Theis Research, Inc. v. Brown & Bain

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

THEIS RESEARCH, INC., an Illinois  No. 02-16839

corporation, D.C. No.

Plaintiff-Appellant, CV-99-20645-RMW

v. ORDER

BROWN & BAIN, a California and AMENDING

Arizona law firm, and such

present and former Brown & Bain  OPINION AND

DENYING

partners, associates, and other REHEARING AND

personnel responsible for the PETITION FOR

management and trial of all REHEARING EN

litigation involving Peter F. Theis BANC AND

and Theis Research, Inc., AMENDED

Defendant-Appellee.

 OPINION

Appeal from the United States District Court

for the Northern District of California

Ronald M. Whyte, District Judge, Presiding

Argued and Submitted

November 5, 2003—San Francisco, California

Filed October 20, 2004

Amended February 18, 2005

Before: David R. Thompson and Stephen S. Trott,

Circuit Judges, and Charles R. Weiner,*

Senior District Judge.

Opinion by Judge Thompson

*Hon. Charles R. Weiner, Senior District Judge for Eastern Pennsylva-

nia, sitting by designation.

1959

THEIS RESEARCH v. BROWN & BAIN 1961

COUNSEL

Paul R. Johnson, Oakland, California, for the plaintiff-

appellant.

Paul Renne, San Francisco, California, for the defendant-

appellee.

ORDER

The opinion in Theis Research, Inc. v. Brown & Bain, pub-

lished at 386 F.3d 1180 (9th Cir. 2004), is amended as fol-

lows:

1. At page 1184, the first sentence of the last beginning

paragraph on that page is deleted. The deleted sentence reads:

Our conclusion that we measure the amount in

controversy by the amount at stake in the underlying

litigation is consistent not only with American Guar-

anty from this circuit, but with decisions from other

circuits as well.

The deleted sentence is replaced by the following sentence:

1962 THEIS RESEARCH v. BROWN & BAIN

Our decision to measure the amount in contro-

versy in this case by the amount at stake in the

underlying litigation is consistent not only with

American Guaranty from this circuit, but with deci-

sions from other circuits as well.

2. At page 1185, the first two sentences of the second

paragraph under III MERITS are deleted. The deleted sen-

tences read as follows:

Theis was required to submit to the arbitrator the

issue whether B&B’s alleged conflicts of interest

rendered the Theis - B&B legal services agreement

void ab initio. Three Valleys Mun. Water Dist. v.

E.F. Hutton, 925 F.2d 1136, 1140 (9th Cir. 1991)

(federal court may consider a defense of fraud in the

inducement of a contract only if the fraud relates

specifically to the arbitration clause itself and not to

the contract generally). The issue was actually sub-

mitted to the arbitrator, who rendered a decision

adverse to Theis.

The two deleted sentences are replaced by the following

two sentences:

Theis submitted to the arbitrator the issue whether

B&B’s alleged conflicts of interest rendered the

Theis-B&B legal services agreement void ab initio.

The arbitrator rendered a decision on this issue

adverse to Theis.

With the foregoing amendments, the panel has voted unani-

mously to deny the petition for rehearing. Judge Trott has also

voted to deny the petition for rehearing en banc, and Judges

Thompson and Weiner recommend denial of that petition.

The full court was advised of the petition for rehearing en

banc and no judge has requested a vote on the petition for en

banc rehearing. Fed. R. App. P. 35.

THEIS RESEARCH v. BROWN & BAIN 1963

The petition for rehearing and the petition for rehearing en

banc are DENIED. No further petitions for panel or en banc

rehearing will be entertained.

OPINION

THOMPSON, Senior Circuit Judge:

This appeal presents the primary question whether, in a

case in which a party seeks to vacate an arbitration award, the

amount in controversy for diversity jurisdiction under 28

U.S.C. § 1332(a) is measured by the amount of the award or

by the amount in dispute in the underlying litigation between

the parties. The arbitration award which Theis Research, Inc.

(“Theis”) moved to vacate was for zero dollars. Contempora-

neously with that motion, Theis filed a complaint that sought

damages from Brown & Bain (“B&B”) in excess of $200 mil-

lion. The claims Theis alleged in this complaint substantially

mirrored the claims it had asserted in the arbitration proceed-

ing, which claims the arbitrator had rejected.

