Where plaintiff commenced parallel federal litigation with a suit it was defending in California state court, a district court judge did not err in staying plaintiff’s petition to compel arbitration.

The 7th U.S. Circuit Court of Appeals affirmed a decision by Chief U.S. District Judge Jane Magnus-Stinson of the Southern District of Indiana.

DePuy Synthes Sales, Inc., a manufacturer of medical implants and instruments, contracted with OrthoLA, Inc., a medical device distributor in the Los Angeles area. The parties signed their agreement in 2008, and the agreement gave OrthoLA the exclusive rights in the Los Angeles area to distribute certain products. The parties renewed the agreement several times. In the 2015 version of the agreement, OrthoLA was appointed as DePuy’s “exclusive sales representative” in a territory that stretched through much of Southern California.

The 2015 agreement contained an arbitration clause. The parties also signed a separate agreement in 2015 that committed DePuy to pay OrthoLA income for ten years after the termination or expiration of the sales agreement, unless DePuy ended the sales agreement pursuant to certain terms. The income agreement also contained an arbitration clause.

In 2017, the sales agreement was once again up for renewal. The parties attempted to negotiate a continuation, but failed to do so. The agreement expired in January 2018. The next day, all of OrthoLA’s sales representatives left OrthoLA and moved to Golden State Orthopedics, another one of DePuy’s distributors. DePuy refused to pay OrthoLA under the income agreement because, it argued, OrthoLA had violated the sales agreement by competing with other distributors and soliciting their business.

In October 2018, OrthoLA sued DePuy in Los Angeles Superior Court. In December 2018, DePuy asked the California court to stay its proceedings and issue an order compelling OrthoLA to arbitrate the claims in accordance with the agreements. The state court denied the motion, finding that California law applied to the preliminary arbitrability issue and that the agreements were unconscionable because they were one-sided.

In March 2015, DePuy appealed the ruling to the state appellate court. On the same day, DePuy filed a demand for arbitration with the American Arbitration Association. Three days later, DePuy filed a petition in the U.S. District Court for the Southern District of Indiana. The petition asked the court to compel OrthoLA to arbitrate the disputes under the income and sales agreements and to enjoin them from proceeding with the California state-court action.

The district court stayed the petitions pursuant to Colorado River Conservation Dist. v. United States, pending the resolution of the California action. DePuy then appealed.

The 7th Circuit panel began by stating that the first question to be answered was whether the concurrent state and federal actions were actually parallel. Second, the panel continued, was the question of whether the necessary exceptional circumstances existed to support a stay or dismissal.

The panel determined there was little debate the California and Indiana litigation were parallel. The panel noted the two suits involved the same parties, the same facts and the same issues.

Next, the panel addressed the second question. The panel noted that the district court found the risk of splintering the litigation across several places was great, as functionally identical suits in two places creates a high risk of inconsistent results and wasteful duplication.

The panel further noted the state court suit was significantly further along than the action in federal court. Finally, the panel determined the state court action would adequately protect the federal plaintiff’s rights, and it therefore concluded the district court did not err in staying DePuy’s petition in the federal courts.

The panel therefore affirmed the decision of the district court.

DePuy Synthes Sales, Inc. v. OrthoLA, Inc. and Bruce Cavarno

No. 19-2765

Writing for the court: Chief Judge Diane P. Wood

Concurring: Judges Ilana Diamond Rovner and Amy St. Eve

Released: March 18, 2020