The opinion
Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
4-26-2004
ITT Corp v. Intelnet Intl Corp
Precedential or Non-Precedential: Precedential
Docket No. 02-4035
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PRECEDENTIAL Intelnet International Corporation;
Intelnet Services of North America,
Inc.;
UNITED STATES Inntraport International, Inc.;
COURT OF APPEALS Intelnet N.A., Inc.;
FOR THE THIRD CIRCUIT Intelepower N.A., Inc.;
Intelemedia N.A., Inc.;
Associated Business Telephone
Systems Corp.;
Nos. 02-4035 / 02-4205 A.B.T.S. International Corporation;
Michael Dalia;
Craig Brunet
ITT CORPORATION; Appellants (No. 02-4205)
ITT SHERATON CORPORATION;
STARWOOD HOTELS AND
RESORTS On Appeal from the
WORLDWIDE, INC. United States District Court
for the District of New Jersey
Appellants (No. 02-4035) D.C. Civil Action No. 01-cv-05410
(Honorable Jerome B. Simandle)
v.
INTELNET INTERNATIONAL Argued December 11, 2003
CORPORATION;
INTELNET SERVICES OF NORTH
AM ERICA, INC.; Before: AMBRO, FUENTES and
CONCIERGE PLUS; GARTH, Circuit Judges
INNTRAPORT INTERNATIONAL,
INC.; (Opinion filed April 26, 2004)
INTELNET N.A., INC.;
INTELEPOWER N.A., INC.; Edward J. Yodowitz, Esq.
INTELECABLE N.A., INC.; Skadden, Arps, Slate, Meagher & Flom
INTELEMEDIA N.A., INC.; Four Times Square
ASSOCIATED BUSINESS New York, NY 10036
TELEPHONE
SYSTEM CORP.; Robert J. Del Tufo, Esq. (Argued)
A.B.T.S. INTERNATIONAL Cynthia V. Fitzgerald, Esq.
CORPORATION; Danielle A. Cutrona, Esq.
DOMINIC DALIA; Skadden, Arps, Slate, Meagher & Flom
MICHAEL DALIA; One Newark Center, 18th Floor
CRAIG BRUNET; Newark, NJ 07102
JOHN DOES 1-10 Attorneys for Appellants/
Cross-Appellees
comply with the applicable statute of
Arthur R. Miller, Esq. (Argued) limitations. ITT’s RICO claims allege that
Harvard Law School Intelnet has engaged in a pattern of
1755 Massachusetts Avenue entering into contracts it cannot perform
Cambridge, MA 02138 with the intent of seizing upon its
customers’ purported breaches to extort
Jerome M. Congress, Esq. settlements by threats of vexatious
Milberg, Weiss, Bershad, Hynes & Lerach litigation. Prior to initiating its federal
One Pennsylvania Plaza action, ITT raised substantially identical
48 th Floor claims in a state court case by means of a
New York, NY 10119 motion to amend its pleadings. The state
court denied the motion.
Carl D. Poplar, Esq.
On cross-appeal, Intelnet argues
Poplar & Eastlack
that the District Court erred in holding that
1010 Kings Highway South
it had jurisdiction, as the Rooker-Feldman
Building Two
doctrine “preclude[s] lower federal court
Cherry Hill, NJ 08034
jurisdiction over claims that were actually
Attorneys for Appellees/
litigated or ‘inextricably intertwined’ with
Cross-Appellants
adjudication by a state’s courts.” Parkview
Assocs. P’shp. v. City of Lebanon, 225
F.3d 321, 325 (3d Cir. 2000) (quoting
Gulla v. North Strabane Township, 146
OPINION OF THE COURT
F.3d 168, 171 (3d Cir. 1998)). We agree
with Intelnet that Rooker-Feldman bars
federal jurisdiction in this case.
AM BRO, Circuit Judge
I. Factual and Procedural History
Plaintiffs ITT Corporation (“ITT
ITT Corp. owns and operates hotels
Corp.”), ITT Sheraton C orporation
and casinos.2 Its affiliates include
(“Sheraton”) and Starwood Hotels and
Sheraton and Caesar’s World, Inc.
Resorts Worldwide, Inc. (“Starwood”)
(“Caesar’s”). Intelnet International Corp.
appeal the District Court’s dismissal of
(“Intelnet International”), Intelnet Services
their Racketeer Influenced and Corrupt
of North America, Inc. (“Intelnet
Organization Act (“RICO”) action against
Services”), INNtraport International, Inc.,
various Intelnet entities1 for failure to
Intelecable N.A., Inc., and Intelemedia
1
Unless the context requires otherwise,
for convenience purposes we use “ITT” entity or entities on the other.
when referring to any ITT-related entity or
2
entities on the one hand, and “Intelnet” In February 1998, ITT Corp. became a
when referring to any Intelnet-related wholly owned subsidiary of Starwood.
