Paycom Software Inc et al v. National Finance Partners Corp
Filing
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ORDER granting 9 Motion to Dismiss, as more fully set out. Signed by Honorable David L. Russell on 12/12/14. (jw)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
PAYCOM SOFTWARE, INC., et al., )
)
Plaintiffs,
)
)
v.
)
)
NATIONAL FINANCE PARTNERS )
CORP.,
)
)
Defendant.
)
Case No. CIV-14-1029-R
ORDER
Before the Court is Defendant National Financial Partners Corp.’s Supplemental
Motion to Dismiss Plaintiffs’ Complaint. Doc. No. 9. Defendant argues that this Court
should decline to hear Plaintiffs’ (“Paycom”) declaratory judgment action because
Paycom engaged in “procedural fencing” by filing in this Court before Defendant could
file its claim against Paycom in the Northern District of Illinois.
Background
Defendant alleges that Paycom’s logo infringes its trademark rights in its
federally-registered logo. Doc. No. 9, Ex. 4, ¶ 6. On September 23, 2014, Defendant’s
General Counsel Timothy Robb contacted Paycom’s Corporate Attorney Lauren Toppins
to discuss the issue. Doc. No. 9, at 9.; Doc. No. 23, at 6. Robb told Toppins that if the
parties could not agree on the terms of a proposed Tolling Agreement, Defendant was
prepared to file a suit for trademark infringement against Paycom in the Northern District
of Illinois. Doc. No. 9, at 9; Doc. No. 23, at 6. In response, Paycom filed this suit for a
declaratory judgment at 7:49 p.m. that same day, and Defendant filed its claim against
Paycom in the Northern District of Illinois approximately two hours later at 9:51 p.m.
Doc. No. 9, at 10; Doc. No. 23, at 6-7. In the Illinois case, Defendant has filed a motion
for a preliminary injunction and Paycom has filed a motion to transfer the case to this
Court. Doc. No. 23, at 5. Those motions have been stayed pending this Court’s ruling on
Defendant’s motion to dismiss. Id.; Doc. No. 25, ¶ 11, Ex. H.
Standard
The Declaratory Judgment Act “confers upon courts the power, but not the duty,
to hear claims for declaratory judgment.” Mid-Continent Cas. Co. v. Vill. at Deer Creek
Homeowners Ass’n, 685 F.3d 977, 980 (10th Cir. 2012) (citing Wilton v. Seven Falls Co.,
515 U.S. 277, 286-87 (1995); Pub. Affairs Assoc. v. Rickover, 369 U.S. 111, 112 (1962)).
“Whether to entertain a justiciable declaratory judgment action is a matter committed to
the sound discretion of the trial court.” Kunkel v. Cont’l Cas. Co., 866 F.2d 1269, 1273
(10th Cir. 1989) (citing Alabama State Fed’n of Labor v. McAdory, 325 U.S. 450, 462
(1945)). The Court considers the following factors in determining whether to exercise its
discretion to hear such a claim:
[1] whether a declaratory action would settle the controversy; [2] whether it
would serve a useful purpose in clarifying the legal relations at issue; [3]
whether the declaratory remedy is being used merely for the purpose of
procedural fencing or to provide an arena for a race to res judicata; [4]
whether use of a declaratory action would increase friction between our
federal and state courts and improperly encroach upon state jurisdiction;
and [5] whether there is an alternative remedy which is better or more
effective.
Mid-Continent, 685 F.3d at 980-81 (quoting State Farm Fire & Cas. Co. v. Mhoon, 31
F.3d 979, 983 (10th Cir. 1994)). Because this case involves two federal courts of
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coordinate jurisdiction, the fourth factor concerning friction between federal and state
courts does not apply. Additionally, both parties have chosen to litigate the issues in this
case, rather than participate in an alternative means of dispute resolution such as
arbitration. Therefore, the last factor is also not relevant to this case. The Court’s
analysis, then, focuses on the first three Mhoon factors.
