VRCompliance LLC v. Homeaway, Inc. ( 2013 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
VRCOMPLIANCE LLC; EYE STREET 
SOLUTIONS LLC,
Plaintiffs-Appellants,
v.
HOMEAWAY, INC.;  No. 12-1143
HOMEAWAY.COM, INC.;
VRBO.COM, INC.;
VACATIONRENTALS.COM, INC.,
Defendants-Appellees.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Liam O’Grady, District Judge.
(1:11-cv-01088-LO-TCB)
Argued: March 20, 2013
Decided: May 24, 2013
Before WILKINSON, SHEDD, and DUNCAN,
Circuit Judges.
Affirmed by published opinion. Judge Wilkinson wrote the
opinion, in which Judge Shedd and Judge Duncan joined.
2 VRCOMPLIANCE v. HOMEAWAY, INC.
COUNSEL
ARGUED: M. Keith Blankenship, EYE STREET SOLU-
TIONS, LLC, Leesburg, Virginia, for Appellants. Adam J.
Kessel, FISH & RICHARDSON, PC, Boston, Massachusetts,
for Appellees. ON BRIEF: James A. Allen, GENERAL
COUNSEL, PC, McLean, Virginia, for Appellants. Ahmed J.
Davis, FISH & RICHARDSON, PC, Washington, D.C.; Wil-
liam Tommy Jacks, FISH & RICHARDSON, PC, Austin,
Texas, for Appellees.
OPINION
WILKINSON, Circuit Judge:
The district court stayed appellants’ action pending the res-
olution of an earlier parallel state lawsuit filed by appellees.
Appellants’ action was based on a "mixed" complaint, one
raising both declaratory and nondeclaratory claims. The par-
ties spend a great deal of energy arguing over whether the
decision to stay a mixed action is governed by the standard
articulated in Colorado River Water Conservation District v.
United States, 424 U.S. 800, 813 (1976), which permits stays
only in "exceptional circumstances," or the standard articu-
lated in Brillhart v. Excess Insurance Co. of America, 316
U.S. 491, 495 (1942), and Wilton v. Seven Falls Co., 515 U.S.
277, 286, 289 (1995), which affords district courts broader
discretion to stay declaratory actions in deference to parallel
state proceedings. We think, however, that regardless of the
standard applied, the district court did not abuse its discretion.
See Chase Brexton Health Servs., Inc. v. Maryland, 411 F.3d
457, 464 (4th Cir. 2005). One consideration in this case looms
above the others—namely, that appellants had every opportu-
nity to procure a federal forum by removing appellees’ first-
filed state suit rather than by bringing a separate federal action
in an entirely separate federal district.
VRCOMPLIANCE v. HOMEAWAY, INC. 3
I.
A.
Rather than book hotel rooms, many travelers now rent pri-
vate residences for accommodation during their vacations.
Appellee HomeAway, Inc. owns and operates a number of
websites that facilitate such rentals. The websites, including
HomeAway.com and VRBO.com, post rental advertisements
by homeowners, whom prospective renters can then contact
directly to make reservations.
Many localities have found that these vacation rentals
deprive them of significant tax revenue. Whereas hotels
almost always pay the taxes that localities assess on room
rentals, private homeowners frequently fail to do so, whether
out of ignorance of the law or purposeful evasion. To combat
such delinquency, some localities have turned to companies
like appellant Eye Street Solutions LLC ("Eye Street"), which
has developed computer software designed to identify home-
owners who neglect to pay taxes when they rent out their
homes. Eye Street claims the software as a trade secret, and
the parties dispute exactly how it works, but in general, it uses
various data to identify the owners of properties advertised on
websites like HomeAway’s and then determines whether the
owners have paid the requisite local rental taxes. Eye Street
has licensed its software to appellant VRCompliance LLC,
which, in turn, uses the software to conduct tax-compliance
investigations on behalf of localities, including those belong-
ing to the Colorado Association of Ski Towns ("CAST").
