Scotts Company v. Seeds, Inc.

When a federal court evaluates realigning the parties in a case, it may not consider claims made in a different case for purposes of dismissing or staying the proceeding.

Scotts and Seeds signed a supply contract requiring Scotts to buy from Seeds. “Scotts, an Ohio LLC, brought a diversity action against Seeds, a Washington corporation, in federal district court for breach.” The “Growers” (two Washington corporations, an Idaho corporation and an Idaho citizen) sued Seeds and Scotts in Washington state court, alleging that Seeds agreed to a premium over the contract price but failed to pay. “Seeds moved to dismiss the federal action under Federal Rule of Civil Procedure Rule 12(b)(7), contending that the Growers were indispensable parties. Scotts filed an Amended Complaint, adding the Growers as defendants. “The Growers and Seeds moved the district court to realign the Growers as plaintiffs and Seeds and Scotts as defendants. Seeds also moved the court to stay or dismiss the case in favor of the state court proceedings. The district court granted both motions.” The realignment stripped the district court of subject matter jurisdiction for lack of diversity. The district court stayed the federal proceedings in favor of the state court proceedings and also dismissed the action for lack of subject matter jurisdiction under Rule 12(b)(1).” Scotts appealed. The Ninth Circuit held that the district court erred when it relied on claims made in a state court action to determine the “primary matter in dispute”. A district court may, in its discretion, stay or dismiss a federal case in favor of state proceedings when: only declaratory relief is sought or exceptional circumstances exist. This discretionary rule does not apply to “claims that exist independent of the request for a declaration”- that is, a claim that would remain when the declaratory claim is dropped from the case. “Scotts’ damages claim is independent because it would be viable without the declaratory claim.” The district court abused its discretion by failing to find exceptional circumstances before dismissing. REVERSED AND REMANDED.