2
N.A., Inc. purchase telephone services in ITT for breach of contract.3 Intelnet
volume from major carriers and resell alleged that in early 1997 Sheraton began
those services to hotels and hotel working with other companies, such as
companies, as well as residential Microsoft Corporation, to develop
customers, at a reduced rate. Sheraton.Net, which w ould service
Sheraton hotel guests in Asia. Intelnet
In 1996, ITT and Intelnet entered
argued that the negotiations between
into a series of contracts for Intelnet’s
Sheraton and M icrosoft breached the C+
provision of telecommunications and
Agreement and the RMPA.4
media services to ITT’s hotels and casinos.
Intelnet represented that it would provide In February 1998 ITT filed various
to ITT a proprietary system called the state law counterclaims against Intelnet,
“Intelnet Platform,” which it claimed including fraud, misrepresentation, and
would provide enhanced services such as breach of contract. Some time later, based
high-speed internet access and video-on- purportedly upon information obtained
demand. The principal contracts were the through discovery in the New Jersey state
C+ Ope rating Ag reeme nt (“C+ court action and through its independent
Agreement”), dated July 3, 1996, and the investigation, ITT filed a motion to amend
A m e n d e d a n d R e s t a te d M a s t e r its pleadings to add counterclaims against
Promotional Agreement (“RMPA”), dated Intelnet under the federal and New Jersey
October 3, 1996. RICO statutes, 18 U.S.C. § 1962(c) & (d)
and N.J. Stat. Ann. § 2C:41-2(c) & (d).
The C+ Agreement formed a
The proposed counterclaims asserted that
limited liability company, Concierge Plus,
Intelnet had engaged in a pattern of
L.L .C., through which Intelnet
racketeering activity by entering into
International and ITT Intelnet Investment
contracts, knowing that it was incapable of
Corp., a wholly owned subsidiary of ITT
performing them, with the intent of
Corp., would share future profits and
extorting settlements from its customers by
Intelnet International would provide
telecommunications products and services.
But Concierge Plus never provided any of
3
the promised services. The RMPA, a Intelnet initially named as defendants
contract between ITT Corp. and Intelnet only ITT Corp. and Sheraton. The
Services, gave the latter the exclusive right complaint was later amended to include
to p rovid e c e r ta i n e n h a n c ed Starwood as well as various affiliates.
telecommunications products and services, 4
including high-speed internet access, to the According to ITT, Intelnet had advised
offices, hotels, and casinos of ITT Corp. ITT that it could not perform in Asia. ITT
and several of its affiliates. also notes that Sheraton.Net was never
implemented. We need not examine the
In December 1997 Intelnet filed an viability of Intelnet’s claim for breach of
action in New Jersey state court against contract, which is irrelevant to our
disposition of this appeal.
3
threatening to entangle them in extensive intended to encompass
and costly litigation based on their breaches of contract, even
purported breaches. The State Court, per breaches of contract that
Judge John A. Fratto, denied the motion to involve $800 million. . . .
amend. Judge Fratto explained: And, I don’t see sufficient in
the proposed complaint that
The ru l e s a ys t h at
I should permit after three
amendments to pleadings
and a half years an
should be freely given. The
amendment to an answer to
rule provides that there be a
raise a RICO claim with all
motion in order to obtain the
of its concomitant results[;]
amendment to the pleading,
so the motion to amend the
so it does not mean that you
answer will be denied.
are automatically entitled to
amend the pleadings at any
time. . . . Whether it be
Judge Fratto’s accompanying Order did
RICO or some other cause
not specify whether ITT’s motion was
of action, there are judges .
denied with or without prejudice. ITT
. . that will allow all
suggests that the motion was denied
amendments on the theory
without prejudice because it was filed
that they can be dealt with
three and one half years after the
later on when the other side
complaint. Intelnet, by contrast, contends
m a k e s a m o ti o n f o r
that the state court also rejected the motion
summ ary judgm ent, a
on the merits and therefore it was with
motion to dismiss[], motion
prejudice.
to strike the pleadings. That
has not been my ITT filed this action in the United
procedure. . . . States District Court for the District of
New Jersey in November 2001. Its
I’ve looked at the
complaint states that “it only was after
proposed amendments . . .
discovery commenced in the New Jersey
and at best it seems that the
Litigation . . . that the ITT Parties
allegation is . . . that the
discovered that the Intelnet Parties had no
plaintiffs were unable to
ability or intent to perform under Intelnet’s
fulfill their contract, and
contract with the ITT Parties, and further,
every time they wrote a
that the Intelnet parties had a history of
letter or sent a wire,
engaging in this pattern of fraudulent
knowing that they were
conduct and racketeering activity.” ITT
unab le to fulfill their
also alleges a variety of fals e
contract, the[y] committed a
representations by Intelnet regarding its
RICO violation.
