FILED UNITED STATES COURT OF APPEALS United States Court of Appeals Tenth Circuit FOR THE TENTH CIRCUIT _________________________________ March 11, 2019
Elisabeth A. Shumaker INTERNATIONAL ASSOCIATION OF Clerk of Court CERTIFIED HOME INSPECTORS, a Colorado nonprofit corporation,
Plaintiff - Appellant,
v. No. 18-1087 (D.C. No. 1:17-CV-01065-RBJ) HOMESAFE INSPECTION, INC., (D. Colo.) a Mississippi corporation incorporated in 2003; HOMESAFE INSPECTION, INC., a Mississippi corporation incorporated in 2014; KEVIN SEDDON,
Defendants - Appellees. _________________________________
ORDER AND JUDGMENT* _________________________________
Before McHUGH, BALDOCK, and KELLY, Circuit Judges. _________________________________
Plaintiff International Association of Certified Home Inspectors (Association),
appeals from the district court’s order that dismissed its amended complaint against
* After examining the briefs and appellate record, this panel has determined unanimously to honor the parties’ request for a decision on the briefs without oral argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore submitted without oral argument. This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. It may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1. defendants Homesafe Inspection, Inc. (Homesafe)1 and Kevin Seddon. Exercising
jurisdiction under 28 U.S.C. § 1291, we affirm.
I. BACKGROUND
A. The Parties
The Association is a Colorado non-profit and trade association that represents
more than 20,000 home inspectors across the United States. Homesafe is a
Mississippi corporation that claims ownership of a patent regarding the use of
infrared technology in home inspections. Mr. Seddon is the president and a director
of Homesafe.
In 2013, a member of the Association told the group’s founder that he had
been sued for violating Homesafe’s patent. The founder contacted Mr. Seddon, who
warned him that Homesafe would continue to sue home inspectors who used its
patented technology without authorization. Not long thereafter, the Association and
Homesafe entered into a license agreement that allowed the members to obtain a
license from Homesafe to use its technology.
B. The Mississippi State Court Litigation
In 2015, Homesafe filed suit against the Association in Mississippi state court
for its alleged breach of the license agreement. Homesafe’s complaint included
claims for violation of the Mississippi Fair Trade Practices Act, unfair competition,
unjust enrichment, breach of contract, and conversion.
1 There is no material difference between the two Homesafe entities named as defendants other than their dates of incorporation. 2 Eventually, the Association filed an amended answer and counterclaims
against Homesafe along with a third-party complaint against Mr. Seddon. The gist of
the counterclaims was the contention that Homesafe and Mr. Seddon misrepresented
the nature and scope of the patent to induce the Association and its members to enter
into the license agreement. More specifically, the counterclaims alleged claims for
fraudulent misrepresentation, negligent misrepresentation, unjust enrichment,
declaratory judgment, and rescission. In its counterclaims, the Association expressly
reserved the right to add claims under the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. §§ 1961-1968:
[The Association] is not presently seeking leave to add a claim under [RICO], [h]owever, based on the allegations . . . above, there is evidence [Homesafe] violated the federal wire fraud statute . . . [and] may have also violated the federal mail fraud statute. . . . As discovery is ongoing, [the Association] reserves the right to seek to add a civil RICO claim. Aplt. App., Vol. 1 at 222.
At the close of discovery in May 2016, the Association’s attorney wrote to
opposing counsel and threatened “to add a civil RICO claim against Homesafe and
Mr. Seddon” if the case did not settle under the terms proposed by the Association.
Id. at 233. The case did not settle, but the Association’s attorney never made good
on the threat. Instead, seven months later, in December 2016, the court granted
Homesafe’s motion for summary judgment on the Association’s counterclaims.2
2 Trial was set for March 2018. However, the Association moved to continue the trial date on the grounds that it had filed suit against Homesafe and Mr. Seddon in federal district court. The court granted the motion and reset trial for March 2019.
3 Although the order does not say so expressly, the Association has admitted that its
counterclaims were dismissed because it could not prove damages.3
C. The Federal Court Litigation
1. The Association’s Amended Complaint
In April 2017, the Association filed suit in the United States District Court for
the District of Colorado. The operative pleading—the Association’s amended
complaint—alleged four claims: (1) violation of RICO; (2) conspiracy to violate
RICO; (3) declaratory judgment to determine its rights and obligations to use
Homesafe’s patents and its common law rights to use infrared technology in home
inspections; and (4) injunctive relief to enjoin Homesafe’s alleged illegal activity.
