J-M Manufacturing Company, Inc. v. Phillips & Cohen , 443 N.J. Super. 447 ( 2015 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-5867-13T2
J-M MANUFACTURING COMPANY,
INC.,
APPROVED FOR PUBLICATION
Plaintiff-Appellant, December 30, 2015
v. APPELLATE DIVISION
PHILLIPS & COHEN, LLP, and
JOHN HENDRIX,
Defendants-Respondents.
Argued October 15, 2015 – Decided December 30, 2015
Before Judges Alvarez, Ostrer, and Haas.
On appeal from the Superior Court of New
Jersey, Law Division, Middlesex County,
Docket No. L-0792-14.
Robert A. Assuncao argued the cause for
appellant (Ansa Assuncao, LLP, attorneys;
Mr. Assuncao, Steven F. Gooby, and Kenneth
A. Burden, on the briefs).
Brian J. Molloy argued the cause for
respondent Phillips & Cohen, LLP (Wilentz,
Goldman & Spitzer, P.A., attorneys; Mr.
Molloy and Willard C. Shih, of counsel and
on the brief; Corinne L. McCann, on the
brief).
John M. Falzone argued the cause for
respondent John Hendrix (Parker Ibrahim &
Berg LLC, attorneys; Mr. Falzone, on the
brief).
The opinion of the court was delivered by
ALVAREZ, P.J.A.D.
Plaintiff J-M Manufacturing Company, Inc., (J-M) appeals
the dismissal, based on the entire controversy doctrine, of its
complaint. For the reasons that follow, we affirm the Law
Division judge's conclusion that J-M should have pursued its
causes of action in the pending California whistleblower qui tam
proceeding filed under the False Claims Act (FCA), 31 U.S.C.A.
§§ 3729-3732, and not in New Jersey.
I.
Defendant John Hendrix, represented by defendant Phillips &
Cohen, LLP (Phillips), filed the qui tam action on January 17,
2006. The case was filed in California because J-M's
headquarters are there. Hendrix alleged that J-M knowingly
perpetrated a fraud upon various government purchasers in the
sale of PVC pipe having only a fraction of its claimed strength.
We summarize the circumstances Hendrix, the "relator" as
defined in the FCA, alleged in the qui tam final amended
complaint. J-M hired Hendrix, an engineer, in July 2002, to
work in its Livingston, New Jersey products assurance division.
His job included technical oversight responsibilities and
customer interaction regarding "the tensile strength of J-M's
PVC pipe." By 2004, Hendrix "became increasingly aware that J-
M's tensile strength problems were not the result of
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inadvertence [in the manufacturing process], but rather were
part of a larger scheme to defraud its customers . . . ."
The products were sold to numerous federal, state, and
local governmental entities around the nation. In 2005, Hendrix
wrote a final memorandum to his superiors expressing his
concerns that the PVC pipe did not meet industry standards. He
was terminated approximately a week later.
Pursuant to the FCA process, the United States government
completed a years-long investigation after the qui tam complaint
was filed and placed under seal. 31 U.S.C.A. § 3730(a). Once
the federal government decided not to assume control of the
case, Hendrix was permitted to proceed on his own. 31 U.S.C.A.
§ 3730(c)(3). The federal complaint was unsealed in February
2010. Needless to say, the stakes are high for all parties,
because of the potential recovery authorized by the "bounty
provisions" of the FCA, 31 U.S.C.A. § 3730(d), potential damage
awards payable by J-M to government purchasers, 31 U.S.C.A.
§ 3729(a), and counsel fees payable to the prevailing parties.
31 U.S.C.A. § 3730(d).
Following a bifurcated trial in California, a jury found
against J-M on forty-nine of forty-nine claims of fraud as to
five exemplar plaintiffs. The California action is currently
pending resolution of the second phase, which will address
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damages and include non-exemplar plaintiffs. The parties
disagree as to the meaning of the jury's verdict and the status
of the proceedings. Suffice it to say that the federal jury's
verdict was rendered November 14, 2013, and J-M's New Jersey
complaint was filed shortly thereafter, on February 21, 2014.
We also summarize the relevant circumstances alleged in
J-M's twenty-three-page amended complaint in this case.
