Tag: Computer Fraud and Abuse Act

Supplemental Jurisdiction Quick-Hits : A Case Note

Southern OceanOcean Tomo v. Barney, (http://docs.justia.com/cases/federal/district-courts/illinois/ilndce/1:2012cv08450/275661/76) states the governing supplemental jurisdiction rules in a business battle over the rights to a patent valuation system.

The defendant, the developer of the system, was a member of the plaintiff financial services firm (an LLC) for several years when the relationship broke down over various issues.  Citing the company’s intolerable conditions, the defendant left with a company laptop.

The plaintiff filed a state court suit under various claims including the Computer Fraud and Abuse Act (CFAA) and the defendant removed the case to Federal court.  There, the defendant counterclaimed for breach of contract and other state law business tort claims in addition to his own CFAA claim against the plaintiff.

Plaintiff moved to dismiss the state law claims on the basis that the court lacked supplemental jurisdiction over them.

Ruling: Motion denied.  Defendant can proceed on his state law counterclaims.

Reasons:

Supplemental jurisdiction principles are codified at 28 U.S.C. 1367.  This section provides that in any case where a Federal court has original jurisdiction, the Federal court has “supplemental jurisdiction” over related state law claims.

Supplemental jurisdiction is proper where the state law claims are so related to the Federal ones that they form part of the same cause of action and stem from a common nucleus of operative fact.  Even a “loose factual connection” between the state and Federal claims will generally provide a predicate for supplemental jurisdiction.

A district court can decline supplemental jurisdiction where: (1) the claim raises a novel or complex issue of State law, (2) the state law claims substantially predominates over the Federal claims; (3) the Federal court has dismissed all claims over which it has original jurisdiction, or (4) exceptional circumstances or other compelling reasons exist for declining jurisdiction.  

The defendant’s Counterclaims alleged that plaintiff violated the LLC operating agreement by withholding profits from the plaintiff and a separate shareholder agreement.  The defendant also alleged a tortious interference with contract claim against the plaintiff.
Defendant’s lone Federal claim was the CFAA one – premised on the allegation that plaintiff was trying to reverse engineer defendant’s patent system, repackage it and sell it to third parties.
Denying the plaintiff’s motion to dismiss, the Northern District found that the defendants state law counterclaims were factually connected to the plaintiff’s Federal CFAA claim. The Court held that, at bottom, Plaintiff’s counterclaims were premised on allegations that Plaintiff engaged in a lengthy fraudulent scheme to steal defendant’s patent ratings system.
And while allowing that defendant’s state law counterclaims (breach of contract, tortious interference, misappropriation) involved a broader set of facts (than plaintiff’s CFAA count), they still derived from the same operative facts that were the foundation of the plaintiff’s claims.

The Court noted that defendant’s counterclaim allegations of plaintiff’s lengthy pattern of duplicitous conduct related directly to defendant’s claim that the plaintiff was trying to pilfer defendant’s patent ratings system.  This pattern of conduct was relevant both to plaintiff’s Federal computer fraud claims and to defendant’s state law counterclaim counts.

Since plaintiff’s motive (was it really trying to reverse engineer and steal the ratings system?) was key to the parties’ state and Federal claims , the Court found they were factually linked and supplemental jurisdiction was proper.

Afterword:

Ocean Tomo provides a succinct summary of supplemental jurisdiction rules.  As long as the state law claims are temporally related and at least loosely factually connected to the Federal claims, a Federal court can – but doesn’t have to – retain jurisdiction over state law claims that normally couldn’t be filed in Federal courts.

 

 

 

 

 

 

 

 

How to Enforce Settlement Agreements In Federal Court

I once represented a plaintiff in a Federal question case (based on the Computer Fraud and Abuse Act) that settled with the defendant making installment payments over time.  In the settlement agreement, I took great pains to emphasize that if the defendant missed a payment, I could immediately move to reinstate the case and accelerate the settlement amount plus fees and costs.  For good measure, I provided that the court retains jurisdiction to enforce the settlement terms if the defendant defaulted.  I thought I was doubly protected.  Defendant’s counsel signed off on all the terms.

