Magellan Health Inc. v. Duncan, No. 1 CA-SA 21-0122 (App. Div. I, December 14, 2021) https://www.azcourts.
Federal court dismissal based upon subject matter jurisdiction not a judgement on merits so claim preclusion does not apply in state court action.
Plaintiff brought a putative class action against defendants for alleged data breach of patients' personal and health information in federal court. The Federal District Court dismissed the action pursuant to Rule 12(b)(1) of the Rules of Civil Procedure. Specifically the court found that plaintiff failed to establish standing under Article III, Section 2 of the United States Constitution. Plaintiff had failed to allege an injury—the unauthorized opening of a credit account in plaintiff's name. In the order the court stated the complaint was to be “dismissed with prejudice for lack of subject matter jurisdiction.” Plaintiff then filed the same class action in Maricopa County Superior Court this time alleging the unauthorized opening of a credit account in her name. Defendants moved to dismiss based upon the argument that the federal court dismissal constituted claim and issue preclusion. The trial court denied the motion finding the federal district court had dismissed the action for lack of subject matter jurisdiction and therefore the dismissal was not based upon the merits. Defendants then brought this special action to the Arizona Court of Appeals, which granted review and denied relief.
Defendants argue that the federal court's use of the words “with prejudice” is shorthand for a final judgment on the merits under Rule 41(b) of the Rules of Civil Procedure. This rule essentially states that unless a dismissal order “states otherwise” it operates as an adjudication on the merits.
Here, the district court made plain that it dismissed the action
based on standing alone. The court specified that the dismissal was for
“lack standing” and “lack of subject matter jurisdiction,” and it expressly
disclaimed reliance on Rule 12(b)(6). The “with prejudice” label therefore
affected only Plaintiff's ability to refile an action with the same
jurisdictional defects in a federal district court. It did not transform the
explicitly jurisdictional decision into a decision on the merits sufficient to
preclude Plaintiff's state-court action. Further, because the district court
decided no issues other than its own jurisdiction, the dismissal order did
not trigger issue preclusion with respect to the state-court action.