Attorneys from Phillips, which has offices in California, met
with Hendrix in 2005. As a result of "their concerted activity,
in furtherance of the litigation," J-M claims Hendrix, among
other things, wrongfully removed and copied numerous
confidential documents and electronic data, including trade
secrets, proprietary information, and "proprietary customer
order and pricing information[,]" and either kept notes of
conversations with co-workers and/or secretly taped them. J-M
contends Hendrix violated the specific terms of his written
"Employee Secrecy Agreement," breached his fiduciary duty to his
employer, committed computer related offenses, and committed
"trespass to chattels." J-M alleges Phillips tortiously
interfered with J-M's contractual rights and tortiously
interfered with J-M's prospective economic advantage, and that
both defendants conspired to harm J-M and engaged in
racketeering.
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Defendants' motions to dismiss pursuant to Rule 4:6-2(e)
were granted on June 30, 2014. During oral argument, when
pressed as to J-M's reason for not pursuing a counterclaim
against Hendrix and Phillips in the California proceeding, no
answer the court considered satisfactory was forthcoming. The
judge found that the claims were compulsory counterclaims under
federal and California law that should have been raised in the
qui tam proceeding, and that in the alternative, the entire
controversy doctrine barred the New Jersey litigation. For
those reasons, he dismissed as to Hendrix.
Since Phillips's exposure was entirely derivative of
Hendrix's liability, arising solely from the firm's
representation of the relator, he also dismissed the counts
against the law firm. The judge noted that any counterclaim
pursuant to federal law could be stayed if necessary in the
California case pending resolution of the qui tam matter.
J-M raises several points on appeal. We only address one,
that the court erred in finding the entire controversy doctrine
barred J-M's pursuit of relief in New Jersey. The remaining
issues are made moot by our decision. See Advanced Elec. Co.,
Inc. v. Montgomery Twp. Bd. of Educ., 351 N.J. Super. 160, 166
(App. Div.) ("A case is mooted if the disputed issue is
resolved . . . . Thus, a court will not decide a case if the
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issues are hypothetical, [or] a judgment cannot grant effective
relief[.]" (citations omitted)), certif. denied, 174 N.J. 364(2002).
II.
In reviewing a Rule 4:6-2(e) dismissal, we employ the same
standard as that applied by the trial court. Donato v. Moldow,
374 N.J. Super. 475, 483 (App. Div. 2005). Our review is
limited to the "legal sufficiency of the facts alleged in the
complaint." Id. at 482. We "assume the facts as asserted by
plaintiff are true[,]" and we give the plaintiff "the benefit of
all inferences that may be drawn[.]" Banco Popular N. Am. v.
Gandi, 184 N.J. 161, 166 (2005) (quoting Velantzas v. Colgate-
Palmolive Co., 109 N.J. 189, 192 (1988)). Dismissal is
appropriate only if "the complaint states no basis for relief
and discovery would not provide one." Ibid.J-M makes two arguments in support of its contention that
the entire controversy doctrine does not apply to the New Jersey
action despite the California proceedings. First, that the
cases are not sufficiently alike in fact or in the legal
theories relevant to each. Secondly, that the doctrine does not
apply to simultaneous proceedings.
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III.
J-M contends that its New Jersey complaint is not barred by
the entire controversy doctrine because it lacks the necessary
"commonality of facts" with the California case. See Alpha
Beauty Distribs., Inc. v. Winn Dixie Stores, Inc., 425 N.J.
Super. 94, 105 (App. Div. 2012) (quoting DiTrolio v. Antiles,
142 N.J. 253, 258 (1995)). J-M further contends that different
witnesses and evidence are required and that any liability
determination in the FCA case would have no impact on the New
Jersey proceedings.
The entire controversy doctrine requires that a party
"litigate all aspects of a controversy in a single legal
proceeding." Kaselaan & D'Angelo Assocs. v. Soffian, 290 N.J.
Super. 293, 298 (App. Div. 1996) (quoting Leisure Tech.-Ne.,
Inc. v. Klingbeil Holding Co., 137 N.J. Super. 353, 357 (App.
Div. 1975)). "[A]ll claims arising from a particular
transaction or series of transactions should be joined in a
single action." Archbrook Laguna, LLC v. Marsh, 414 N.J. Super.