Believing that Eye Street’s software was impermissibly
accessing its websites, HomeAway sent a letter, on December
10, 2010, to CAST and Eye Street, in which it demanded that
CAST’s members cease using the software. Specifically,
HomeAway asserted that CAST’s members were using Eye
Street’s software to "scrape" HomeAway’s websites—that is,
to access and copy from the websites’ computer servers infor-
4 VRCOMPLIANCE v. HOMEAWAY, INC.
mation that identified the homeowners who posted rental
advertisements. Such access, HomeAway contended, violated
the websites’ terms and conditions of use and thus constituted
unlawful interference with contractual relations as well as a
deceptive and unfair trade practice, in violation of Colorado
law. Additionally, because HomeAway claimed the lists of
homeowners who posted advertisements on its websites to be
copyrighted and trade secrets, it contended that the localities’
actions also violated federal copyright law and the Colorado
Uniform Trade Secrets Act, Colo. Rev. Stat. §§ 7-74-101 to
-110.
On September 28, 2011, HomeAway sent a second letter to
CAST, copying the organization’s members, as well as a sep-
arate letter to Eye Street and VRCompliance. Reiterating the
allegations from the first letter, the second round of letters
threatened Eye Street, VRCompliance, and CAST and its
members with legal action unless, by October 5, 2011, they
stopped "scraping" data from HomeAway’s websites and
turned over any data they had already obtained.
B.
On October 3, 2011, HomeAway filed suit against Eye
Street, VRCompliance, and CAST in the District Court of
Travis County, Texas. Its complaint asserted the following
Texas state-law claims: breach of contract; misappropriation
of trade secrets; violations of the Texas Theft Liability Act,
Tex. Civ. Prac. & Remd. Code Ann. §§ 134.001-.005; conver-
sion; and constructive trust. The defendants, in turn, later
asserted various state-law counterclaims, including tortious
interference with existing and prospective contractual rela-
tions; defamation; business disparagement; and violations of
the Texas Deceptive Trade Practices Act, Tex. Bus. & Com.
Code Ann. §§ 17.47, .58, .60, .61.
Eye Street did not attempt to remove HomeAway’s Texas
suit to federal district court. Instead, on October 6, 2011, it
VRCOMPLIANCE v. HOMEAWAY, INC. 5
filed its own action against HomeAway and its subsidiaries in
the U.S. District Court for the Eastern District of Virginia.*
Eye Street’s complaint sought declaratory judgments that (1)
it was not committing the various state common-law and stat-
utory violations asserted in HomeAway’s Texas complaint;
(2) it was not violating the federal Computer Fraud and Abuse
Act (CFAA), 18 U.S.C. § 1030; and (3) it was not infringing
any of HomeAway’s copyrights and thus was not violating
federal copyright law. It also raised nondeclaratory Virginia
state-law claims for defamation; tortious interference with
existing and prospective contractual relations; and violations
of the Virginia Consumer Protection Act, Va. Code Ann.
§ 59.1-196 to -207—claims for which it sought compensatory
and punitive damages.
After HomeAway moved to dismiss Eye Street’s action for
improper venue or, alternatively, to transfer venue to the U.S.
District Court for the Western District of Texas, the district
court stayed the action pending the resolution of
HomeAway’s Texas lawsuit. Eye Street challenges the propri-
ety of the stay in this appeal.
II.
The district court based its ruling on our decision in United
Capitol Insurance Co. v. Kapiloff, 155 F.3d 488, 493-94 (4th
Cir. 1998), which identified factors for district courts to con-
sider in deciding whether to stay declaratory actions in defer-
ence to parallel state proceedings under Brillhart/Wilton. In
reviewing its ruling for abuse of discretion, we bear in mind
that, as with any multi-factor test governing the exercise of
federal jurisdiction, a district court should not treat the factors
as a "mechanical checklist," but rather should apply them
*VRCompliance, but not CAST, joined Eye Street as a plaintiff in the
federal action and thus is also an appellant here. For ease of reference,
however, we hereinafter refer to VRCompliance and Eye Street collec-
tively as "Eye Street."
6 VRCOMPLIANCE v. HOMEAWAY, INC.
flexibly in light of the particular circumstances of each case.
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 16 (1983).
First, the district court found that "Texas has a strong inter-
est in deciding the issues of this case in its courts." J.A. 238.
All of Eye Street’s claims relate to a single general question:
whether appellants violated the terms and conditions of use
for HomeAway’s websites. As the court noted, because the
terms and conditions contain Texas choice-of-venue and
choice-of-law provisions, Texas has a strong interest in hav-
ing its courts take a first stab at resolving this question.
