Bay State HMO v. Tingley Systems

• Court: Court of Appeals for the First Circuit
• Decided: June 30, 1999
• Docket: 96-1574
• Status: Published

Opinion

USCA1 Opinion

                  United States Court of Appeals

                      For the First Circuit

                       ____________________



No. 96-1574



             BAY STATE HMO MANAGEMENT, INC., ET AL.,

                      Plaintiffs, Appellees,



                                v.



                      TINGLEY SYSTEMS, INC.,

                      Defendant, Appellant.



                       ____________________



No. 98-2334



                      TINGLEY SYSTEMS, INC.,

                      Plaintiff, Appellant,



                                v.



                      CSC CONSULTING, INC.,

                    f/k/a CSC PARTNERS, INC.,

                       Defendant, Appellee.



                       ____________________



          APPEALS FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS



         [Hon. Reginald C. Lindsay, U.S. District Judge]



                       ____________________



                              Before



                     Torruella, Chief Judge,



                    Cyr, Senior Circuit Judge,



                and Pollak, Senior District Judge.



                      _____________________    G. Donovan Conwell, Jr., with whom Guillermo A. Pernas, Jr.,

Fowler, White, Gillen, Boggs, Villareal & Banker, P.A., Edward P.

Liebensperger, Christa von der Luft and Nutter, , McClennen & Fish,

LLP were on brief, for appellant.

    Michael Arthur Walsh, with whom Eric J. Marandett, Laura M.

Scott and Choate, Hall & Stewart were on brief, for appellee CSC

Consulting, Inc.

    Marc K. Temin, with whom Foley, Hoag & Eliot LLP was on brief,

for appellee Bay State Health Management, Inc., et al.



                       ____________________



                         June 30, 1999

                       ____________________         TORRUELLA, Chief Judge.  Appellant Tingley Systems, Inc.

("Tingley") appeals from the district court's orders in two

consolidated cases.  Tingley brought suit against appellee Bay

State Health Management, Inc. ("Bay State") and its parent,

appellee Blue Cross and Blue Shield of Massachusetts ("BCBSMA"),

for breach of contract, fraud, misappropriation of trade secrets,

and copyright infringement.  After learning of facts that allegedly

implicate appellee CSC Consulting, Inc. ("CSC") as a co-perpetrator

in this conduct, Tingley filed a new complaint against CSC and

consolidated that case with the case against Bay State into "one

proceeding."  Tingley and Bay State settled the claims raised in

the first complaint and stipulated to dismiss the first action with

prejudice.  Upon motion by CSC, the district court then entered

summary judgment against Tingley in the second action, finding it

barred by the res judicata effect of the dismissal of the first

action.  Tingley sought to have the judgment in the first action

modified to preserve the claims of the second action, but the

district court denied Tingley's motion, despite what the district

court termed a "harsh result."  Tingley appeals, and we reverse. 

                            BACKGROUND

         Bay State is a Boston, Massachusetts-based health care

maintenance organization ("HMO").  Tingley is a Florida corporation

which creates, supports, and distributes computer software for the

HMO industry.  In a licensing agreement dated March 14, 1989,

Tingley licensed computer software to Bay State for Bay State's own

internal use.  The licensing agreement contained strict

confidentiality requirements and prohibited Bay State from

providing any third party with access to the Tingley software.  

         In 1990, Bay State created three software packages that

allegedly incorporated the file structure and source code of the

Tingley software.  The resulting dispute over ownership of these

software packages led Bay State to sue Tingley on June 14, 1993 in

the United States District Court for the District of Massachusetts. 

In response, Tingley immediately sued Bay State in the United

States District Court for the Middle District of Florida.  In the

Florida action, Tingley alleged that Bay State breached the

licensing agreement and misappropriated trade secrets by disclosing

Tingley's proprietary material to consultants during the creation

of the software packages.  The Florida action was transferred to

the District of Massachusetts, and on December 17, 1993, the

district court consolidated the two cases into Civil Case

No. 97-1574 ("the Bay State cases").  Tingley later amended the

complaint to add BCBSMA as a defendant and to allege causes of

action for copyright infringement and fraud.

         Tingley claims that, during discovery, it learned that 

CSC performed consulting services on one of Bay State's software

package projects.  In mid-December of 1994, after several delays

and subpoenas, Tingley obtained several weekly status reports that

were prepared by CSC consultants in connection with the Bay State

software project.  According to Tingley, those status reports

revealed that one of the CSC consultants, Vicki Gifford, obtained

the Tingley trade secret file layouts, studied them, and then

loaded them into the software that CSC was creating for Bay State. 