97, 105 (App. Div. 2010) (citing Brennan v. Orban, 145 N.J. 282,
290 (1996)). "Non-joinder of claims required to be joined by
the entire controversy doctrine shall result in the preclusion
of the omitted claims . . . ." R. 4:30A.
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The doctrine, important to our jurisprudence, was designed:
(1) to encourage the comprehensive and
conclusive determination of a legal
controversy;
(2) to achieve party fairness, including
both parties before the court as well as
prospective parties; and
(3) to promote judicial economy and
efficiency by avoiding fragmented, multiple
and duplicative litigation.
[Mystic Isle Dev. Corp. v. Perskie & Nehmad,
142 N.J. 310, 322 (1995).]
The doctrine, however, is ultimately "one of judicial
fairness and will be invoked in that spirit." Archbrook, supra,
414 N.J. Super. at 104 (quoting Crispin v. Volkswagenwerk, A.G.,
96 N.J. 336, 343 (1984)). Causes of action which arise out of
the same transaction or transactional circumstances are
considered duplicative if the "factual circumstances giving rise
to the controversy itself" are the same. Brennan, supra, 145
N.J. at 290.
Here, J-M's allegations against both Hendrix and Phillips
all stem from Hendrix's conduct in gathering information for the
qui tam complaint, undertaken because of Hendrix's suspicion
that J-M was defrauding governmental entities by its production
of PVC pipe that did not meet industry standards. Both the qui
tam action and this case arise out of J-M's alleged fraud and
Hendrix's subsequent investigation. The information and
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documents in Hendrix's possession are the basis for the qui tam
action. Even Hendrix's supposed breach of his "Employee Secrecy
Agreement," or other contractual obligations as an employee,
occurred in preparing for the qui tam action. Therefore, this
New Jersey complaint is clearly based on the same transaction or
series of transactions as the qui tam action. See Archbrook,
supra, 414 N.J. Super. at 105.
Moreover, to allow the New Jersey action to proceed would
result in "fragmented, multiple and duplicative litigation" that
would not achieve fairness to the parties. See Mystic Isle,
supra, 142 N.J. at 322. Counterclaims may be filed in qui tam
litigation, although ultimately subject to dismissal to avoid
indemnification or offset in light of the public policy behind
the implementation of the FCA. Madden v. Gen. Dynamics Corp.,
4 F.3d 827, 830-31 (9th Cir. 1993).
The federal courts have long distinguished between
counterclaims seeking only indemnification, and counterclaims
for independent damages which might nonetheless have the effect
of indemnifying a qui tam defendant. Madden, supra, 4 F.3d at
830-31. Although qui tam defendants are not permitted to
offset their liability by seeking indemnification or
contribution from the relator, "[c]ounterclaims for independent
damages are distinguishable, however, because they are not
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dependent on a qui tam defendant's liability." Ibid. "If a qui
tam defendant is found liable the counterclaims [for independent
damages] can then be dismissed on the grounds that they will
have the effect of providing for indemnification or
contribution." Id. at 831. "On the other hand, if a qui tam
defendant is found not liable, the counterclaims can be
addressed on the merits." Ibid. This "mechanism" is intended
"to insure [sic] that relators do not engage in wrongful conduct
in order to create the circumstances for qui tam suits and to
discourage relators from bringing frivolous actions." Id. at
831. The causes of action against Hendrix and Phillips accrued,
and became known, once the qui tam complaint was unsealed.
Simply stated, J-M has the right to pursue a counterclaim in the
federal proceeding, in nature no different than the complaint
filed in New Jersey.
In fact in Madden, supra, 4 F.3d at 829, the defendant's
counterclaim for damages was strikingly similar to the one here.
It included "1) breach of duty of loyalty and breach of
fiduciary duty; 2) breach of implied covenant of good faith and
fair dealing; 3) violations of the California labor code; 4)