capabilities, describes evidence of
I don’t think RICO is or was Intelnet’s “extortionate objectives,” and
4
lists numerous acts of alleged mail and its burden of demonstrating the existence
wire fraud. In essence, ITT’s federal of “storm warnings” more than four years
action raises the same claims it sought to prior to the initiation of the federal action
introduce in the New Jersey case before (specifically, as early as January 1997). It
Judge Fratto.5 further determined that ITT had failed to
show that it was unable to discover its
In February 2002, Intelnet filed a
injuries, despite exercising due diligence,
motion to dismiss ITT’s federal complaint
within the applicable period.
based on the four-year statute of
limitations. The District Court granted ITT appeals on the bases that: (1)
Intelnet’s motion. In so doing, the Court the District Court misconstrued the nature
applied the two-step “injury discovery” of its RICO claims, which were founded
rule set out in Mathews v. Kidder, Peabody on extortion through threat of litigation
& Co., Inc., 260 F.3d 239, 250 (3d Cir. rather than fraudulent inducement; (2) the
2001). It concluded that Intelnet had met District Court relied on information
extrinsic to the pleadings, thereby
converting Intelnet’s motion to dismiss
5
To illustrate, the federal complaint of into a motion for summary judgment
ITT alleges that: (1) Intelnet had “an without providing notice of conversion;
extensive history of entangling their and (3) ITT did in fact act with reasonable
customers and vendors in contracts that the diligence subsequent to the “storm
Intelnet Companies could not perform, warnings” cited by the District Court.
with the ultimate goal of seizing upon a Intelnet cross-appeals, alleging that the
pretextual breach of contract by the District Court lacked jurisdiction in light
contracting party to extort a settlement of the Rooker-Feldman doctrine or should
payment from them under the threat of have abstained from exercising jurisdiction
protracted and expensive litigation,” (2) under the Colorado River doctrine.6
that the strategy of extortion was integral
to Intelnet’s business strategy, and (3) that
6
ITT, through discovery, had identified While “[i]t is axiomatic that the federal
many similar lawsuits. In its prior state courts have a ‘virtually unflagging
court counterclaim, ITT alleged that “the obligation . . . to exercise the jurisdiction
Intelnet parties used the U.S. Mail as a given them’ by Congress,” Ryan v.
critical part of their scheme to defraud the Johnson, 115 F.3d 193, 195 (3d Cir. 1997)
ITT parties, all in order to . . . wait until (quoting Colo. River Water Conservation
the Intelnet parties could seize upon some Dist. v. United States, 424 U.S. 800, 817
pretext to declare that the ITT parties had (1976)), the Colorado River doctrine
breached their agreements with Intelnet permits a federal court to refrain from
and then sue the ITT parties for an exercising its jurisdiction when the
extraordinary sum of money (hundreds of litigation would be duplicative of a
millions of dollars) unless the ITT parties concu rrent foreign or state court
paid the Intelnet [sic] exorbitant sums.” proceeding. Because the lower federal
5
Intelnet also argues that ITT has failed to satisfied to trigger Rooker-Feldman, and
plead its RICO claims with sufficient we struggle to conjure a scenario in which
particularity. As the Rooker-Feldman a claim would be “actually litigated” by a
doctrine bars federal jurisdiction in this state court and yet federal litigation of the
case, we go no further. same claim would not be “inextricably
intertwined” with the state court
II. Discussion
judgment.8 The “actually litigated” test is
A . Rooker-Feldman Doctrine as
Interpreted in the Third Circuit
Our Court’s boundaries for
the Rooker-Feldman doctrine are pinched
indeed. See, e.g., Parkview Assocs. P’ship 8
In Desi’s Pizza, we noted the factors
v. City of Lebanon, 225 F.3d 321, 326 (3d for determining whether an issue was
Cir. 2000). Nonetheless, the facts of this “actually litigated” by the state courts: a
case point to its application here. plaintiff must present its federal claims to
The Rooker-Feldman doctrine bars the state court, and the state court must
f e d e r a l j u r i s d ic t i o n u n d er t w o decide those claims. Id. at 419.
circumstances: if the claim was “actually Ordinarily, it will be more difficult to
litigated” in state court or if the claim is demonstrate that a claim was “actually
“inextricably intertwined” with the state litigated” than to show that the federal
adjudication. Desi’s Pizza, Inc. v. City of claim is “inextricably intertwined” with
Wilkes-Barre, 321 F.3d 411, 419 (3d Cir. the state court judgment. The former
2003); Parkview Assocs., 225 F.3d at requires that the state court has considered
325.7 Our discussion examines whether a and decided precisely the same claim that
District Court judgment in favor of ITT on the plaintiff has presented in the federal
the RICO claims would be inextricably court. Conversely, two claims may
intertwined with the state court litigation. proceed on different theories or involve
Only one prong of the test need be different parties and yet be inextricably
intertwined if the District Court’s
judgment would “prevent a state court
courts lack jurisdiction in this case under from enforcing its orders.” Id. at 422.
the Rooker-Feldman doctrine, we need not The actually litigated prong is
address whether abstention would be principally useful where the claims before
appropriate. the state and federal courts are in all
respects identical. In such cases, the
7
Habeas corpus petitions are, of course, straightforward application of the “actually
an exception to the Rooker-Feldman litigated” test avoids the more complicated
jurisdictional bar. Blake v. Papadakos, “inextricably intertwined” inquiry. See,
953 F.2d 68, 72 n.2 (3d Cir. 1992) e.g., Saudi Basic Indus. Corp. v. Exxon
(quoting Sumner v. Mata, 449 U.S. 539, Corp., No. 02-2130, ___ F.3d ___ (3d Cir.
