Indianapolis, Ind. — The Southern District of Indiana has dismissed a declaratory judgment suit filed by ZPS America, LLC of Marion County, Ind. (“ZPS”) holding that it was an impermissible attempt to secure its preferred forum in anticipation of litigation that Hammond Enterprises, Inc. of Pittsburg, Calif. (“Hammond”) had promised to initiate imminently.
ZPS manufactures the Mori-Say TMZ 642 CNC machine (“TMZ machine”), a high-precision lathe that can be configured to manufacture various precision parts. In early 2009, after discussing its requirements, Hammond purchased two TMZ machines from ZPS. Accounts vary regarding whether the TMZ machines ever performed as had been promised. Attempts were made by the parties and their attorneys to resolve the issues with the machines but settlement discussions broke down in June 2012.
On June 4, 2012, Hammond’s lawyer sent ZPS a letter stating that the machines had been misrepresented and that Hammond was only interested in “hearing back from you…that ZPS is prepared to make arrangements to accept the return of both machines. If we do not hear from you by Friday, June 15 , that you are prepared to accept their return, we have been authorized to file a lawsuit against ZPS and will proceed to do so.”
On June 14, 2012, one day before the deadline in Hammond’s letter, ZPS filed suit against Hammond in Marion Circuit Court, an Indiana state court. Its complaint was for damages and declaratory judgment. It asked that the court declare that Hammond had accepted the machines and was not entitled to revoke that acceptance; its damages claim arose from nonpayment by Hammond of amounts due for filter systems that had been purchased for the TMZ machines. Notice of that suit was served on June 26, 2012.
On July 10, 2012, Hammond filed a lawsuit against ZPS in the Northern District of California, seeking damages based on claims for negligent misrepresentation, revocation of acceptance, breach of contract, breach of express warranty, and breach of implied warranty. On July 12, 2012, Hammond served ZPS with a summons and complaint. On that same day, Hammond removed the action filed by ZPS in state court to the Southern District of Indiana, asserting diversity jurisdiction.
Hammond argued to the Indiana federal court that it should exercise its discretion to dismiss the complaint on the grounds that ZPS “raced to the courthouse” to deprive Hammond, the “natural plaintiff,” of the forum of its choosing.
The Indiana federal court held that ZPS’ declaratory judgment action was impermissible, as it had been filed in anticipation of litigation, beating Hammond to the courthouse by filing the day before the deadline to settle that had been set by Hammond. The court further held that the additional state-law claim for breach of contract that ZPS had asserted did not secure a place for it in the Indiana court.
The court cited three reasons for its decision: (1) the fact that a plaintiff filed a declaratory judgment action first does not give it a right to choose the forum; (2) the plaintiff’s additional claims for affirmative or coercive relief may be filed as counterclaims in the second-filed action; and (3) the plaintiff should not be rewarded for filing a declaratory judgment action as a pre-emptive strike. The court declined to exercise jurisdiction over the matter and dismissed the case without prejudice.
Declaratory judgment actions are frequently filed in intellectual-property matters, especially patent litigation. Such a suit allows the potential defendant not only to choose its own forum, to the extent that the forum is consistent with jurisdictional restrictions, but also to remove an ever-present cloud of potential litigation and potential damages for patent infringement that may be continuing to accrue.
The Declaratory Judgment Act provides that “any court of the United States, upon the filing of an 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.” A federal district court may, in its discretion, decline to hear a case brought under the Act, even if the court has subject matter jurisdiction.
In general, if two actions are pending in two different courts that concern the same general claims, the case filed first takes priority. However, the Seventh Circuit has never adhered to a rigid first-to-file rule. In addition, courts generally give priority to the coercive action (such as an action for damages or an injunction) over the declaratory judgment action, regardless of which case was filed first.
Courts also depart from the first-to-file rule if, as was true in this case, the declaratory judgment action is filed in anticipation of litigation by the other party. Here, rather than responding to Hammond regarding its letter, which contained a plain declaration of intent to file suit with a deadline for a response, ZPS filed suit. Only after securing a favorable forum did ZPS offer to negotiate a settlement. It was this conduct that the court held justified a dismissal of the declaratory judgment action as an improper anticipatory filing.