If we measure the amount in controversy for purposes of 28

U.S.C. § 1332(a) by the amount of the arbitration award, the

district court lacked subject matter jurisdiction. If we measure

the amount in controversy by the amount in dispute in the

underlying litigation, the district court had subject matter

jurisdiction.

We conclude that the amount at stake in the underlying liti-

gation, not the amount of the arbitration award, is the amount

in controversy for purposes of diversity jurisdiction, and thus

the district court had jurisdiction under 28 U.S.C. § 1332. The

court denied Theis’s motion to vacate the zero dollar arbitra-

tion award, granted B&B’s motion to confirm the award, and

granted summary judgment in favor of B&B and against

Theis on the claims Theis asserted in its complaint. Theis

1964 THEIS RESEARCH v. BROWN & BAIN

appeals. We have jurisdiction under 28 U.S.C. § 1291, and we

affirm.

I

FACTS AND PROCEEDINGS

B&B was Theis’s attorney in patent litigation that turned

out badly. Theis demanded arbitration of claims against B&B

for legal malpractice, breach of fiduciary duty, fraud and

breach of contract. The ensuing arbitration resulted in a zero

dollar award to each party. In commenting on the litigation

that spawned the arbitration, the arbitrator stated:

Viewed as a whole, the litigation that is the subject

of this arbitration was an almost unmitigated disaster

both for [Theis] and for B&B. The hopes of [Theis]

and its investors were dashed; years of work by Mr.

Theis and others went unrequited; B&B got no

return on millions of dollars of invested time, and

had to chalk up a major loss on its results chart.

Dissatisfied with the arbitrator’s decision, Theis filed in the

United States District Court a “COMPLAINT FOR BREACH

OF PROFESSIONAL AND FIDUCIARY DUTY, LEGAL

MALPRACTICE, AND FRAUD: APPLICATION AND

NOTICE OF MOTION TO VACATE ARBITRATION

AWARD.” Theis also demanded a jury trial. The claims Theis

set forth in its complaint sought compensatory damages of

$200 million, plus “exemplary and punitive damages.”

After court proceedings which are not relevant to the issues

before us, B&B filed a motion to confirm the arbitrator’s

award. Theis responded with a renewed motion to vacate the

award and a motion for partial summary judgment. The dis-

trict court denied Theis’s motion to vacate and its motion for

partial summary judgment. The court granted B&B’s motion

to confirm the award. Thereafter, the district court granted

THEIS RESEARCH v. BROWN & BAIN 1965

summary judgment in favor of B&B, which judgment rejected

all of the claims Theis asserted in its complaint. This appeal

followed.

On December 16, 2003, we filed a memorandum disposi-

tion affirming the district court’s summary judgment in favor

of B&B. At the time our memorandum disposition was filed,

there did not appear to be any reason to question the existence

of the district court’s subject matter jurisdiction; the parties

were diverse, and neither party suggested, nor did it occur to

us, that the amount in controversy might not meet the $75,000

monetary threshold requirement of 28 U.S.C. § 1332(a).

The question of subject matter jurisdiction was called to

our attention by Luong v. Circuit City Stores, Inc., 256 F.3d

1188 (9th Cir. 2004) (Luong I), an opinion now withdrawn,

which was filed after we had filed our memorandum disposi-

tion. In the Luong I opinion, a panel of this court, with one

member of the panel dissenting, held that the amount in con-

troversy on a petition to vacate an arbitration award should be

measured by the amount of the award rather than the amount

of the claim in the underlying dispute. Id. at 1194. Applying

this measure, Luong I determined that because no monetary

damages had been awarded by the arbitrator, the amount in

controversy requirement for diversity jurisdiction had not

been met. Id. In view of what appeared to be similarities

between Luong I and this case, we recalled our mandate and

awaited finality of the Luong I decision.