Analysis
A. Whether a Declaratory Judgment Would Settle the Controversy or Serve
a Useful Purpose in Clarifying the Legal Relations at Issue
The first and second factors are whether a declaratory judgment would settle the
controversy between the parties or serve a useful purpose in clarifying the legal relations
at issue. These factors are intended to “shed light on the overall question of whether the
controversy would be better settled in [the other] court.” United States v. City of Las
Cruces, 289 F.3d 1170, 1187 (10th Cir. 2002). In its Complaint, Paycom seeks a
declaratory judgment stating that the use of its logo does not constitute trademark
infringement, unfair competition, or dilution. Doc. No. 1, at 3. In its Complaint filed
against Paycom, Defendant brought claims for federal trademark infringement; federal
unfair competition and false designation of origin; deceptive trade practices under Illinois
law; consumer fraud and deceptive business practices under Illinois law; and common
law unfair competition. Doc. No. 9, Ex. 4, at 9-15. In its allegations for deceptive trade
practices and consumer fraud and deceptive business practices, Defendant includes in its
list of injuries the fact that its goodwill has been diluted. Doc. No. 9, Ex. 4, ¶¶ 42, 51. In
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addition to an injunction, Defendant seeks Paycom’s profits resulting from the alleged
infringement and punitive damages. Doc. No. 9, Ex. 4, ¶¶ 1, 5, 7.
Based on the allegations in each Complaint, Paycom’s declaratory judgment
action will not settle all disputes between the parties, such as Defendant’s state law
claims for consumer fraud and deceptive business practices and the issue of damages.1
But the action brought in the Northern District of Illinois will resolve all the issues raised
in the declaratory judgment action.2 Moreover, the Court would not necessarily do a
better job than the Illinois Court at clarifying the legal issues present in this case, which
include claims under Illinois state law. Accordingly, this declaratory judgment action is
“unnecessarily duplicative and uneconomical,” and the first two factors weigh against
exercising jurisdiction. Mid-Continent, 685 F.3d at 982.
B. Whether the Declaratory Remedy is Being Used Merely for the Purpose of
Procedural Fencing
The third factor is whether the declaratory remedy is being used merely for the
purpose of procedural fencing. This factor typically involves “questionable actions on the
part of the party seeking a declaratory judgment.” Id. at 984 (citation omitted). Under the
first-to-file rule, a district court may decline to exercise jurisdiction when “a complaint
raising the same issues against the same parties has previously been filed in another
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Although Paycom seeks a declaratory judgment that use of its logo “does not violate Defendant’s rights
under the trademark laws of the United States or any other laws,” Doc. No. 1, at 5 (emphasis added), the
Court limits its review to the laws expressly mentioned in Paycom’s Complaint.
2
See Mid-Continent, 685 F.3d at 982 n.3 (“Especially relevant may be whether the state court action
would necessarily resolve the issues in the declaratory judgment action. Here, while the declaratory
judgment action would settle the controversy between Mid–Continent and Greater Midwest over the
scope of Mid–Continent’s coverage obligations, that issue would also be resolved in the Missouri
equitable garnishment action. By contrast, the issues in the Missouri equitable garnishment action would
not necessarily be resolved in the declaratory judgment action.”).
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district court.” Buzas Baseball, Inc. v. Regents of Univ. Sys., No. 98-4098, 1999 WL
682883, at *2 (10th Cir. Sept. 2, 1999) (unpublished) (citation omitted). “However,
‘simply because a court is the first to obtain jurisdiction does not necessarily mean that it
should decide the merits of the case.’” Id. (quoting Hospah Coal Co. v. Chaco Energy
Co., 673 F.2d 1161, 1164 (10th Cir. 1982)). The court in which the first case was filed
may decline to follow the first-to-file rule and dismiss the action if the suit was filed “for
the purpose of anticipating a trial of the same issues in a court of coordinate jurisdiction.”
Id. at *3 (citation omitted).
The Court must balance the purpose of the Declaratory Judgment Act in
preventing “one party from continually accusing the other, to his detriment, without
allowing the other to secure an adjudication of his rights by bringing suit,” Tempco
Electric Heater Corp. v. Omega Eng’g, Inc., 819 F.2d 746, 749 (7th Cir. 1987), and the
public policy in favor of encouraging settlement and not providing any one party with an
unfair advantage, TBG, Inc. v. Bendis, 36 F.3d 916, 924 (10th Cir. 1994); Traders & Gen.