libel; 5) trade libel; 6) fraud; 7) interference with economic
relations; 8) and misappropriation of trade secrets." Ibid.10 A-5867-13T2
To allow J-M's New Jersey complaint to stand would be
unfair to Hendrix while sidestepping the public policy goals
behind the FCA. The FCA is designed to protect a relator, and
encourage the very whistleblowing activities for which J-M seeks
recovery in New Jersey.1 Indeed, the law provides for not only a
significant bounty for a relator, but also protection from
employer retaliation. Cell Therapeutics v. Lash Group, Inc.,
586 F.3d 1204, 1206 (9th Cir. 2010).
J-M, the defendant in the California proceedings, should
not be able to effectively indemnify itself for any portion of
its qui tam liability by suing the relator and his lawyers in
this state. Nor should J-M be able to sidestep the employee
protection the FCA gives Hendrix by filing its claim in New
Jersey. Clearly, the New Jersey litigation is being pursued to
gain unfair advantage and to engage in the very forum shopping
1
Prior to oral argument, J-M's counsel brought to our attention
the Supreme Court's decision in State v. Saavedra, 222 N.J. 39(2015). The case disallowed self-help in employment
discrimination cases as an alternative to legal processes. It
allowed the criminal prosecution for theft of documents to go
forward; however, the documents in that case were individual
student records removed from a school in violation of federal
and state confidentiality laws. Furthermore, the Court
distinguished between criminal prosecutions and retaliatory
civil actions which may still be barred pursuant to a multi-
factor balancing test. See Quinlan v. Curtiss-Wright Corp, 204
N.J. 239 (2010).
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that the entire controversy doctrine is intended to avoid. See
Archbrook, supra, 414 N.J. Super. at 107.
It follows that we agree with the Law Division judge that
the complaint must be dismissed as to Phillips as well. J-M
fails to assert a theory under which Phillips could be found
liable other than for assisting or directing Hendrix's
investigation.
If Hendrix's conduct was not illegal or tortious, a
question dependent on the outcome of the qui tam action,
Phillips cannot be held accountable for assisting or directing
legal non-tortious conduct. In a civil conspiracy, the "gist of
the claim is . . . the underlying wrong, which absent
conspiracy, would give a right of action." Banco Popular,
supra, 184 N.J. at 177-78 (quoting Morgan v. Union Cty. Bd. of
Chosen Freeholders, 268 N.J. Super. 337, 364 (App. Div. 1993)).
To impose liability for "aiding and abetting" it is "essential
that the conduct of the actor be in itself tortious[.]" State,
Dep't. of Treasury v. Qwest Commc's Int'l, Inc., 387 N.J. Super.
469, 482 (App. Div. 2006) (quoting §876(b) of the Restatement
(Second) of Torts (1979)). If Hendrix did nothing wrong,
Phillips's representation cannot be considered conduct amounting
to a civil conspiracy.
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The same analysis applies to J-M's other allegations of
wrongdoing by Phillips. We cannot imagine a scenario, and J-M
does not suggest one, in which Phillips could be held
individually responsible for damages without Hendrix being first
found to have been a wrongdoer. Any liability on Phillips is
derivative of Hendrix's liability. We agree with the Law
Division judge on the point.
Additionally, the entire controversy doctrine mandates
dismissal as to Phillips when applied directly. Although
Phillips is not a party to the California litigation, the
complaint against Phillips arises out of the same transaction.
J-M argues it must separately sue Phillips because the law
firm could not be joined in a counterclaim while acting as
counsel in the qui tam action. Procedurally, however, as is the
practice with counterclaims against relators, the causes of
action against Phillips could be held in abeyance pending the
final outcome of the qui tam action. See Cell Therapeutics,
supra, 586 F.3d at 1208-09. Thereby the court most familiar
with the federal proceedings and the parties could separately
deal with any claims against Phillips after J-M's liability has
been determined.
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IV.
Alternatively, J-M contends that this action falls outside
the scope of the entire controversy doctrine because it does not
apply to litigation conducted simultaneously. In response,
Hendrix and Phillips point out that this argument is raised for
the first time on appeal. They therefore argue that we should
not consider the issue as it was not plain error, is not
jurisdictional in nature, nor does it involve important issues
of public interest. See Nieder v. Royal Indem. Ins. Co., 62
N.J. 229, 234 (1973).
Under the plain error standard, where an error is "clearly
capable of producing an unjust result," Rule 2:10-2, an order or
judgment will be reversed. First, however, a determination must
be made that an error occurred. Ibid. Since we find the judge
did not err at all, his decision was not plain error. The issue
is not jurisdictional in nature. However, we do consider the
question to be one of sufficient importance to merit discussion.