543-44 (1981)). 2004).
6
a recent development unique to our Court, 9 State and federal claims are
and it is potentially misleading in this case inextricably intertwined “(1) ‘when in
because of its close relationship to the order to grant the federal plaintiff the relief
concepts of claim and issue preclusion. sought, the federal court must determine
See, e.g., Ivy Club v. Edwards, 943 F.2d that the state court judgment was
270, 294 (3d Cir. 1991) (“A party is erroneously entered’ [or] 11 (2) when ‘the
precluded from litigating in a subsequent federal court must . . . take action that
proceeding both claims that it actually would render [the state court’s] judgment
litigated and claims that it could have ineffectual.’” Desi’s Pizza, 321 F.3d at 421
litigated in an earlier proceeding.”) (quoting FOCUS v. Allegheny Cty. Court
(citation omitted)). Whereas the term of Common Pleas, 75 F.3d 834, 840 (3d
“inextricably intertwined” has been Cir. 1996)). “If the relief requested in the
integral to Rooker-Feldman doctrine since federal action requires determining that the
its inception, Feldman, 460 U.S. at 486, state court’s decision is wrong or would
the term “actually litigated” derives from void the state court’s ruling, then the
the preclusion context. 10 issues are inextricably intertwined and the
district court has no subject matter
jurisdiction to hear the suit.” FOCUS, 75
9
In Parkview Associates, 225 F.3d at F.3d at 840 (quoting Charchenkov v. City
325, we briefly inquired whether the state of Stillwater, 47 F.3d 981, 983 (8th Cir.
court had “actually litigated” the claims at 1995)).
issue. We are not aware of the term’s use
in any prior discussion by our Court of the
Rooker-Feldman doctrine. Other courts with reference to actual litigation: “When
have occasionally invoked Rooker- an issue of fact or law is actually litigated
Feldman and the “actually litigated” test in and determined by a valid and final
the same breath. See, e.g., Kropelnicki v. judgment, and the determination is
Siegel, 290 F.3d 118, 128 (2d Cir. 2002) e s s e nt i a l t o t he ju d gm e n t , t h e
(noting that “[i]n addition to claims that determination is conclusive in a
were actually litigated in state court, the subsequent action between the parties,
Rooker-Feldman doctrine bars lower whether on the same or a different claim.”
federal courts from exercising jurisdiction Comment d. to § 27 defines the term
over claims that are ‘inextricably “actu ally litigated” for preclu sion
i n t e rt w i n e d ’ w i t h s ta t e c o u rt purposes: “When an issue is properly
determinations,” but discussing only the raised, by the pleadings or otherwise, and
latter). To our knowledge, however, none is submitted for determination and is
has established a formal “actually determined, the issue is actually litigated.”
litigated” alternative under the Rooker-
11
Feldman doctrine. The passage in Desi’s Pizza reads
“and” rather than “or.” The Court,
10
The Restatement (Second) of however, considered the two tests in the
Judgments, § 27, defines issue preclusion alternative.
7
In assessing whether the claims There can be little doubt that ITT
here are inextricably intertwined, we must presented its RICO claims to the state
resolve whether the state court decided court. In its “First Amended Answers and
ITT’s RICO claims on the merits. If we First Amended Counterclaims,” ITT
conclude that Judge Fratto did not decide devoted more than fifty pages to its state
(or should not have decided) the merits of and federal RICO claims. In denying the
ITT’s RICO claims, then federal judgment motion to amend, Judge Fratto explicitly
for ITT would neither render the state addressed both the substantive allegations
court’s remaining judgment—namely, the (“I don’t think RICO is or was intended to
denial of the motion to amend based on encompass breaches of contract”) and
balancing the sufficiency of the proposed ITT’s delay in filing its motion (“And, I
claim with ITT’s delay in don’t see sufficient in the proposed
filing 1 2 — nece ssarily erroneous nor complaint that I should permit after three
ineffectual. Gulla v. North Strabane and a half years an amendment”). 13 He
Township, 146 F.3d 168, 172–73 (3d Cir. differentiated himself from those judges
1998). Conversely, if we conclude that the who “allow all amendments on the theory
state court did resolve the claims on the that they can be dealt with later on.” In
merits, then the state and federal claims short, Judge Fratto intended to dispose of
would be “inextricably intertwined” (as the motion on the merits.14
well as “actually litigated”). A contrary
decision by a federal court on an issue
resolved on the merits by a state court is
13
precisely the brand of federal appellate Arguably, even the language
review that Rooker-Feldman is intended to pertaining to delay reflects a judgment on
prevent. the merits. Judge Fratto did not simply
deny the amendment based on delay.