According to the Association, Homesafe and Mr. Seddon engaged in a “continuing
pattern of racketeering.” Id., Vol. 1 at 179. The amended complaint cited letters
written to 34 of the Association’s members between 2008 to 2011, in which
Homesafe demanded that they pay license fees to use its patented technology or they
would be sued.
3 In response to Homesafe’s motion to dismiss in the federal suit, the Association stated that “the undisputed reason [the motion for summary judgment was granted was] due to the fact that, at that point, [the Association] was unable to specifically prove damages under Mississippi law.” Aplt. App., Vol. 2 at 324.
4 2. Homesafe’s Motion to Dismiss
Homesafe and Mr. Seddon moved to dismiss the amended complaint on
several grounds, including res judicata.4 Their motion noted that under 28 U.S.C.
§ 1738, the preclusive effect of a state judgment is governed by the rules of
preclusion of that state, and the “four ‘identities’ for application of res judicata”
under Mississippi law are: “‘(1) identity of the subject matter of the action,
(2) identity of the cause of action, (3) identity of parties to the cause of action, and
(4) identity of the quality or character of a person against whom the claim is made’”
Aplt. App., Vol. 1 at 200 (quoting Hill v. Carroll Cty., 17 So. 3d 1081, 1085
(Miss. 2009)). They then explained how each element was present by comparing the
Mississippi suit to the claims in the federal suit.
Further, Homesafe and Mr. Seddon argued that the Association’s claims were
barred by Mississippi Rule of Civil Procedure 13(a) concerning compulsory
counterclaims, which they described as “a companion rule to the doctrine [of]
res judicata.” Id. Rule 13(a) provides that a party must state as a counterclaim “any
claim which . . . the pleader has against any opposing party if it arises out of the
transaction or occurrence that is the subject matter of the opposing party’s claim and
does not require . . . the presence of third parties over whom the court cannot acquire
jurisdiction.” As such, they maintained that because the federal claims were
compulsory counterclaims under Rule 13(a) and the Association failed to raise them
4 The additional grounds to dismiss included: (1) claim splitting and Colorado River abstention; (2) the Noerr-Pennington doctrine; (3) lack of venue; and (4) the failure to properly allege a RICO claim. 5 in the Mississippi suit, they were “barred” in the federal litigation. Aplt. App., Vol. 1
at 201 (citing Tyler Marine Servs., Inc. v. Aqua Yacht Harbor Corp., 920 So. 2d 493,
496 (Miss. Ct. App. 2006)).
3. The Association’s Response
The Association’s response in opposition contained no meaningful response to
the res judicata argument and never mentioned the Mississippi compulsory
counterclaims. Instead, its “legal argument” began with a lengthy quote from a case
from the Federal Circuit Court of Appeals, Sharp Kabushiki Kaisha v. ThinkSharp,
Inc., 448 F.3d 1368 (Fed. Cir. 2006), which explained the two branches of
res judicata—claim preclusion and issue preclusion. Not only was this explanation
unnecessary, it was based on the federal law of res judicata—not Mississippi law.
Then, continuing to rely on Sharp, the Association maintained that Homesafe
and Mr. Seddon had to establish the following elements: “(1) an identity of parties or
their privies; (2) a final judgment on the merits of the prior claim; and (3) the second
claim must be based on the same transactional facts as the first and should have been
litigated in the prior case.” Aplt. App., Vol. 2 at 326 (citing Sharp, 448 F.3d at
1370).
Applying the three Sharp factors, the Association argued that: (1) there was
no identity of the parties “because [the Association] also brought [the federal suit] as
assignee of home inspectors who were not parties to the state court action and who
can prove damages resulting from Homesafe’s misconduct”; (2) “there has been no
final judgment on the merits of whether Homesafe engaged in fraud because a jury
6 must still determine the fraudulent inducement defense”; and (3) “while there is some
overlap, [the Association’s] claims are not based entirely on the same facts as in the
state court action.” Id. The Association further argued that the federal suit “is based
on facts that either occurred, or were discovered, only after the deadline passed
within which those claims may have been litigated in the state court action,” and “the
elements required to prove a RICO case are not the same as those required to prove a
claim for misrepresentation or a fraudulent inducement defense.” Id. The only legal
authority cited by the Association was Sharp, and its fleeting references to the two
suits lacked any detail or analysis.
