Exxon Mobil Corp. v. Saudi Basic Industries Corp.

Issues 

Oral argument: 
February 23, 2005
 
In 1980, Saudi Basic Industries Corporation (SABIC) and the Exxon (now Exxon Mobil Corp.) subsidiaries, Exxon Chemical Arabia, Inc (ECAI) and Mobil Yanbu Petrochemical Company (Yanbu) created two joint venture entities: Yanpet and Kemya. SABIC entered into sublicensing agreements with the two entities under which both were to pay royalties for use of an exclusive gas-phase process to manufacture polyethylene. Nearly twenty years later, Exxon Mobil, Yanbu, and ECAI claimed that SABIC actually charged Yanpet and Kemya more than the amount of royalties actually agreed upon.
 
In 2000, SABIC sued Yanbu and ECAI in the Delaware Superior Court seeking a declaratory judgment that the joint venture agreements had not been violated and that the royalty charges were correct. Exxon Mobil, Yanbu, and ECAI countersued in the United States District Court for the District of New Jersey, seeking the converse declaratory judgment. In 2003, the Delaware Superior Court returned a verdict against SABIC. SABIC has appealed the verdict, which is currently pending. Prior to the state court trial, SABIC moved to dismiss Exxon Mobil's federal court action claiming foreign sovereign immunity. The motion was denied and SABIC then appealed to the Court of Appeals for the Third Circuit. The federal appeals court did not address the sovereign immunity issue but vacated the District Court's orders with instructions for dismissal, finding that the Rooker-Feldman doctrine barred federal subject matter jurisdiction over the claims of Exxon and its subsidiaries because such was previously decided in the state court case. The Supreme Court faces the issue of whether the Rooker-Feldman doctrine, which bars lower federal courts from conducting de facto appellate review of decisions by state courts, may be interpreted to incorporate preclusion principles and deny jurisdiction to federal courts because a pending state-court proceeding presents identical issues, notwithstanding the long-established system of dual federal and state jurisdiction.

Questions as Framed for the Court by the Parties 

Whether the Rooker-Feldman doctrine, which bars lower federal courts from conducting de facto appellate review of decisions by state courts, may be expansively interpreted to incorporate preclusion principles and divest federal courts of jurisdiction solely because a pending state-court proceeding presents identical issues, notwithstanding the long-established system of dual federal and state jurisdiction.

Facts 

In 1980, Saudi Basic Industries Corporation (SABIC) and the Exxon (now Exxon Mobil Corp.) subsidiaries, Exxon Chemical Arabia, Inc (ECAI) and Mobil Yanbu Petrochemical Company (Yanbu) created two joint venture entities: Yanpet and Kemya. Exxon Mobil Corp. v. Saudi Basic Industries Corp., 364 F.3d 102, 103 (3d. Cir. 2004). Yanpet was the joint venture between SABIC and Yanbu, and Kemya was the joint venture between SABIC and ECAI. Id. Both of these entities are limited liability partnerships engaged in the manufacturing of polyethylene in Saudi Arabia. Saudi Basic Industries Corp. v. Exxonmobil Corp., 194 F.Supp.2d 378, 384 (D. N.J. 2002).
 
In October 1980, SABIC entered into sublicensing agreements with both Yanpet and Kemya under which both partnerships were required to pay SABIC royalties for use of Unipol®, an exclusive gas-phase process to manufacture polyethylene. Id. at 385. Nearly twenty years later, Exxon Mobil, Yanbu, and ECAI disputed the amount of the royalty charges and claimed that SABIC actually charged Yanpet and Kemya more than the amount of royalties actually agreed upon. Id.
 
In September 2000, SABIC sued Yanbu and ECAI in the Delaware Superior Court seeking a declaratory judgment that the joint venture agreements with Yanbu and ECAI had not been violated and that the royalty charges imposed by SABIC were not more than the amount agreed upon. Exxon Mobil Corp., 364 F.3d at 103. Later that month, Exxon Mobil, Yanbu, and ECAI countersued SABIC in the United States District Court for the District of New Jersey, seeking the converse declaratory judgment. Id.
 
In March of 2003, after a two-week trial, the jury in the Delaware Superior Court case returned a verdict against SABIC in favor of Exxon Mobil for $416,880. SABIC has appealed the verdict, which is currently pending in the Delaware Supreme Court. Id. Prior to the state court trial, SABIC moved to dismiss Exxon Mobil's federal court action claiming foreign sovereign immunity. Id. The motion was denied by the federal court in 2002. See Saudi Basic Indus. Corp., 194 F.Supp.2d at 378. SABIC then appealed to the Court of Appeals for the Third Circuit. See Exxon Mobil Corp., 364 F.3d at 103.
 