Ins. Co. v. Rudco Oil & Gas Co., 129 F.2d 621, 628 (10th Cir. 1942). A party should not
have to “‘bet the farm’ by taking actions that could subject them to substantial liability
before obtaining a declaration of their rights,” Surefoot LC v. Sure Foot Corp., 531 F.3d
1236, 1243 (10th Cir. 2008) (quoting MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118,
129 (2007)), but a “federal declaratory judgment is not a prize to the winner of the race to
a courthouse,” Buzas Baseball, 1999 WL, at *2 (quoting Perez v. Ledesma, 401 U.S. 82,
119 n.12 (1971) (Brennan, J., concurring in part and dissenting in part)).
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1. Facts
Because Paycom filed its declaratory judgment action on the same day Defendant
told Paycom that it would file its own suit in Illinois if the two parties could not agree on
the terms of a proposed Tolling Agreement, Defendant contends that this is “a textbook
example of ‘procedural fencing’ in the form of an anticipatory lawsuit.” Doc. No. 9, at
11. Robb called Toppins at approximately 1:30 p.m. on September 23, 2014 and left a
voicemail, with a follow-up email at 1:52 asking her to contact him regarding an “‘urgent
legal mat[t]er’ relating to NFP’s ‘concerns’ over PSI’s use of the PC Logo.” Doc. No. 9,
Ex. 3, ¶ 6; Doc. No. 23, at 6; Doc. No. 26, Ex. A.3 At 2:33 p.m., Robb emailed Toppins a
document titled “Material Regarding NFP’s Trademark Concerns,” as well as a proposed
Tolling Agreement. Doc. No. 9, Ex. 3, ¶ 7; Doc. No. 23, at 6; Doc. No. 26, Ex. C. The
first paragraph of the proposed agreement states, “The purpose of this Tolling Agreement
is to facilitate discussions between the Tolling Parties during the Resolution Period.”
Doc. No. 9, Ex. 3, at 11; Doc. No. 26, Ex. E.
When they spoke on the phone shortly after Robb emailed Toppins the two
documents, Robb told Toppins that “Paycom had until 4:30 p.m. CT to inform [him]
whether Paycom would enter into a mutually agreeable version of the Tolling Agreement
with NFP,” and that “NFP was prepared to file a trademark infringement lawsuit against
Paycom in Illinois if Paycom would not be willing to enter into any Tolling Agreement.”
Id. § 10; Doc. No. 26, ¶ 9. At 4:50 p.m., Toppins called Robb saying that she could not
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For the purposes of this motion, the Court considers any facts not disputed by the parties in their briefs
or submitted affidavits as conceded.
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yet confirm whether Paycom would agree to the terms of the proposed agreement, “and
asked if NFP would consider making some changes to the Tolling Agreement.” Doc. No.
9, Ex. 3, ¶ 11. Robb told Toppins that NFP would give Paycom “several additional hours
to consider the proposed Tolling Agreement,” and that NFP would consider making
changes. Id. Toppins then told Robb “that she would get back to [him] that evening to let
[him] know whether Paycom would agree to sign a Tolling Agreement, and if so what
those changes would be.” Id.
Robb waited until 6:45 p.m., and having not yet heard back from Toppins, emailed
her saying that he was leaving the office and that NFP “would like to resolve this matter
as amicably as we can.” Id. ¶ 12; Doc. No. 26, Ex. F. He included his cell phone number
in this email, and stated that “NFP was prepared to file a trademark infringement lawsuit
if [she] did not contact [him] or NFP’s outside counsel by 9:00 p.m. CT that evening.”
Doc. No. 9, Ex. 3, ¶ 12; Doc. No. 26, Ex. F. Instead of contacting Robb or NFP’s outside
counsel, Paycom filed a declaratory judgment action in this Court at 7:49 p.m. that
evening. Doc. No. 23, at 6. NFP’s outside counsel then filed suit in the Northern District
of Illinois at 9:51 p.m. Doc. No. 9, Ex. 3, ¶ 13.