4. The District Court’s Decision
The district court found that the claims were precluded by the doctrine of
res judicata and granted the motion to dismiss. First, the court acknowledged that
“[a]ccording to the Mississippi law of res judicata, ‘when a court of competent
jurisdiction enters a final judgment on the merits of an action, the parties or their
privies are precluded from re-litigating claims that were decided or could have been
raised in that action.’” Id. at 407 (quoting Harrison v. Chandler-Sampson Ins., Inc.,
891 So. 2d 224, 232 (Miss. 2005)). The court then addressed, and rejected, the
Association’s only argument—unsupported by any law from Mississippi or
elsewhere—that there was no final judgment because a jury had not determined the
validity of its fraudulent inducement defense: “The existence of an outstanding
affirmative defense does not . . . change the preclusive effect of the state court’s
7 decision on [the Association’s] counterclaims or correct [the Association’s] failure to
allege its RICO counterclaims in that suit.” Id. at 408.
Next, the district court moved to the four identities required for res judicata
under Mississippi law. Regarding the first two identities, the court noted that
because the Association relied on federal law, it had to “attempt[] to discern from
[the Association’s] argument those points that are relevant to the [Mississippi] test.”
Id. at 407 n.3. The court explained that it was further handicapped by the
Association’s failure to “directly address the identity of the substance of the suit,”
id. at 408, or “address [the] identity [of the cause of action] head on,” id. at 411.
Nonetheless, the court carefully and thoroughly examined the two suits and
determined that the first two identities were present.
The district court also found that the third element—identity of the parties—
was present. It rejected the Association’s argument that the parties were not the same
because it was bringing suit as assignee of individual home inspectors who were not
parties to the state court action. Not only did the court find this argument to be at
odds with the caption and description of the parties in the amended complaint, but the
Association “fails to identify who these inspectors are, which rights were assigned to
[the Association], and when that assignment occurred.” Id. at 412. As such, the
court rejected the “vague and suspect” alleged assignments “as grounds to escape res
judicata.” Id.
As to the fourth element, the district court explained that under Mississippi
law, there is an “identity of the quality or character of the person against whom a
8 claim is made . . . when the named defendant is the same in the subsequent action as
in the previous action.” Id. at 413 (citing Hill, 17 So. 3d at 1087). As such, the court
found this factor was satisfied “because HomeSafe was the counter-defendant and
Mr. Seddon was the third-party defendant in the state suit, and they are the
defendants in the present suit.” Id.
Last, even though the district court found that “res judicata is dispositive in
this case,” it was “also persuaded by HomeSafe’s invocation of the doctrine of
compulsory counterclaims.” Id. “In the same way that claims that could have been
advanced in a previous suit are barred by res judicata, compulsory counterclaims not
raised in a previous suit are barred in subsequent suits under the Mississippi rule of
compulsory counterclaim.” Id. (citing Rule 13(a)).
II. STANDARD OF REVIEW
Ordinarily, we review the dismissal of a complaint on the grounds of res
judicata de novo. Katz v. Gerardi, 655 F.3d 1212, 1218 (10th Cir. 2011). However,
when an argument was not raised before the district court but is instead advanced for
the first time on appeal, the court will only reverse if the appellant shows the district
court’s decision amounted to plain error. Richison v. Ernest Grp., Inc., 634 F.3d
1123, 1128 (10th Cir. 2011).
“To show plain error, a party must establish the presence of (1) error, (2) that
is plain, which (3) affects substantial rights, and which (4) seriously affects the
fairness, integrity, or public reputation of judicial proceedings.” Id. “Plain error
review presents an extraordinary, nearly insurmountable burden.” Royal Maccabees
9 Life Ins. Co. v. Choren, 393 F.3d 1175, 1181 (10th Cir. 2005) (internal quotation
marks omitted).
Finally, where a party has not “attempted to show how his new legal theory
satisfies the plain error standard . . . the failure to do so . . . marks the end of the road
for an argument for reversal not first presented to the district court.” Richison,
634 F.3d at 1130-31.
III. ANALYSIS
A. Final Judgment
In its response to Homesafe’s res judicata argument, the Association raised
one argument—unsupported by any legal authority—that the dismissal of its
Mississippi state court counterclaims was not a final judgment because a jury had not
determined the fraudulent inducement defense. Now, for the first time on appeal, the
Association argues several new reasons why there is not a final judgment, citing
Mississippi court rules and cases it never mentioned in its response. These
arguments and authorities should have been raised in the district court, and the failure
to do so means they have been forfeited. See id. at 1128 (“[I]f the theory simply
wasn’t raised before the district court, we usually hold it forfeited.”).