B. What Did the State Court Hold and Rather, he emphasized that the proposed
Did It Intend That Holding To Be on the complaint was insufficient to warrant a
Merits? late amendment. Of course, as discussed
“[T]h e f i r st s te p in a below, Judge Fratto’s intent to dispose of
Rooker-Feldman analysis is to determine the amendment on the merits will not
exactly what the state court held.” Gulla, alone trigger the Rooker-Feldman
146 F.3d at 171 (internal quotation doctrine; if he should not have reached the
omitted). Unfortunately, the order denying merits, Rooker-Feldman does not apply.
ITT’s motion for leave to file its amended 14
counterclaims is of limited usefulness on Whether Judge Fratto’s conclusion is
this score. Thus we devote substantial correct as a matter of federal law is, of
attention to the transcript of the motion course, irrelevant for Rooker-Feldman
hearing before Judge Fratto. purposes. The underlying rationale of the
Rooker-Feldman doctrine is to prevent the
lower federal courts from reviewing state
12
See infra note 13. court decisions in an appellate capacity.
8
In addition to the statements made exclusively on the viability of the claims.
by Judge Fratto, comments made by
counsel at the motion hearing support this
While Judge Fratto’s reference to
view. For example, counsel for ITT
the merits in his final disposition of the
argued that because it needed to develop
motion was limited, a state court’s brevity
the facts, it was entitled to discovery. He
does not prevent application of Rooker-
noted that, if ITT were permitted to amend
Feldman. Gulla, 146 F.3d at 172 (“If a
its pleadings, Intelnet could “bring [a]
state court considers and rejects a
multiplicity of summary and partial
constitutional claim on the merits, a
summary judgment motions.” ITT would
paucity of explicit analysis in the court’s
then bear the burden of demonstrating that
opinion will not strip the holding of its
“a reasonable juror could conclude from
validity for purposes of Rooker-Feldman’s
the activities and facts deduced that
jurisdictional bar.”).
litigation, both in this case and in other
cases, was entered into with the absolute
understanding by the plaintiffs that it was
C. Would New Jersey Law Regard the
spurious and was done simply as a method
State Court’s Judgment As Properly on
of extorting goods or services.” Implicit in
the Merits?
this line of reasoning is the possibility that
Judge Fratto could dismiss the amendment Judge Fratto’s intent alone,
on legal grounds. Significantly, ITT’s however, will not support application of
counsel referenced Intelnet’s argument Rooker-Feldman. ITT might avoid
“that we are precluded as a matter of law application of the doctrine if it can
this morning from such allegations” establish that (1) Judge Fratto’s denial of
(emphasis added). the motion to amend would not be
recognized as an adjudication on the
From this we glean that ITT
merits under New Jersey law (and
recognized that denial of the amendment
therefore does not constitute a state court
on the merits was possible. Moreover,
judgment for Rooker-Feldman purposes),
counsel for Intelnet clearly promoted the
or (2) Judge Fratto should not have
position that ITT could not make out a
considered the merits of the amendment
RICO claim based on extortionate
under New Jersey law. We consider these
litigation. He referenced Intelnet’s
issues in turn.
argument “that the commencement of a
lawsuit . . . does not in any way arguably 1. Is the Denial of a Motion to Amend
constitute RICO as a matter of law” That Does Not Specify Whether It Is
(emphasis added). He deemed it with Prejudice Nonetheless a Decision
unnecessary to “get into the facts . . . at on the Merits Under New Jersey Law?
this point in time.” There was virtually no
The first potential argument for
discussion before Judge Fratto of the
evading Rooker-Feldman is that Judge
timeliness of ITT’s motion to amend.
Fratto’s order denying ITT’s motion to
Instead, oral argument focused almost
9
amend would not be regarded as deciding disciplinary dismissals.15 Thus a dismissal
the merits under state law. ITT suggests that is not jurisdictional or disciplinary is
that an order denying a motion to amend is on the merits.
without prejudice, and thereby not on the
Reviewing the first two predicates,
merits, in the absence of explicit language
an objection to a motion to amend for
to the contrary. We conclude otherwise.