Second, the district court concluded that "the Texas State
Court will likely ‘resolve the issues more efficiently’ than this
court." J.A. 240 (quoting Kapiloff, 155 F.3d at 494). In gen-
eral, where two parallel suits are pending in state and federal
court, "the first suit should have priority, absent the showing
of balance of convenience in favor of the second action." Elli-
cott Mach. Corp. v. Modern Welding Co., 502 F.2d 178, 180
n.2 (4th Cir. 1974) (internal quotation marks omitted). As the
district court noted, although the period between the two
actions was short, Eye Street filed its federal action after
HomeAway filed its Texas action. While Eye Street claims to
have been unaware of the Texas action at the time, it still had
known that such an action was imminent, given the threat in
HomeAway’s final cease-and-desist letter. Nor have the par-
ties indicated that the Texas action has been stayed, suggest-
ing that that action has progressed further, and promises to
conclude more promptly, than the federal one.
The district court noted, moreover, that "an inquiry into
‘the scope of the pending state court proceeding’ convinces
the Court the suit ‘can better be settled in the proceeding
pending before the state court.’" J.A. 240-41 (quoting Brill-
hart, 316 U.S. at 495). The Texas suit includes not only all the
parties in the federal suit, but also CAST, thus promising a
more comprehensive resolution. See Kapiloff, 155 F.3d at 494
VRCOMPLIANCE v. HOMEAWAY, INC. 7
(finding that the state court action "included more parties than
did the federal action, suggesting that the same action would
be more efficient in resolving all interested parties’ rights").
Eye Street’s federal action also "explicitly mirror[s]" most
of the claims in the Texas suit. J.A. 240. In particular, Eye
Street’s state-law declaratory claim is explicitly styled as a
general defense to HomeAway’s Texas claims, while its non-
declaratory claims merely recast its Texas counterclaims in
terms of Virginia law. Eye Street will thus have an opportu-
nity in the Texas proceeding to litigate all the offensive claims
against HomeAway that it sought to litigate in the district
court. To be sure, the Texas action does not include Eye
Street’s two federal-law declaratory claims, nor could it possi-
bly include the copyright claim, which is subject to exclusive
federal jurisdiction. See 28 U.S.C. § 1338(a). But the core of
Eye Street’s action is its state-law declaratory claim, and its
federal-law declaratory claims turn on the very same factual
questions—questions that, for all the reasons noted, the Texas
court can more efficiently resolve.
Third, because "the Texas and Virginia Suits involve ‘over-
lapping issues of fact [and] law,’" the district court concluded
that "permitting this action to go forward would result in
unnecessary entanglement between the federal and state court
systems." J.A. 241 (alteration in original) (quoting Kapiloff,
155 F.3d at 494). The risk of such entanglement is especially
acute where the same issues being litigated in federal court
"are already being litigated by the same parties in the related
state court action[ ]," since any factual determinations first
made in one proceeding would likely have preclusive effect
in the other, thus "frustrat[ing] the orderly progress of [the
other] proceeding[ ] by leaving the . . . court with some parts
of [the] case foreclosed from further examination but still
other parts in need of full scale resolution." Nautilus Ins. Co.
v. Winchester Homes, Inc., 15 F.3d 371, 379, 377 (4th Cir.
1994) (internal quotation marks omitted). This procedural
maze, of course, perfectly describes the instant case. The sim-
8 VRCOMPLIANCE v. HOMEAWAY, INC.
ilarities between the Texas and federal actions are, as the dis-
trict court aptly put it, "unambiguous." J.A. 241.
Consequently, the district court would almost certainly have
to accord any prior factual findings by the Texas court preclu-
sive effect, a prospect made all the more likely by the fact that
the Texas suit was filed first and has progressed further.
III.
The district court’s foregoing discussion is all well and
good, and we in no sense discount it. However, one consider-
ation looms above the rest and would justify the stay under
either Brillhart/Wilton or Colorado River. Thus, although
"[o]ur jurisprudence suggests that, in a ‘mixed’ complaint sce-
nario, the Brillhart/Wilton standard does not apply, at least to
the nondeclaratory claims. . . . [w]e need not express a defini-
tive view on this point" because even if we applied the height-
ened Colorado River standard, "the result would not change."