The Luong I panel subsequently withdrew its opinion and

replaced it with a new opinion, in which the panel unani-

mously held that the district court had subject matter jurisdic-

tion predicated upon the existence of a federal question under

28 U.S.C. § 1331. Luong v. Circuit City Stores, Inc., 368 F.3d

1109, 1112 (9th Cir. 2004) (Luong II). In the Luong II opin-

ion, the panel did not address the question whether the

amount in controversy in a proceeding to vacate an arbitration

award should be determined by the amount of the award or by

1966 THEIS RESEARCH v. BROWN & BAIN

the amount at issue in the underlying dispute. This case pre-

sents that question. To resolve it, we ordered supplemental

briefing limited to the issue whether the district court had sub-

ject matter jurisdiction. We now conclude that the district

court had diversity jurisdiction pursuant to 28 U.S.C. § 1332.

Our previously filed memorandum disposition is withdrawn,

and we file this opinion affirming the district court’s summary

judgment in favor of B&B.

II

JURISDICTION

In American Guaranty Co. v. Caldwell, 72 F.2d 209 (9th

Cir. 1934), we considered what was the appropriate measure

of the amount in controversy for purposes of diversity juris-

diction under 28 U.S.C. § 1332(a) in the context of proceed-

ings in the district court initially to confirm, and then after re-

arbitration, to vacate an arbitration award. In that case, the

district court had acquired subject matter jurisdiction when

American Guaranty removed to federal court the petitioner’s

application to confirm a $32,500 award. At that time the mon-

etary threshold for diversity jurisdiction under § 1332(a) was

$3,000. The district court vacated the $32,500 award because

the arbitrator was biased, directed the parties to arbitrate their

dispute anew, and retained jurisdiction of the case pending

that arbitration. In the renewed arbitration proceedings, the

plaintiff was shut out with a zero dollar arbitration award

which it then sought to vacate by a motion filed in the pend-

ing district court case.

Eventually, the district court in American Guaranty vacated

the zero dollar arbitration award, and American Guaranty

appealed. On appeal, American Guaranty challenged the dis-

trict court’s subject matter jurisdiction, contending that the

zero dollar award that resulted from the re-arbitration was

insufficient to satisfy the then $3,000 threshold for diversity

jurisdiction under 28 U.S.C. § 1332(a). The American Guar-

THEIS RESEARCH v. BROWN & BAIN 1967

anty court rejected that argument, and held that the district

court had not lost the subject matter jurisdiction it acquired

when the case was first removed to federal court on what was

then the petitioner’s application to confirm the $32,500

award. The court stated “[i]t is the amount in controversy

which determines jurisdiction, not the amount of the award.”

Id. at 211.

It is unclear whether in making this statement the American

Guaranty court was referring to the zero dollar arbitration

award the petitioner eventually sought to vacate, or the

$32,500 arbitration award the petitioner initially sought to

confirm. However, the court’s statement makes sense only if

the court was referring to the zero dollar award — the one

which had the potential of defeating subject matter jurisdic-

tion. That the American Guaranty court measured the

“amount in controversy” by the amount involved in the under-

lying dispute is made clear by the court’s statement:

In addition to the record showing this original

award of $32,500, it further discloses that evidence

had been offered showing [petitioner] had suffered

damages in excess of $100,000, and in one of its

answers [American Guaranty] claims an indebted-

ness by way of offset of $5,525. It is the amount in

controversy which determines jurisdiction, not the

amount of the award.

Id. at 211 (emphasis added).

There is an important difference, however, between the

present case and American Guaranty. In American Guaranty,

the district court initially acquired jurisdiction by the filing of

a motion to confirm the arbitration award of $32,500.

In the present case, the arbitration award was for zero dol-

lars. Theis initially filed in the district court a motion to

vacate that award, coupling that motion with a complaint that

1968 THEIS RESEARCH v. BROWN & BAIN

alleged substantially the same claims Theis had asserted in the

arbitration. Theis’s prayer for relief in its district court com-

plaint was for $200 million plus “exemplary and punitive

damages,” which on the face of the complaint satisfied the

$75,000 monetary threshold for diversity jurisdiction.