Upon receiving this information, Tingley immediately moved to

extend the discovery cutoff in the Bay State cases, but the motion

was denied.

         On February 9, 1995, Tingley filed a new action against

CSC ("the CSC case"), claiming: (1) misappropriation of trade

secrets; (2) copyright infringement; (3) unfair competition;

(4) tortious interference with the licensing agreement and

Tingley's business relationship with Bay State; and (5) conspiracy

with Bay State to misappropriate Tingley's trade secrets and copy

Tingley's software.  On July 11, 1995, upon motion by Tingley,

Magistrate Judge Marianne B. Bowler consolidated the CSC case and

the Bay State cases into "one proceeding."  On July 28, 1995,

Tingley filed a second amended complaint in the Bay State cases,

including nine additional allegations of fraud against Bay State. 

The amended complaint captioned the Bay State and CSC cases, but

only amended the claims against Bay State.

         In September of 1995, Tingley and Bay State reached a

settlement in the Bay State cases.  A stipulation and order of

dismissal was signed by the parties and entered by the court on

September 11, 1995.  The order captioned both the Bay State and CSC

cases, but dismissed only the Bay State cases.

         On October 17, 1995, CSC filed a motion for summary

judgment in the CSC case on the basis of res judicata, claiming

that the September 11, 1995 order of dismissal of the Bay State

cases barred all of Tingley's claims against CSC.  Tingley opposed

this motion and alternatively moved for limited relief from

judgment in the Bay State cases.  The district court granted CSC's

motion for summary judgment in the CSC case and denied Tingley's

motion for limited relief from judgment in the Bay State cases. 

Tingley now appeals both rulings.

                            DISCUSSION

         We turn first to Tingley's appeal of the grant of summary

judgment in favor of CSC.  We review a grant of summary judgment on

res judicata grounds de novo.  See Porn v. National Grange Mut.

Ins. Co., 93 F.3d 31, 33 (1st Cir. 1996).  The applicability of the

doctrine of res judicata is a question of law subject to plenary

review.  See id. 

         Under federal law, a final judgment on the merits of an

action precludes the parties from relitigating claims that were

raised or could have been raised in that action.  See id. at 34

(citing Allen v. McCurry, 449 U.S. 90, 94 (1980)).   For a claim to

be precluded, there must be: (1) a final judgment on the merits in

an earlier action; (2) sufficient identity between the causes of

action asserted in the earlier and later suits; and (3) sufficient

identity between the parties in the two suits.  See id. (citing

Apparel Art Int'l, Inc. v. Amertex Enters. Ltd., 48 F.3d 576, 583

(1st Cir. 1995)).  CSC and Tingley dispute the first and third

elements, as well as Tingley's claim that CSC consented to allow

Tingley to split its claims, free of res judicata effect.  Because

we find that the first element is not satisfied, we do not address

Tingley's other contentions.

         The district court held that the dismissal of the Bay

State cases with prejudice constitutes a "final judgment on the

merits" for res judicata purposes.  The district court cited two

First Circuit cases in stating that: (1) cases consolidated for

purposes of convenience and judicial efficiency retain their

separate identities, and (2) final judgments rendered in each

individual action are final judgments.  See Tingley Sys., Inc. v.

CSC Consulting, Inc., 919 F. Supp. 48, 51 (D. Mass. 1996) (citing

Fed. Deposit Ins. Corp. v. Caledonia Inv. Corp., 862 F.2d 378, 381

(1st Cir. 1988), and In re Massachusetts Helicopter Airlines, Inc.,

469 F.2d 439, 441-42 (1st Cir. 1972)). 

         Tingley does not dispute the finality of the resolution

of the Bay State cases, but claims that there was no final judgment

on the merits in a separate action because the Bay State cases and

the CSC case should be treated as a single action for res judicata

purposes.  If the cases are treated as a single action, the

dismissal of the claims against Bay State would be treated as a

dismissal of all claims against CSC's "co-defendants" and therefore

would have no preclusive effect on the claims against CSC.

         At the outset, we note that there is no doubt that the

Bay State cases and the CSC case are technically separate actions. 