Great Am. Ins. Co. v. Gross, 468 F.3d 199, 211 (4th Cir.
2006). That is, appellants’ procedural gamesmanship renders
us unable to say that the district court abused its discretion
under either governing standard.
Crucially, Eye Street insisted on proceeding with its federal
action, rather than seeking to remove HomeAway’s action to
the appropriate federal district court in Texas, even after
HomeAway indicated it would not oppose removal. "At
numerous points," the district court noted, HomeAway
"evinced its assent to removal of the Texas Suit. And at no
point did [Eye Street] argue removal of the Texas Suit would
have been improper." J.A. 243 n.11. Eye Street thus desired
not a federal forum per se, but one that would approach the
dispute on its terms and potentially preempt HomeAway’s
alternative framing of the issues in the Texas suit. This, of
course, is precisely the kind of "procedural fencing" that fed-
eral case law aims to forestall. Kapiloff, 155 F.3d at 494.
Congress designed the federal removal statute, 28 U.S.C.
§ 1446, as the primary avenue for obtaining federal court
VRCOMPLIANCE v. HOMEAWAY, INC. 9
review of claims already pending in a state court. Under the
statute, a defendant in an action pending in state court may
seek to remove the action only to the federal district court "for
the district and division within which such action is pending."
Id. § 1446(a). But if the defendant could gain a federal forum
in any federal district court with personal jurisdiction over the
state court plaintiffs simply by filing a federal action recasting
the claims against it as declaratory claims, then the removal
statute’s comprehensive jurisdictional scheme would be sup-
planted with a regime of forum shopping. District courts
enjoy discretion to consider a litigant’s deliberate decision to
forego removal as a reason to stay its federal declaratory
action.
Colorado River does not counsel the contrary. That deci-
sion embodies the notion that, barring "exceptional circum-
stances," litigants should have access to a federal forum
where Congress has afforded them one. 424 U.S. at 813. This
principle is especially salient where, as here, some of a liti-
gant’s claims are based on federal law. But in Colorado River
all the federal claims were nondeclaratory. Here, all of Eye
Street’s federal claims are declaratory, where the breadth of
the district court’s discretion reflects the permissive language
in the Declaratory Judgment Act itself. See 28 U.S.C. § 2201(providing that a district court "may declare the rights and
other legal relations of any interested party seeking such dec-
laration" (emphasis added)). In any event, Eye Street has
always had access to a federal forum for all its claims, federal
and state, via removal of HomeAway’s Texas suit to federal
district court. Because Eye Street decided voluntarily to
forego the opportunity to litigate in one federal forum, the
concerns underlying Colorado River are now mitigated as it
seeks to litigate in another.
Moreover, as the district court emphasized, because it
issued a stay rather than dismissing Eye Street’s action out-
right, it has by no means "thwart[ed] . . . Eye Street’s access
to a federal forum for resolution of [its] federal claims or
10 VRCOMPLIANCE v. HOMEAWAY, INC.
additional claims that properly invoke the [district court’s]
jurisdiction." J.A. 243 n.11. The Supreme Court has coun-
seled this exact course in cases like the instant one. See Wil-
ton, 515 U.S. at 288 n.2 ("We note that where the basis for
declining to proceed is the pendency of a state proceeding, a
stay will often be the preferable course, because it assures that
the federal action can proceed without risk of a time bar if the
state case, for any reason, fails to resolve the matter in contro-
versy.").
Of course, the district court issued the stay based in part on
the belief that the Texas court is likely to answer the central
questions in the dispute, including those underlying Eye
Street’s federal declaratory claims. But insofar as this means
that Eye Street is unlikely to have a chance to litigate those
questions in federal court, it yet again has only itself to blame,
for it deliberately chose not to remove HomeAway’s Texas
action. A party should not be heard to complain that it lacks
a federal forum when such deprivation stems from its own
apparent procedural gamesmanship.
We thus conclude that the district court did not abuse its
discretion in staying Eye Street’s action. Given the strong
case for a stay under the Kapiloff factors and Eye Street’s
deliberate choice to forego removal, the court’s decision
would be an appropriate exercise of discretion under either
Brillhart/Wilton or Colorado River.
IV.
For the foregoing reasons, the judgment of the district court
is affirmed.
AFFIRMED