failure to state a cause of action is treated
If the state court’s denial of ITT’s like a motion to dismiss, and a motion to
motion to amend its pleadings was “with dismiss is governed by a certain set of
prejudice,” and therefore on the merits, the rules—namely, the dismissal is on the
Rooker-Feldman doctrine precludes ITT merits unless (1) it states that it is without
from filing substantially the same claims prejudice or (2) it is jurisdictional or
in the federal courts by withholding disciplinary. We may conclude that denial
jurisdiction from those courts. New Jersey of an amendment for failure to state a
case law does not address explicitly cause of action is governed by the same set
whether a denial of a motion to amend is of rules.16 Therefore, if the order denying
with prejudice when the judgment does not
so specify. We resolve the question by
deductive reasoning based on the 15
That rule provides: “For failure of the
following propositions. plaintiff to cause a summons to issue
First, “[o]bjection to the filing of an within 15 days from the date of the Track
amended complaint on the ground that it Assignment Notice or to comply with
fails to state a cause of action should be these rules or any order of court, the court
determined by the same standard in its discretion may on defendant’s
applicable to a motion to dismiss. . . .” motion dismiss an action or any claim
Interchange State Bank v. Rinaldi, 696 against the defendant. Such a dismissal
A.2d 744, 752 (N.J. App. Div. 1997). shall be without prejudice unless otherwise
specified in the order.” While ITT seeks
Second, under New Jersey law an to apply the exception to this case, no basis
order granting a motion to dismiss that exists to do so. Rule 4:37-2(a) extends
does not state whether it is with prejudice only to the dismissal of a claim as a court-
is “on the merits” except under limited i m p o s e d s a n c t io n , a p r i n c ip l e
circumstances not applicable here. New acknowledged by ITT in its own letter
Jersey Rule 4:37-2(d) provides: “Unless brief. See, e.g., Woodward-Clyde
the order of dismissal otherwise specifies, Consultants v. Chem. & Pollution Scis.,
a dismissal under R. 4:37-2(b) or (c) and 523 A.2d 131, 134 (1987); Zaccardi v.
any dismissal not specifically provided for Becker, 440 A.2d 1329, 1333 (1982).
by R. 4:37, other than a dismissal for lack
of jurisdiction, operate[] as . . . 16
Our reasoning approximates what in
adjudication[s] on the merits.” Rule 4:37- logic is termed a “hypothetical syllogism”:
2(a) carves out another exception for if A implies B, and B implies C, then A
implies C. See Ruggero J. Aldisert, Logic
10
the amendment is silent as to its prejudicial
value, the denial is on the merits unless it
is jurisdictional or disciplinary. As we 415, suggesting that, while it may be
explain in the next section, Judge Fratto without prejudice, dismissal for failure to
denied ITT’s amendment because it failed state a claim is nonetheless “an
to state a claim as a matter of law. His adjudication on the merits entitled to res
order did not specify whether it was with judicata effect.” Moreover, in Mystic Isle
prejudice, but neither was it jurisdictional Development Corp. v. Perskie & Nehmad,
or disciplinary. It thus qualifies under 662 A.2d 523, 534 (N.J. 1995), the Court
New Jersey law as an “adjudication on the emphasiz e d that Woodward-Clyde
merits.” 17 involved a defendant whose counterclaim
was dismissed without prejudice for failure
to comply with a discovery order—an
for Lawyers: A Guide to Clear Legal adjudication wholly unrelated to the
Thinking 159 & n.7 (3d ed. 1997). merits.
Whether a claim is dismissed on
17
New Jersey case law explaining the factual or legal grounds is relevant to its
preclusive effect of a dismissal for failure preclusive effect. For example, the New
to state a claim is somewhat confusing. Jersey Supreme Court has cautioned that
Even if we concluded that Judge Fratto’s applications for dismissal under Rule 4:6-
judgment was without prejudice, it might 2(e) for failure of a complaint to state a
still be on the merits. While a dismissal claim “should be granted in only the rarest
with prejudice clearly constitutes an of instances. If a complaint must be
adjudication on the merits, a dismissal dismissed after it has been accorded . . .
without prejudice only “indicates,” as a meticulous and indulgent
general matter, that there has been no examination, then, barring any other
adjudication on the merits of the claim. impediment such as a statute of
Velasquez v. Franz, 589 A.2d 143, 148 limitations, the dismissal should be
(N.J. 1991); Cornblatt v. Barow, 708 A.2d without prejudice to a plaintiff’s filing of
401, 413 (N.J. 1998). an amended complaint.” Printing Mart-
Per New Jersey’s Supreme Court in Morristown v. Sharp Elecs. Corp., 563
Woodward-Clyde, 523 A.2d at 135, “[a] A.2d 31, 48 (N.J. 1989). This principle,
dismissal without prejudice is not an however, while framed in general terms, is
adjudication on the merits and does not bar addressed to the “sufficiency of facts
reinstitution of the same claim in a later alleged in a complaint,” id. at 34.
action.” Yet in Zaccardi v. Becker, 440 (emphasis added), and has little, if any,
A.2d 1329, 1333 (N.J. 1982), the same bearing on pure determinations of law. As
Court implied that a dismissal without we conclude in the next section that Judge
prejudice of a complaint may later be a Fratto denied ITT’s proposed amendments
basis for dismissing a subsequently filed on legal grounds, it follows that a
complaint. The Court attempted to resolve subsequent suit on the same legal theory
these tensions in Cornblatt, 708 A.2d at would be barred.
11
2. Should the State Court Have claims only if state law authorized him to
Refrained from Considering the Merits decide the motion on the merits.
of the Proposed Amended Complaint? Accordingly, we turn yet again to New
Jersey law.
