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Rycoline Products, Inc. v. C & W Unlimited

March 25, 1997




On Appeal from the United States District Court for the District of New Jersey (D.C. No. 96-cv-02567)

BEFORE: COWEN, McKEE and JONES *fn1 Circuit Judges

COWEN, Circuit Judge.

Argued February 14, 1997

Filed March 25, 1997

OPINION

This is an appeal from the November 20, 1996, order of the district court, granting defendants' motion to dismiss the complaint on the grounds that the action is barred by application of New Jersey's Entire Controversy Doctrine. We must decide whether the Entire Controversy Doctrine precludes the initiation of a second action before the first action has been concluded. We also determine the proper procedural mechanism for bringing a motion contending that an action is barred by the Doctrine. We will reverse the order of the district court and remand for further proceedings because we conclude that the Doctrine does not preclude the initiation of a second action while a prior action is still pending.

I.

Plaintiffs Rycoline Products, Inc. and Sun Graphic, Inc. (collectively "Rycoline") are manufacturers and marketers of specialty chemical products used in the newspaper and commercial printing industry. In 1979, defendants Michael Walsh and Joseph Cavallo left Rycoline to form defendant C&W Unlimited, a competitor of Rycoline's that also manufactures certain chemicals used in the printing industry. Cavallo subsequently sold his interest in C&W, and that company is currently co-owned by Walsh and defendant Eric Berliner.

In the Spring of 1995, C&W hired defendants Stephen Pauloski, Carl Kaiser, and Bernard Bush, all former employees of Rycoline. Shortly thereafter, Rycoline filed an action in the New Jersey Superior Court, Law Division, against all defendants herein except Cavallo and Berliner, asserting state common-law and statutory claims, including a claim for equitable relief pursuant to the New Jersey Consumer Fraud Act ("CFA"), N.J.S.A. 56:8-1 et seq. (1989). Rycoline alleged essentially that defendants had breached contractual and fiduciary duties they owed to Rycoline, and that they had committed various business torts, including misappropriation of trade secrets and employee piracy.

Several months later, Rycoline moved in state court to amend its complaint to add Berliner as a defendant and to add claims pursuant to the New Jersey and the federal Racketeer Influenced and Corrupt Organizations Acts ("RICO"), N.J.S.A. 2C:41-1 et seq. (1996) and 18 U.S.C. Section(s) 1961 et seq. (1984), and the Lanham Act, 15 U.S.C. Section(s) 1125 (1982), and to obtain additional relief under the CFA. Rycoline's motion was denied without prejudice as to its proposed RICO claims and was denied with prejudice as to its proposed CFA claim. However, Rycoline was permitted to amend its complaint to add the Lanham Act claim and to add Berliner as a defendant, and it did so.

In May of 1996, in the course of bringing a second application for temporary restraints, *fn2 Rycoline alleged for the first time that Walsh had misappropriated trade secrets from Rycoline when he left that company in 1979. In denying the application for temporary restraints, the state court noted that the complaint encompassed alleged conduct by the defendants only from 1995. The parties have undertaken extensive discovery in the state action, which is currently scheduled to begin trial on October 6, 1997.

After the second application for temporary restraints was denied in state court, Rycoline filed this action in district court, asserting essentially the same claims against defendants as are asserted in the state court action. The federal complaint additionally includes the claims pursuant to the New Jersey and federal RICO statutes and the CFA that had been the subject of Rycoline's motion to amend the complaint in state court. The federal complaint also expands the scope of the claims brought in state court by alleging conduct by Walsh, Cavallo, and C&W dating back to 1979. Additionally, as part of its RICO claims, Rycoline alleged that Walsh and C&W engaged in perjury and tampering with evidence in relation to hearings that took place in the state court action. Except for Cavallo, who is a defendant in this action but not in the state litigation, the parties are identical.

Defendants in the federal action subsequently moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. They contended that application of New Jersey's Entire Controversy Doctrine bars this federal action because the claims asserted either have been brought or could have been brought in the first-filed state court action. In the alternative, defendants moved to dismiss the complaint, or to stay the proceedings, on the ground that the district court should abstain pursuant to the doctrine first enunciated in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817-20, 96 S.Ct. 1236, 1246-48 (1976). In the course of responding to the motion, Rycoline pointed out to the district court that Rycoline disagreed with several of defendants' factual assertions. It explained, however, that it would not specifically enumerate the parties' points of disagreement, given that the motion was brought pursuant to Fed. R. Civ. P. 12(b)(6) and that matters outside the pleadings are beyond the scope of such a motion.

The district court granted defendants' motion, but did so pursuant to Fed. R. Civ. P. 12(b)(1) on the ground that the action was barred by the Entire Controversy Doctrine and that this bar divested the court of subject matter jurisdiction. See Rycoline Prods., Inc. v. C & W Unlimited, No. 96-2567, slip op. at 8 n.4, 11-13 (D.N.J. Nov. 20, 1996). In the course of its opinion, the court referred to several factual matters outside the pleadings, matters that Rycoline disputes, such as that Cavallo is legally incompetent, see id. at 2 n.1, and that Rycoline knew or should have known at the outset of the state litigation that defendants' alleged misconduct dated back to at least 1979. See id. at 9-11. The court did not address defendant's alternative ground for dismissal or for a stay. This appeal by Rycoline followed.

II.

As an initial matter, although it does not affect the ultimate disposition of this appeal, we hold that the district court erred by treating defendants' motion as a motion to dismiss for lack of subject matter jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1), and by considering matters outside the pleadings pursuant to such a motion. To ...


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