Theis argues, however, that we should ignore the claims it

asserted in its district court complaint because those claims

were “non-substantial” as evidenced by the district court’s

eventual dismissal of them as barred by res judicata. We

reject this argument. To treat Theis’s claims as non-

substantial simply because they were eventually dismissed as

being barred by res judicata would retroactively preclude

jurisdiction in any action in which the affirmative defense of

res judicata was asserted and successfully maintained. The

question is not whether B&B was successful in its res judi-

cata defense. The question is whether the amount of damages

Theis claimed in its complaint was asserted in good faith; if

so, that amount controls for purposes of diversity jurisdiction.

St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283,

288-89 (1938).

There is nothing on the face of Theis’s complaint, nor in

the record before us, to suggest that the claims Theis asserted

in the district court were not asserted in a good faith belief in

the validity of those claims, notwithstanding that it turned out

Theis’s good faith belief was misplaced. See id.; see also Bud-

get Rent-a-Car, Inc. v. Higashiguchi, 109 F.3d 1471, 1473

(9th Cir. 1997) (dismissal for lack of jurisdiction not proper

if claim exceeding jurisdictional amount is made in the com-

plaint in good faith, even when later events reduce the amount

recoverable).

[1] The question presented to us thus boils down to whether

the $200 million Theis sought to recover by its complaint is

the amount in controversy under 28 U.S.C. § 1332(a), or

whether the amount in controversy must be measured by the

zero dollar arbitration award Theis sought to vacate. We are

THEIS RESEARCH v. BROWN & BAIN 1969

satisfied that the amount in controversy is the amount Theis

sought to recover by its complaint.

Decisions from other circuits support this conclusion,

although the cases have turned upon whether the party seek-

ing to vacate an arbitration award also sought to reopen the

arbitration. See Sirotzky v. New York Stock Exch., 347 F.3d

985, 989 (7th Cir. 2003) (“[T]he amount in controversy in a

suit challenging an arbitration award includes the matter at

stake in the arbitration, provided the plaintiff is seeking to

reopen the arbitration.”); Baltin v. Alaron Trading Corp., 128

F.3d 1466, 1472 n.16 (11th Cir. 1997) (“[T]he [plaintiffs] did

not request an award modification that would provide [them]

with money. Instead, [they] sought merely to reduce or elimi-

nate the arbitration award against them.”); Ford v. Hamilton

Investments, Inc., 29 F.3d 255, 260 (6th Cir. 1994) (“In the

arbitration proceedings [the plaintiff] claimed more than

$50,000 against Hamilton Investments, but he never asked the

district court to order that the arbitrators reopen his claim

. . .”); but see American Guaranty, 72 F.2d at 211 (concluding

that the amount in controversy in the arbitration itself deter-

mines jurisdiction; no apparent request for remand to arbitra-

tion); Bull HN Info. Sys., Inc. v. Huston, 229 F.3d 321, 329

(1st Cir. 2000) (reversing district court decision dismissing

petition to vacate arbitration award based on fact that plaintiff

did not seek remand to arbitration; instead, measuring “the

amount in controversy by the amount at stake in the entire

arbitration”).

Although neither Theis nor B&B asked that the arbitration

proceedings be reopened, Theis sought to obtain by its district

court complaint substantially what it had sought to obtain in

the arbitration. Theis simply chose to “reopen” its claims in

the district court rather than in arbitration. The amount in con-

troversy requirement of 28 U.S.C. § 1332(a) was satisfied.

[2] Our decision to measure the amount in controversy in

this case by the amount at stake in the underlying litigation is

1970 THEIS RESEARCH v. BROWN & BAIN

consistent not only with American Guaranty from this circuit,

but with decisions from other circuits as well. In the Eleventh

Circuit’s decision in Baltin v. Alaron Trading Corp., 128 F.3d

1466 (11th Cir. 1997), the Baltins sought to undo an arbitra-

tion award under which they were required to pay Alaron

Trading $36,284.69. Id. The court held that the then jurisdic-

tional minimum of $50,000 was not met because “[t]he maxi-

mum remedy sought by the Baltins was the vacatur of the

arbitration award of $36,284.69.” Id. Because neither the Bal-

tins nor Alaron Trading sought additional damages, the

amount in controversy was limited to the amount of the arbi-

tration award. See id. & n.16.