We have concluded that Judge
Fratto intended to dispose of ITT’s New Jersey Rule 4:9-1 provides
proposed amendments on the merits, and that motions for leave to amend “shall be
that a judgment by the state court on freely given in the interest of justice.” A
substantive grounds triggers Rooker- court nonetheless retains discretion to deny
Feldman regardless whether it is labeled an amendment un der appropriate
“with prejudice.” These conclusions do circumstances. Kernan v. One Washington
not, however, get Intelnet home. In Gulla, Park Urban Renewal Assocs., 713 A.2d
we held that the District Court had 411, 421 (N.J. 1998). ITT points to a
jurisdiction to hear a claim addressed by substantial body of New Jersey case law
the state court because the latter, though it addressing whether a court, in determining
purported to decide the merits of the whether to grant a motion to amend, may
plaintiff’s claims, should not have done so consider the merits of the amendment.
under Pennsylvania law. Gulla, 146 F.3d See, e.g., Hansen v. Hansen, 770 A.2d
at 172 (“Under Pennsylvania law, the court 1278, 1286 (N.J. Super. Ct. App. Div.
could not resolve the merits of the 2001); Interchange State Bank v. Rinaldi,
[plaintiffs’] claims if they lack standing to 696 A.2d 744, 752 (N.J. Super. Ct. App.
bring their suit.”). Judge Fratto’s denial Div. 1997); City Check Cashing, Inc. v.
of the proposed amendment precludes Nat’l State Bank, 582 A.2d 809, 811 (N.J.
federal jurisdiction over ITT’s RICO Super. Ct. App. Div. 1990). These cases
do indeed limit a court’s freedom to
consider substantive issues in ruling on a
We need not resolve these nuances motion to amend. See, e.g., Rinaldi, 696
of New Jersey law because we have A.2d at 752 (stating that a motion for leave
determined that ITT’s state and federal to amend should ordinarily be decided
claims are substantially the same. “without consideration of the ultimate
Consequently, under New Jersey merits of the amendment”).
preclusion law, a second action would be Nonetheless, New Jersey case law
barred regardless whether Judge Fratto is explicit that there are no firm rules
previously denied them on factual or legal prohibiting consideration of the merits in
grounds and regardless whether the these cases. “[C]ourts are free to refuse
dismissal was with prejudice. For even a leave to amend when the newly asserted
judgment that is without prejudice has claim is not sustainable as a matter of law.
preclusive effect with respect to a In other words, there is no point to
“subsequent suit between the same parties, permitting the filing of an amended
asserting the same claims, based on the pleading when a subsequent motion to
same facts in state court.” Velasquez, 589 dismiss must be granted.” Rinaldi, 696
A.2d at 144.
12
A.2d at 752 (quoting Mustilli v. Mustilli, explicitly construed the claims in a light
681 A.2d 650 (N.J. Super. Ct. Ch. Div. most favorable to the moving party (“at
1995)). Denial of an amendment for best it seems”). Judge Fratto denied the
failure to state a claim should be examined amendment based on his conviction that
under the standard applicable to a motion
to dismiss under New Jersey Rule 4:6-2(e).
See Maxim Sewerage Corp. v. Monmouth language, one might argue that the state
Ridings, 640 A.2d 1216, 1219 (N.J. Super. court did not “actually litigate” the claim
Ct. Law Div. 1993) (citing Banks v. Wolk, advanced by ITT in federal court because
918 F.2d 418 (3d Cir. 1990)), which Judge Fratto misc onstrue d IT T ’s
“requires treating all the allegations of the allegations. We hesitate to parse the
pleading as true, and considering only language in this fashion, given that ITT
whether those allegations are legally explained its RICO theory to the state
sufficient to establish the necessary court in the same terms as in the federal
elements of the claimed cause of action.” litigation. We construe Judge Fratto’s
reference to “breaches of contract” as
It is in this context that our earlier convenient shorthand for the alleged
examination of whether Judge Fratto scheme. According to ITT, Intelnet used
denied ITT’s motion to amend its the United States mail (a) fraudulently to
counterclaims for legal reasons becomes induce the ITT parties to execute their
important. As already noted, there is little agreements, (b) consistently to postpone
doubt that he denied ITT’s proposed performance while concealing its inability
amendment as a matter of law. After to perform, with the purpose (c) of seizing
examining ITT’s lengthy allegations and upon pretexts to declare that ITT had
hearing counsel at argument, Judge Fratto breached the agreements and extorting
concluded, “[A]t best it seems that the settlements. There was extensive
allegation is . . . that the plaintiffs were discussion at the motion hearing as to what
unable to fulfill their contract, and every these allegations entailed, and Judge Fratto
time they wrote a letter or sent a wire, likely believed his oral summation was
knowing that they were unable to fulfill adequate against that backdrop.
their contract, the[y] committed a RICO In any case, this strategy is
violation.” He continued, “I don’t think unavailing because it runs up against the
RICO is or was intended to encompass “inextricably intertwined” prong of the
breaches of contract, even breaches of Rooker-Feldman doctrine. If Judge Fratto
contract that involve $800 million.” 18 He denied ITT’s proposed amendment
because he concluded, whatever his
reasoning, that it failed to state a claim
18
Judge Fratto appears subtly to have upon which relief might be granted, a
misstated the theory advanced by ITT in federal judgment permitting a substantially
federal court—that Intelnet violated RICO identical claim to proceed would render
by seizing on a pretextual breach to the state court decision necessarily
threaten litigation. Based on this erroneous.