In Employers Reinsurance Corp. v. Mid-Continent Casualty Co., 358 F.3d 757
(10th Cir. 2004), we noted several factors in reaching our conclusion there was no
plain error. Those factors are present here. “[T]he error was not an act or omission
by the district court,” the complaining party “had ample opportunity to bring the error
to the district court’s attention” by an appropriate motion, and “the alleged error . . .
10 does not concern any matter of significant public policy . . . [because] [w]e are
dealing with a private contract dispute in a business relationship.” Id. at 770.
“In short, the judicial proceeding below was fair, and the [failure of the Association
to raise its arguments] should not raise serious doubts about the integrity of that
proceeding or bring disrepute upon the district court.” Id.
B. Identity of Subject Matter
On de novo review, we have examined the Mississippi cases relied on by the
district court and agree with its thorough and well-reasoned analysis of this issue in
the order dated February 5, 2018. See Aplt. App., Vol. 2 at 408-13.
C. Identity of Parties
In its response in district court, the Association argued that there was no
identity of the parties because it was bringing the federal suit as the assignee of
numerous individual home inspectors who were not parties to the state court action.
Once again, the Association did not cite any rules or case law to demonstrate the
sufficiency of this allegation.
For the first time on appeal, the Association relies on Rules 8 and 12(b)(6) of
the Federal Rules of Civil Procedure to argue the sufficiency of the amended
complaint regarding the alleged assignments. According to the Association, its
bare-bones allegation that the claims had been assigned was sufficient to survive a
motion to dismiss, citing Khalik v. United Air Lines, 671 F.3d 1188 (10th Cir. 2012).
We review this issue de novo. In the district court, Homesafe argued that the
caption and description of the parties in the amended complaint established an
11 identity of the parties. In response, the Association said only that it “brought this
action as assignee of home inspectors who were not parties to the state court action,”
Aplt. App., Vol. 2 at 326, without citing the amended complaint or Rules 8 or 12.
Nonetheless, the district court analyzed the sufficiency of the naked allegation and
concluded that the “purported assignment is so vague and suspect” that it cannot
defeat res judicata. Aplt. App., Vol. 2 at 412. In doing so, the court recognized that
this threadbare allegation lacked the “details [the Association] should know and
could properly have plead to satisfy the plausibility requirement.” Khalik, 671 F.3d
at 1194. In particular, the court found that the amended complaint “fails to identify
who these inspectors are [who assigned their claims to the Association], which rights
were assigned . . . , and when that assignment occurred. There is thus no indication
of a valid assignment of rights.” Aplt. App., Vol. 2 at 412 (citation omitted). We see
no error in this ruling.
D. Declaratory Judgment
Last, the Association concedes that it did not raise any arguments regarding its
declaratory judgment claim in the district court and the arguments are forfeited.
Therefore, we review the court’s ruling for plain error.
The Association’s apparent argument is that its claim for declaratory relief in
the Mississippi suit cannot be barred by res judicata because a patent dispute can only
be resolved in federal court. While we agree with the Association’s general
statement that patent disputes are within the exclusive jurisdiction of the federal
courts, its arguments lack merit. First, the Association’s counterclaim for declaratory
12 relief in the Mississippi suit was not dismissed because the court lacked jurisdiction
to determine the validity of Homesafe’s patent—the counterclaims were dismissed
because the Association could not prove damages. Second, the Association’s
counterclaim for declaratory relief in Mississippi did not challenge Homesafe’s
patent—it sought a declaration that it was fraudulently induced into entering into the
license agreement. Third, the Association’s claim for declaratory relief in the federal
court is not premised on the jurisdiction granted to the federal courts to determine
patent disputes—it is a request to settle the controversy between the parties regarding
the use of infrared technology in home inspections, and whether Homesafe
misrepresented its rights in the technology in its dealing with the Association and its
members.
The Association cannot meet the first test for plain error—that there was an
error—let alone any of the other three factors.
IV. CONCLUSION
The judgment of the district court is affirmed.5
Entered for the Court
Bobby R. Baldock Circuit Judge
5 Because we affirm the district court’s res judicata ruling, we do not address the address the court’s alternative grounds for dismissal, i.e., the claims were compulsory counterclaims under Mississippi law.