The U.S. Court of Appeals for the Second Circuit has held that the "special circumstances" exception to the usual "first to file" rule used to determine priority when competing lawsuits have been filed in different forums does not apply merely because the plaintiff here, two insurance carriers in the first-filed action was partly motivated by a desire to select a forum with favorable law.
When a dispute involving the same parties and the same issues results in lawsuits pending in different federal courts, the "first-filed rule" creates a presumption that the earlier filed case will take priority. There are, however, two categories of exceptions to this rule that allow the later-filed case to take precedence: if a "balance of convenience" test tilts in favor of the later-filed case's forum; and if "special circumstances" exist.
Employers Insurance of Wausau, et al. v. Fox Entertainment Group, Inc., --- F.3d --- (2d Cir. March 27, 2008), arose out of an insurance coverage dispute between Employers Insurance of Wausau and National Casualty Company (the insurers) and several subsidiaries of News Corporation (collectively, News Corp.). News Corp. first gave notice to the insurers of a potential California-based claim under certain policies in May 2005, eighteen months after it learned of the underlying facts. After nine months of correspondence between the insurers and News Corp. concerning various coverage-related issues, the insurers sued News Corp. in the Southern District of New York on February 28, 2006, seeking a declaratory judgment that they had no obligations to News Corp. due to News Corp.'s breach of the policies' provisions requiring prompt notice to and cooperation with the insurers.
Initially, the insurers sued only three News Corp. defendants with relatively strong ties to New York, and only several months later amended their complaint to add several other News Corp. subsidiaries with principal places of business in California (the California defendants). Less than a month later, News Corp. filed suit against the insurers in California seeking a declaration that it was entitled to coverage by the insurers. News Corp. quickly followed up with a motion to dismiss the insurers' New York action in favor of its own California action.
The district court granted the motion to dismiss the New York action on July 27, 2006, because it found that the insurers' choice of New York as a forum was due to New York's more favorable law (to insurers) concerning late notice of claims. While the district court was able to point to other district court precedents holding that evidence of forum shopping could amount to "special circumstances," the district court's finding also appeared to be motivated by its belief that the insurers' preemptive filing was seriously unfair, even if not strictly forbidden.
In particular, the district court found unacceptable the insurers' decision to file the New York action to disclaim coverage before responding to News Corp.'s request for coverage -- even, according the district court, before News Corp. actually requested coverage. The district court also found that the initial roster of defendants in the insurers' New York action proved that the insurers were trying to "game" any future dispute over the proper forum because the original complaint in the New York action had, in the district court's view, conspicuously omitted the California defendants. (The district court, however, did not explain how the insurers' amendment of its complaint to add the California defendants fit into this analysis of the insurers' motives.) These facts, according to the district court, proved that the insurers' New York action had caught News Corp. "off-guard" and was "designed to manipulate questions of forum and law." The district court found this conduct sufficient to hold that "special circumstances" existed and dismissed the New York action in favor of News Corp.'s California action.
On appeal, the Second Circuit clarified that forum shopping could not amount to a "special circumstance" and therefore up-end the presumption in favor of the first-filed action unless "the first-filing plaintiff [engaged] in some manipulative or deceptive behavior, or the ties between the litigation and the first forum [were] so tenuous or de minimis that a full balance of convenience' analysis would not be necessary to determine that the second forum is more appropriate than the first." Just as important, the Second Circuit signaled a far more approving attitude than the district court toward the efforts of litigants and lawyers to choose a forum with favorable law: "Any lawyer who files a case on behalf of a client must consider which of the available fora might yield some advantage to his client, and thus, to that degree, engages in forum shopping.'"
Having thus narrowed the special circumstances exception as applied to accusations of forum shopping, the Second Circuit found that the district court had based its findings respecting the insurers' motives on a factual error: contrary to the district court's opinion, the record showed that News Corp. had requested coverage well before the insurers filed the New York action. Because the insurers were entitled under New York law to disclaim coverage by filing a declaratory judgment action without prior notice to News Corp., the Second Circuit found that the district court had abused its discretion. Accordingly, it reversed the dismissal and remanded to the district court so the balance of convenience test could be applied.
Because the choice of law issue appeared to be determinative of the insurers' late-notice defense, the Second Circuit's rejection of forum shopping as a "special circumstance" underscores the importance of forum consideration.
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