We then entered a stipulation to dismiss.  The court dismissed the suit with prejudice.  I remember feeling vaguely uneasy about the “with prejudice” language but quickly reminded myself that (a) dismissals with prejudice AND with the court retaining jurisdiction (seemingly an oxymoron) are entered all the time in State court and (b) the defendant’s counsel requested the with prejudice language as an inducement for getting his client to agree.  After a ton of time and money on this case, both sides were anxious to put this one to bed.

Fast forward about 4 months into an 18-month payment arrangement and the defendant defaulted and my demand letter for compliance went unanswered.  I quickly filed a motion to vacate the dismissal, to reinstate and enter judgment for the full settlement amount – just as the settlement agreement allowed me to.  Imagine my shock when the court denied my motion?!  Apparently, the “with prejudice” language has teeth.

I then filed a motion to vacate the dismissal under FRCP 60 – the rule that governs motions to vacate judgments on the basis of mistake, fraud, inadvertence or other reasons “that justify relief.”  The Court denied this motion too. My only remedy was to now file a breach of contract action in State Court for breach of the settlement agreement (the contract).  While we were able to recover some additional payments from the defendant after we filed in state court (before the defendant filed for bankruptcy protection), I had to consider the question of what I could have done differently?

Key Settlement Enforceability Rules

Federal courts don’t like to babysit settlement agreements (who knew?!).  Seventh Circuit caselaw provides that when a case is dismissed pursuant to a stipulation to dismiss, the court does not automatically acquire jurisdiction over disputes arising out of an agreement that produces the stipulation.  Kokkonen v. Guardian Life Ins. Co. v. Am., 511 U.S. 375, 378 (1994); McCall-Bey v. Franzen, 777 F.2d 1178, 1188 (7th Cir. 1985)(rejecting suggestion that federal judges have inherent power to enforce settlement agreements arising from lawsuits that were previously before them). 

An important rule in the 7th Circuit is that “[a] settlement agreement, unless it is embodied in a consent decree or some other judicial order or unless jurisdiction to enforce the agreement is retained (meaning that the suit has not been dismissed with prejudice), is enforced just like any other contract.”  Lynch, Inc. v. SamataMason, Inc., 279 F.3d 487, 489 (7th Cir. 2002). 

The 7th Circuit holds that a district judge can’t dismiss a suit with prejudice and at the same time retain jurisdiction to enforce the settlement agreement: it’s a contradiction in terms.  A signed stipulation of dismissal does not vest the Court with jurisdiction over an ancillary contract dispute just because the parties included retention of jurisdiction language in the stipulation.   Parties cannot confer federal jurisdiction by agreement.  Lynch, 279 F.3d at 489. 

What About FRCP 60?

I was also surprised that my Rule 60 motion to vacate motion was denied.  But, it turns out the standard for Rule 60 relief is high.  Like life-and-death high.  In Nelson v. Napolitano, 657 F.3d 586, 589 (7th Cir. 2011), the Court held that there may be “some instances” where a Federal court will vacate a voluntary dismissal on plaintiff’s motion, but it would have to be on the order of “a defendant faking his own death with a fraudulent death certificate in order to induce a plaintiff to voluntarily dismiss.”

The take-away:

In dismissing an action in Federal Court (at least in the 7th Circuit), it’s a bad idea to put “with prejudice” language in a dismissal order or stipulation if you want to be able to reopen the case at a later date (such as where a defendant misses an installment payment). 

Even better, try to put the settlement payment terms in the dismissal order.  This will increase your chances of getting the court to enforce a settlement if the defendant defaults. 

If you can’t reinstate a case because of prior “with prejudice” language, then file a new suit for breach of contract (for breach of settlement agreement) in state court.