Schmidt, Sethi & Akmajian Blog

Civil Procedure—Federal Court Dismissal as Claim Preclusion to State Court Action

Posted by Ted A. Schmidt | Dec 16, 2021 | 0 Comments

Magellan Health Inc. v. Duncan, No. 1 CA-SA 21-0122 (App. Div. I, December 14, 2021) https://www.azcourts.gov/Portals/0/OpinionFiles/Div1/2021/1%20CA-SA%2021-0122.pdf

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.

About the Author

Ted A. Schmidt

Ted's early career as a trial attorney began on the other side of the fence, in the offices of a major insurance defense firm. It was there that Ted acquired the experience, the skills and the special insight into defense strategy that have served him so well in the field of personal injury law. Notable among his successful verdicts was the landmark Sparks vs. Republic National Life Insurance Company case, a $4.5 million award to Ted's client. To this day, it is the defining case for insurance bad faith, and yet it is only one of several other multi-million dollar jury judgments won by Ted during his career. He is certified by the State Bar of Arizona as a specialist in "wrongful death and bodily injury litigation".

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