See Johnson v. Manhattan Ry. Co., 289 U.S. 479, 496-97 (1933)

(stating that consolidation is simply a judicial tool which "is

permitted as a matter of convenience and economy in administration,

but does not merge the suits into a single cause, or change the

rights of the parties, or make those who are parties in one suit

parties in another").  Three separate original complaints were

filed, and those three cases were consolidated before the district

court in Massachusetts.  However, the essence of consolidation is

that, even though the cases are technically separate actions, they

are treated as a single action for particular purposes.  Despite

CSC's representations to the contrary, the Johnson Court did not

state that consolidated actions must always be treated as separate

actions for all purposes.  The question here is whether we should

overlook this technical separateness and treat the consolidated

cases as a single action for purposes of determining the res

judicata effect of the settlement of the Bay State cases.

         We agree with Tingley that we are not bound by the

statements in Massachusetts Helicopter and Caledonia Investment in

making this decision.  Those cases dealt with the question of

whether an order terminating one of two or more consolidated cases

is appealable absent a certification pursuant to Fed. R. Civ. P.

Rule 54(b).  Rule 54(b) provides that, when an action presents more

than one claim for relief or when multiple parties are involved,

the district court may direct the entry of final judgment as to

less than all of the claims or parties -- and therefore allow a

separate appeal -- if it finds that there is no just reason for

delay.  See Fed. R. Civ. P. 54(b).  In Massachusetts Helicopter, we

held that consolidated cases retain their separateness for purposes

of appeal and therefore the district court need not issue such a

Rule 54(b) certification to allow an appeal from the termination of

one of the consolidated cases.  See Massachusetts Helicopter, 469

F.2d at 441-42.  We affirmed that principle in Caledonia

Investment.  See 862 F.2d at 381.

         The question presented in Massachusetts Helicopter bears

little on the question of whether the termination of one of the

consolidated cases should preclude further proceedings in the

remaining case or cases.  The idea that consolidated cases maintain

their separateness for purposes of determining their appealability

is not inconsistent with treating those consolidated cases as a

single action for res judicata purposes.  The fact that certain

claims are separate enough to be appealed separately does not mean

that the claims are separate enough to preclude all other similar

claims on res judicata grounds.  For example, if a district court

dismisses claims against one of several co-defendants in a

particular non-consolidated case, the court may certify that

dismissal as an immediately and separately appealable final

judgment.  See Fed. R. Civ. P. 54(b).  Yet there is no suggestion

that the court's certification of the appealability (and therefore

the separateness) of this portion of the case somehow forever

precludes further litigation of the rest of the case.  Therefore,

while Massachusetts Helicopter provides the rule of this circuit

regarding the separateness of consolidated cases for the one

purpose of appeal, it does not bar us from accepting Tingley's

invitation to treat the Bay State cases and the CSC case as a

single action for res judicata purposes.

         Tingley cites opinions of other courts that it claims

have addressed the separateness issue in the res judicata context.

While most miss the mark, one is at least marginally helpful to

Tingley.  In Chase Manhattan Bank, N.A. v. Celotex Corp., 56 F.3d

343, 347 (2d Cir. 1995), the Second Circuit faced a situation in

which two closely related actions were pending before the same

judge.  The plaintiff in one of the actions abandoned its claims

and stipulated to a dismissal of its claims with prejudice.  The

district court then granted summary judgment in the other action on

res judicata grounds, finding the plaintiffs to be in privity.  The

Second Circuit reversed, finding that the plaintiffs were not in

privity because the plaintiff in the abandoned case had different

incentives than the plaintiff who remained.  See id. at 346-47.  In

closing, the court commented that it was a "peculiar case in which

to assert claim preclusion for another reason."  Id. at 347.  The

court noted that the closely related cases were pending before the

same judge, although there was no formal order of consolidation. 

See id.  The court stated that, therefore, the defendant was not in

the position of having litigated in one forum and then being forced

to defend an identical action in another forum.  See id.  The court

then described the use of res judicata as "something of an ambush,"

because the actions proceeded together absent only a formal

consolidation order.  Id.  However, the court stopped short of

explicitly declaring that this constituted an independent ground

for reversing the district court's application of res judicata.

