's Cross-Appeal Is Procedurally Untenable
Wohl & Fruchter argues that the district court erred in declining to decide the merits of Reed Smith's state-court claims, arguing that we should apply claim and issue preclusion to deny Reed Smith's claims. We see no abuse of discretion in the district court's refusal to adjudicate *161the merits of a claim that has not been asserted before it.
CONCLUSION
For the foregoing reasons, we AFFIRM the district court's injunction of Reed Smith's state-court action.
Reference
- Full Case Name
- David E. KAPLAN, individually and on behalf of all others similarly situated, Michael S. Allen, individually and on behalf of all others similarly situated, Chi-Pin Hsu, individually and on behalf of all others similarly situated, Fred M. Ross, Gary W. Muensterman, individually and on behalf of all others similarly situated, Plaintiffs-Appellees-Cross-Appellants v. REED SMITH LLP, Appellant-Cross-Appellee.
- Cited By
- 31 cases
- Status
- Published