2. Paycom’s Procedural Fencing
Paycom argues that it did not file in this Court because it thought it would receive
a more favorable outcome here, but rather “because this forum is clearly the most
appropriate and convenient to resolve the dispute,” as Paycom’s principal place of
business is in Oklahoma City, and “virtually all of the witnesses and documents are
located here.” Doc. No. 23, at 5, 8; Doc. No. 24, ¶¶ 10, 12. The Court is more concerned
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not with why Paycom chose to file in this particular District, but why Paycom decided to
file suit in this District at 7:49 p.m. on September 23. The reasoning of the Sixth Circuit
is persuasive on this point:
[W]hether the forum chosen by the declaratory plaintiff is “logical” can
have only a minimal value in determining whether procedural fencing has
occurred. The question is not which party has chosen the better forum, but
whether the declaratory plaintiff has filed in an attempt to get her choice of
forum by filing first. That a particular forum is better or worse is irrelevant
in answering that factual question.
AmSouth Bank v. Dale, 386 F.3d 763, 789 (6th Cir. 2004) (footnote omitted). Although
Paycom has explained why it would prefer to litigate in this District rather than in the
Northern District of Illinois, the timing of its filing constituted inequitable forum
shopping. See Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183 (1952)
(“The factors relevant to wise administration [of the Declaratory Judgment Act] are
equitable in nature.”).
Paycom was “not caught in a web of extended and unending uncertainty
necessitating a judicial determination of its rights.” Obsolete Ford Parts v. Ford Motor
Co., 306 F. Supp. 2d 1154, 1158 (W.D. Okla. 2004). Defendant contacted Paycom with
an opportunity to begin settling the dispute under the terms of a tolling agreement.
Instead of engaging in settlement negotiations in good faith, Paycom misled Defendant
into thinking that it was seriously considering the agreement and filed suit before
notifying Defendant that it had decided to litigate the issue. Regardless of the particular
reason for choosing one forum over another, Paycom “is given an equal start in the race
to the courthouse, not a headstart.” Hospah, 673 F.2d at 1164 (quoting Kerotest, 342 U.S.
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at 185). Because Paycom demonstrated bad faith in its interactions with Defendant, the
Court finds that this factor also weighs against exercising jurisdiction. See GS & S Co.
(Transpacific Inc.) v. Westland Giftware, No. CIV-11-275-C, 2011 WL 2923857, at *3
(W.D. Okla. July 18, 2011) (finding procedural fencing when “the parties were in the
midst of negotiations when the dispute was brought to the courts,” and the declaratory
judgment plaintiff did not notify the defendant of its decision to halt negotiations).
C. Other Factors
Paycom argues that the Court should consider the same factors it would when
deciding whether to transfer a case under 28 U.S.C. § 1404(a), including the convenience
of litigating this case in Oklahoma. Doc. No. 23, at 12-13. In support of this argument, it
cites cases from the District of Utah, the Federal Circuit, the Northern District of
California, and the Northern District of Illinois. Id. Because Paycom’s conduct in this
case represents precisely “the kind of procedural fencing that courts condemn,” Obsolete,
306 F. Supp. 2d at 1158, the Court declines to consider additional factors. See St. Paul
Fire & Marine Ins. Co. v. Runyon, 53 F.3d 1167, 1170 (10th Cir. 1995) (“[P]rocedural
fencing is another adequate reason for the district court to refuse jurisdiction in a
declaratory judgment action.”); see also Eli’s Chicago Finest, Inc. v. Cheesecake
Factory, Inc., 23 F. Supp. 2d 906, 909 (N.D. Ill. 1998) (“If the Court were to allow such
maneuvering, litigants would have no alternative but to quickly file suits in the forum of
their choice.”).
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Conclusion
Because all of the relevant Mhoon factors weigh against exercising jurisdiction in
this case, Defendant’s motion to dismiss the Complaint [Doc. No. 9] is GRANTED.
IT IS SO ORDERED this 12th day of December, 2014.
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