         CSC responds by citing Robinson v. Worthington, 544

F. Supp. 949, 952 (M.D. Ala. 1982), in which a district court

opined that, even if two actions were to be consolidated before the

same court, the separate identities of the two actions would

remain, and final judgment in one action might bar the second

action on res judicata grounds.  See id.  We note first that the

cases in Robinson had not actually been consolidated, so the

court's statement regarding the potential effects of consolidation

was merely dicta.  Nevertheless, the district court reached its

conclusion after citing authority for the principle that

consolidation does not merge two actions into a single case.  See

id.  However, this analysis ignores the fact that consolidated

actions are treated as a single action for some purposes, such as

discovery or trial.  The Robinson district court performed no

inquiry into res judicata principles; instead, it simply applied

the technical separateness of consolidated cases in the res

judicata context.  Thus, Robinson provides little assistance in

determining whether consolidated actions should be treated as a

single action for res judicata purposes.

         Notwithstanding the paucity of authority cited by the

parties on this question, we believe that the Bay State cases and

the CSC case should be treated as a single action for res judicata

purposes.  We can find no circuit opinion in which the first of two

consolidated cases to be resolved was found to have a res judicata

effect on the other.  However, we have found a very recent Second

Circuit case, not cited by the parties, in which a plaintiff with

two closely related actions pending before the same district judge

at the same time was spared the potentially punitive res judicata

effect of the entry of judgment in the first action.  In Devlin v.

Transportation Communications Int'l Union, No. 98-7237, 1999 WL

203526 (2d Cir. Apr. 13, 1999), the Second Circuit was faced with

a district court decision similar to the one at bar.  The

plaintiffs, retirees and former employees of the defendant labor

union, filed an action challenging a $100 charge under their

medical benefits plan.  In that action ("Devlin I"), the plaintiffs

alleged claims under the Employee Retirement Income Security Act,

29 U.S.C.  1001 et seq. ("ERISA"), as well as New York anti-

discrimination and contract law.  The claims for breach of contract

and age discrimination were quickly dismissed as preempted by

ERISA, but the ERISA claims remained.  In the order dismissing the

anti-discrimination claims, the court stated that "[i]f Plaintiffs

have a federal age discrimination claim, they should plead it." 

Rather than amend the complaint, the plaintiffs filed a second

action while the first was still pending.  The complaint in the new

action ("Devlin II") alleged a claim under the Age Discrimination

in Employment Act, 29 U.S.C.  621 et seq. ("ADEA"), based on acts

both related to and apart from the medical benefits plan.  Devlin

II was then transferred, as a "related case," to the same court in

which Devlin I was pending.  Nearly two years later, summary

judgment was entered in favor of defendants on all remaining claims

in Devlin I.  Shortly thereafter, the district court dismissed

plaintiffs' medical benefits claim in Devlin II, based on the res

judicata effect of the judgment in Devlin I.

         The Second Circuit vacated the district court's

application of res judicata.  See Devlin, 1999 WL 203526 at *9. 

The court noted that both cases were before the same district judge

at the same time and that the judge knew that the cases were

related.  See id. at *8.  The court also noted that the plaintiffs

did not wait until after the entry of judgment in Devlin I before

filing the related action.  See id.  The Second Circuit then framed

the question as "whether the appellants should be hoisted with

their own procedural petard for failing to plead the ADEA claim in

Devlin I as the district court instructed."  Id.  The court

expressed puzzlement as to why the plaintiffs did not plead their

ADEA claims in Devlin I as instructed, but stated that the puzzling

actions should not lead to the dismissal of the ADEA claims on res

judicata grounds, "given the fortuitous circumstance that the same

district judge had both Devlin I and Devlin II on his active docket

at the same time."  Id.  The court then remanded for a

determination of whether Devlin II should be consolidated with

Devlin I, which was reopened in a companion appeal.  See id. at *9. 

         It is possible to limit the holding of the Devlin opinion

by finding that it vacated the application of res judicata based on

the fact that the judgment in Devlin I was reversed and the case

reopened, but we believe that to be an incorrect reading.  From the

court's extensive analysis, it is clear that the Second Circuit

found that res judicata was not appropriate in such a situation and

contemplated that consolidation below would cure any future similar

problems.  The situation at bar is quite analogous in that the

actions were closely related and pending before the same judge at

the same time.  Like the plaintiffs in Devlin, Tingley did not wait

until the termination of the first case to commence the second

case.  Like the plaintiffs in Devlin, Tingley could have chosen to

assert its new claims in the existing action, but instead chose to

file a new action.  The present situation is even more favorable to

Tingley than was the situation in Devlin because Tingley's cases

were consolidated.  Tingley actively sought to bring the case to

the attention of the district court to have it consolidated with

the Bay State cases.  As a result, we find, as did the Devlin

court, that res judicata is inapplicable to bar the later-filed

action.