J-M relies on Kaselaan as support for the argument that the
entire controversy doctrine does not apply to simultaneous
proceedings. In Kaselaan, the plaintiff filed an action in the
Law Division when he already had a case arising out of the "same
sequence of events" pending in federal district court.
Kaselaan, supra, 290 N.J. Super. at 296. In Kaselaan, we
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concluded that the entire controversy doctrine did not require
dismissal where multiple actions involving the same or related
claims were pending simultaneously. Id. at 299. Instead, we
suggested other procedural tools to prevent any unfairness to
litigants or the waste of judicial resources, such as a stay of
our proceedings until the disposition of the case in federal
court. Id. at 300.
But in Kaselaan, we also said: "where it would be
inappropriate for both cases to proceed simultaneously, 'the
general rule [is] that the court which first acquires
jurisdiction has precedence in the absence of special
equities.'" Ibid. (alteration in original) (quoting Yancoskie
v. Delaware River Port Auth., 78 N.J. 321, 324 (1978)).
Clearly, the California court was not only the first, but was
for several years, the only court dealing with these parties.
Kaselaan makes the point that there should not be a
mechanistic application of the entire controversy doctrine.
Rather, courts should carefully examine the interests of the
parties, expenditure of judicial resources, and any procedural
mechanisms available to achieve a just result. See id. at
300-01.
Since Kaselaan, we have restated those principles. The
decision whether to apply the entire controversy doctrine is
15 A-5867-13T2
"ultimately 'one of judicial fairness and will be invoked in
that spirit.'" Archbrook, supra, 414 N.J. Super. at 104(quoting Crispin, supra, 96 N.J. at 343). It is not an
artificial bright line rule. See id. at 104-05.
In Archbrook, the New Jersey plaintiff dismissed its
counterclaim in the Georgia case, where it was the defendant,
and filed suit here based on "the same transaction or series of
transactions." Supra, 414 N.J. Super. at 103, 106. There was
no showing that the Georgia court would have barred the
counterclaim, which was equivalent to the complaint in New
Jersey. Id. at 107. The Georgia case was tried, and the
plaintiff there, defendant here, recovered a total judgment in
excess of two million dollars, id. at 104, while the New Jersey
action was pending. In Archbrook, we applied the entire
controversy doctrine to affirm the summary judgment dismissal of
the New Jersey proceedings because the case was filed to gain
unfair advantage in this state, as opposed to disposing of all
the claims on the merits in the Georgia proceeding.
The New Jersey plaintiff's dismissal of its counterclaim in
Georgia, and attempt to litigate in New Jersey, was precisely
the kind of deliberate manipulation and forum shopping that the
entire controversy doctrine is intended to avoid. Id. at 110.
We even expressed concern that the New Jersey defendant failed
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to earlier move for summary judgment, possibly to gain some
procedural advantage in the Georgia proceeding. Id. at 110. As
we observed, equitable considerations might result in a court's
refusal to apply the entire controversy doctrine because
although the "parties are entitled to zealously litigate in
their own best interests, they also owe the judicial system a
further duty." Ibid.Since a defendant in a qui tam proceeding has the right to
pursue a counterclaim against the relator seeking money damages,
and even to pursue an independent claim against third parties, 2
the circumstances approximate those in Archbrook, not Kaselaan.
The concern in Kaselaan was that the plaintiff would lose his
ability to have his dispute adjudicated at all. The concern in
Archbrook was that the complaint was filed in New Jersey by the
Georgia defendant in an effort to double the litigation expense
for the Georgia plaintiff and avoid a possible negative outcome
in Georgia.
Hence we conclude that J-M's reading of Kaselaan
misinterprets the holding in that case. The thrust of Kaselaan,
followed in Archbrook, is that the entire controversy doctrine
must be applied in order to achieve fairness. The substantive
question is whether application of the doctrine meets the goals
2
See Cell Therapeutics, supra, 586 F.3d at 1213.
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of fairness to the parties while allowing for judicial economy
and efficiency.
Having assumed that the facts as asserted by J-M are true,
and drawing all inferences in its favor, we nonetheless conclude
dismissal is mandated by the entire controversy doctrine. The
issues are properly adjudicated in conjunction with the
California qui tam proceeding. We do not reach J-M's remaining
points of error.
Affirmed.
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