13
ITT had failed to state a claim as a matter
of law, and he had the discretion to do so
under New Jersey law.19 p r o c e ed i n g . S e e , e .g . , D i c i v .
Pennsylvania, 91 F.3d 542, 548 (3d Cir.
1996).
19
ITT raises a final objection to Rooker- We see no reason why a different
Feldman based on the non-identity of the rule should govern Rooker-Feldman. On
parties in the state versus federal actions. several occasions, to be sure, we have
(Various Intelnet affiliates are defendants declined to apply Rooker-Feldman to bar
in the federal case but were not parties in a federal claim by a non-party to a state
the New Jersey action, and ITT affiliates action. For example, in Marks v. Stinson,
that were named defendants in state court 19 F.3d 873, 885 n.11 (3d Cir. 1994), we
are not plaintiffs in the federal action.) held that “Rooker-Feldman [does] not bar
The argument finds some support in our the district court from hearing the claims
decision in Valenti v. Mitchell, 962 F.2d of the [] plaintiffs because they were not
288 (3d Cir. 1992). In that case, we parties to any of the state court
declined to apply Rooker-Feldman against proceedings on the matter.” Similarly, in
plaintiffs who were not parties to the state National Railroad Passenger Corp. v.
action. Relying on the “close affinity” Pennsylvania Public Utility Commission,
between the Rooker-Feldman doctrine and 342 F.3d 242, 257 (3d Cir. 2003), we
claim and issue preclusion, we explained noted that “[a] state court order to which
that “[w]e [had] found no authority which [the plaintiff] was not a party cannot be the
would extend the Rooker-Feldman basis to deny [the plaintiff] its statutory
doctrine to persons not parties to the right to a federal forum.” Id. But we have
proceedings before the state . . . court.” Id. n e v e r d e e m e d R o o k e r - F e ld m a n
at 297. inapplicable based on the non-participation
However, the “close affinity” in state court of a party asserting the
between the Rooker-Feldman and jurisdictional bar. On the contrary, we
preclusion doctrines that supported federal have applied Rooker-Feldman to bar a
jurisdiction in Mitchell undercuts ITT’s federal claim by a plaintiff whose state
theory that Rooker-Feldman does not proceeding was non-adversarial (in other
apply in this case. We did not decide in words, there was apparently no defendant
Valenti whether the Rooker- at the state level). The parties to the
Feldman jurisdictional bar can be asserted federal action in that case were necessarily
by a non-party to the state court action non-identical. See E.B. v. Verniero, 119
against a party to both proceedings. In the F.3d 1077, 1092 (3d Cir. 1997).
preclusion context, however, the rule is In this case, ITT lost in state court:
quite clear. While res judicata may Judge Fratto denied its motion to amend its
require total identity of the parties, pleadings. Now, after raising the same
collateral estoppel usually requires only claims in federal court, it asserts that
that the party against whom preclusion is jurisdiction is appropriate because it has
being sought participated in the prior named defendants who were not parties to
14
jurisdiction in this case. Accordingly, we
vacate the decision of the District Court
III. Conclusion
and dismiss for lack of jurisdiction.
We summarize as follows. ITT
presented its RICO claims to the state
court in the form of a proposed pleading
amendment adding counterclaims. New
Jersey law permits a state court to deny an
amendment on procedural grounds (such
as inordinate delay in filing) or because
the amendment fails to state a claim. The
latter is treated like a motion to dismiss for
failure to state a claim and is a permissible
decision on the merits under state law and
thus for Rooker-Feldman purposes. Judge
Fratto denied the amendment at least in
part on the ground that it failed, as a matter
of law, to state a claim upon which relief
can be granted. In this context, the
Rooker-Feldman doctrine bars federal
the state court action. We will not permit
a party to end-run the Rooker-Feldman
doctrine in this manner. The opinion of
our Court in Saudi Basic Industries Corp.
v. Exxon Corp., No. 02-2130, ___ F.3d
___, ___ (3d Cir. 2004), borrowing from
preclusion concepts, concluded that
“[c]laims and issues decided against an
entity bind also its parties in privity” for
Rooker-Feldman purposes. Per Saudi
Basic, ITT may not evade Rooker-
Feldman’s grasp by adding affiliates as
plaintiffs in the federal suit. In a similar
vein, we now hold that Rooker-Feldman
bars jurisdiction where, as here, related but
non-identical defendants (the Intelnet
affiliates) were drawn into the federal
litigation by the parties (ITT Corp. and its
affiliates) against whom the state court
action was decided.
15