         For other reasons as well, we do not believe that Tingley

should be "hoisted with [its] own procedural petard."  Res judicata

is a judge-made doctrine resting on policy considerations, see

Diversified Foods, Inc. v. First Nat'l Bank of Boston, 985 F.2d 27,

31 (1st Cir. 1993), and in this case the policy considerations

militate against the application of res judicata.  "The policy

rationale behind res judicata is to 'relieve parties of the cost

and vexation of multiple lawsuits, conserve judicial resources,

and, by preventing inconsistent decisions, encourage reliance on

adjudication.'"  Apparel Art Int'l, 48 F.3d at 583 (quoting Allen,

449 U.S. at 94).  None of those policy concerns is implicated here. 

First, there was no "cost and vexation of multiple lawsuits."  At

the time of the settlement, these cases were proceeding as if one

case had been filed against co-defendants CSC and Bay State.  The

continuance of the case against CSC when only Bay State chose to

settle is not the type of cost or vexation with which the res

judicata doctrine is concerned.  Second, Tingley's actions did

nothing to waste judicial resources.  In asserting its claims

against CSC, it mattered little in terms of judicial efficiency

whether Tingley amended its pending Bay State action or filed a new

action and immediately consolidated them.  The cases still

proceeded as if only one case existed.  Finally, there was no

concern for inconsistent decisions here because the cases were

consolidated.  This was not a situation in which one case was filed

and proceeded to judgment, only to have another case come along

threatening a contrary result.  There was no greater risk of

inconsistency here than would have existed if all claims had been

brought by Tingley in one comprehensive complaint.  As demonstrated

above, one purpose of the res judicata doctrine is to prevent a

plaintiff from raising claims that should have been raised in an

earlier action.  Thus, when a plaintiff consolidates two actions in

order to ensure that all claims will be adjudicated together, it

makes little sense to bar the later-filed claims once the original

claims are settled.

         In addition to these policy concerns, equitable

considerations favor treating the consolidated cases as a single

action for res judicata purposes.  We agree with Tingley that, for

all practical purposes, CSC and Bay State were co-defendants in a

single lawsuit.  Until the time of the settlement in the Bay State

cases, the court treated the actions as one lawsuit with claims

against multiple defendants.  See, e.g., July 17, 1995 Transcript,

at 43 (magistrate's statement that "this is consolidated" and that

"[i]t's one big case in the eyes of the Court").  The only

difference between the present situation and a single lawsuit with

multiple claims is that Tingley chose to list its causes of action

against CSC in a new complaint, rather than in an amended complaint

in the Bay State cases.  Tingley could easily have done the latter

if it had known that it risked res judicata preclusion, but

Tingley's July 28, 1995 second amended complaint instead amended

only the claims against Bay State.  Equity demands that we not

allow such a draconian result to turn on this procedural quirk.

         There are accusations that Tingley filed the new

complaint in order to avoid discovery deadlines in the Bay State

cases, but even if those accusations are true, we do not believe

that total preclusion of Tingley's claims against CSC is the proper

punishment, if any punishment is appropriate.  Tingley found out

about CSC's involvement in the alleged wrongdoing very late in

discovery in its case against Bay State.  According to CSC and the

district court, Tingley's alternatives were: (1) to amend its Bay

State complaint to add claims against CSC, but proceed without

discovery on those claims, or (2) to file a new action against CSC

that would be precluded if Bay State chose to settle.  Forcing

Tingley to choose between those alternatives is not equitable, when

neither alternative gave Tingley the opportunity to fully

investigate and litigate its newly-discovered claims against CSC. 

         In sum, we are persuaded by the Second Circuit's decision

in Devlin, the policy concerns surrounding the res judicata

doctrine, and equitable considerations that, at least in the

limited circumstances presented here, the consolidated cases should

have been treated as a single action for res judicata purposes.

Consequently, the first element of the res judicata standard is not

satisfied.  There was no final judgment on the merits in an earlier

action; there was only a final judgment on a portion of the

aggregate case.  Therefore, the application of res judicata in this

case was inappropriate.  We need proceed no further.

                            CONCLUSION

         Based on the foregoing, the district court's entry of

summary judgment in favor of CSC on Tingley's claims against it is

REVERSED, and the CSC case is REMANDED to the district court for

further proceedings.  We DISMISS as moot Tingley's appeal from the

district court's denial of its motion for relief from judgment in 

the Bay State cases.