Likewise, in Ford v. Hamilton Investments, Inc., 29 F.3d

255 (6th Cir. 1994), the Sixth Circuit held that diversity juris-

diction was lacking because the amount in controversy did not

exceed the $50,000 minimum. Id. at 260. As in Baltin, the

party against whom a $30,524 arbitration award was entered

simply sought to vacate that award, and neither party sought

any additional damages. Id. Indeed, the Sixth Circuit was

quite clear that had the losing party sought to challenge the

arbitrator’s denial of that party’s counterclaims, the amount in

controversy would have been met:

In the arbitration proceedings Mr. Ford claimed

more than $50,000 against Hamilton Investments,

but he never asked the district court to order that the

arbitrators reopen his claim against Hamilton

Investments; all he sought from the district court was

the vacation of an award that fell short of the juris-

dictional amount by almost $20,000.

Id. (emphasis added).

[3] We conclude that in the present case the monetary

threshold of $75,000 for diversity jurisdiction under 28 U.S.C.

§ 1332(a) has been met. There is no dispute as to diversity of

THEIS RESEARCH v. BROWN & BAIN 1971

the parties. The district court, therefore, had subject matter

jurisdiction pursuant to 28 U.S.C. § 1332.

III

MERITS

Theis also appeals the district court’s summary judgment in

favor of B&B by which the court rejected Theis’s claims for

breach of professional and fiduciary duty, legal malpractice,

and fraud. We affirm the district court’s summary judgment.

[4] Theis submitted to the arbitrator the issue whether

B&B’s alleged conflicts of interest rendered the Theis-B&B

legal services agreement void ab initio. The arbitrator ren-

dered a decision on this issue adverse to Theis. The district

court thus did not err when it determined that Theis was

barred from relitigating the same issue as part of its federal

court malpractice claims. Ficek v. S. Pac. Co., 338 F.2d 655,

657 (9th Cir. 1964) (claimant may not voluntarily submit his

claim to arbitration, await the outcome, and if the decision is

unfavorable, challenge the authority of the arbitrator to act).

Having submitted the claim to the arbitrator, Theis could

seek vacatur of the arbitral result only if it was a manifest dis-

regard of the law, First Options of Chi., Inc. v. Kaplan, 514

U.S. 938, 942 (1995) (citing Wilko v. Swan, 346 U.S. 427,

436-37 (1953)), an implausible interpretation of the contract,

Employers Ins. of Wausau v. Nat’l Union Fire Ins. Co. of

Pittsburgh, 933 F.2d 1481 (9th Cir. 1991), the award was pro-

cured by corruption, fraud, or undue means, 9 U.S.C. § 10, or

the arbitrator exceeded his powers, First Options, 514 U.S. at

942. The only argument that fits within any of these catego-

ries which Theis made to the district court, and thus preserved

for appeal, is its argument that the arbitrator’s failure to dis-

close his involvement with B&B’s malpractice carrier

resulted in an award procured by corruption, fraud or undue

means. This argument is wholly unsupported by the record.

1972 THEIS RESEARCH v. BROWN & BAIN

The arbitrator disclosed at the beginning of the hearing that he

had arbitrated other legal malpractice claims involving the

carrier, had recognized the carrier’s representative’s name on

the attendance list, and had dealt with the representative in the

context of prior arbitrations. He then asked the parties if there

were any objections to his proceeding as arbitrator. All parties

consented. By failing to object to the arbitrator proceeding as

arbitrator, and continuing to participate in the hearing after the

arbitrator’s full disclosure, Theis waived any claim that the

arbitrator’s subsequent award should be vacated by reason of

corruption, fraud or undue means predicated upon the arbitra-

tor’s involvement with B&B’s malpractice carrier.

[5] Nor did the district court abuse its discretion when it

refused to permit additional discovery. “We will only find that

the district court abused its discretion if the movant diligently

pursued its previous discovery opportunities, and if the

movant can show how allowing additional discovery would

have precluded summary judgment.” Qualls v. Blue Cross, 22

F.3d 839, 844 (9th Cir. 1994) (emphasis in original). Theis

failed to show how the additional discovery it sought would

have precluded summary judgment. The district court did not

err in denying further discovery.

No other issues raised in this appeal warrant further discus-

sion.

AFFIRMED.