The federal appeals court never addressed the question of sovereign immunity and vacated the District Court's orders with instructions for dismissal for lack of subject matter jurisdiction. Id. at 106. It was found that the Rooker-Feldman doctrine barred federal subject matter jurisdiction over the claims of Exxon Mobil, Yanbu, and ECAI because such was previously decided in the state court case. See id. at 104-06. Exxon Mobil and its subsidiaries now appeal to the United States Supreme Court claiming that the Rooker-Feldman doctrine does not apply.

Analysis 

The Rooker-Feldman doctrine is the result of two Supreme Court cases: Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983). The crux of the doctrine is that federal district courts "do not have jurisdiction. . . over challenges to state court decisions in particular cases arising out of judicial proceedings. Feldman, 460 U.S. at 486. In analyzing the doctrine, it is essential to understand the outcomes of the two original cases:
 
In Rooker, the plaintiff brought a bill in equity in federal district court to have an Indiana state court judgment nullified and to obtain relief. Rooker, 263 U.S. at 414. The Supreme Court held that the federal court did not have jurisdiction due to § 237 of the Judicial Code (now 28 U.S.C. § 1257) which granted power only to the United States Supreme Court to review state court judgments. Id. at 416. Rooker established the principle that de facto prohibits the appeal of a state court judgment in federal district court. See id.
In Feldman, the plaintiffs petitioned the District of Columbia Court of Appeals, the equivalent of a state supreme court, to waive certain bar exam requirements; however, the court denied the petitions. Feldman, 460 U.S. at 465-69. Plaintiffs then filed suit in federal district court, claiming that the District of Columbia Court of Appeals violated their constitutional and statutory rights in denying their petitions. Id. at 469. The federal district court dismissed the case for lack of jurisdiction, but the federal court of appeals reversed. Id. at 474. The United States Supreme Court reversed the federal appellate decision and held that the jurisdictional bar, as set forth in Rooker, applied where plaintiffs sought favorable federal decision after the state court denied their waiver petitions. See id. at 482. The Court ruled: "If the constitutional claims . . . are inextricably intertwined with the state court's denial in a judicial proceeding of a particular plaintiff's application [for relief], then the District Court is in essence being called upon to review the state court decision. This the District Court cannot do." Id. at 483.
The current case before the Supreme Court is important because disagreement among the federal circuit courts, regarding the connection between the Rooker-Feldman doctrine and res judicata, necessitates a clarifying decision. Res judicata is a legal doctrine that stands for the principle that the final judgment of a court is conclusive against the same parties in any additional cause of action between the parties involving the same issue. The majority of the circuits, particularly the Fourth, Sixth, Seventh, and Ninth, have made clear distinctions between the Rooker-Feldman doctrine, a non-waivable jurisdictional bar, and res judicata a waivable, affirmative defense. However, the decision of the Third Circuit that the Rooker-Feldman doctrine applies simply because the federal and state actions involve identical claims (the approach also taken by the Second Circuit), seems, in effect, to hold that Rooker-Feldman applies to all claims that would ordinarily fall within the scope of res judicata.
 
The main concern of the petitioners in this case is that the discrepancies between the circuit court opinions will promote forum shopping; it would seem that a defendant, facing suit in a federal district court that shares the approach of the Third Circuit, may defeat federal jurisdiction by suing in state court and raising identical issues. The opinion of the Third Circuit, however, expresses the concern that parties in situations like this, with cases pending in both federal and state court, will seek such federal actions as "insurance policies" against potential unfavorable state court decisions.

Discussion 

Although the concerns of the Third Circuit seem reasonable, it is likely that the Supreme Court will rule against its decision. The interpretation of the Rooker-Feldman doctrine by the appeals court seems inconsistent with both decisions in Rooker and Feldman, as well as the established principle that parallel claims may be available in both state and federal court where the federal claims do not challenge the outcome in the state court.
 
In Rooker and Feldman, the claims brought by the plaintiffs in both cases were in response to unfavorable outcomes in state court actions, and were in direct conflict with the state court decisions. See Rooker, 263 U.S. 413; Feldman, 460 U.S. 462. Also, in clear support for the sustainability of parallel claims in both federal and state court, the Supreme Court stated in McClellan v. Carland: "The rule is well recognized that the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction." McClellan v. Carland, 217 U.S. 268, 282 (1910). In the current case before the Supreme Court, Exxon's claims in federal court are not in response to an unfavorable state court decision, and are not in conflict with the state court decision.
 
Overall, the interpretation offered by the Third Circuit and followed in the Second Circuit, that the Rooker-Feldman doctrine is coextensive with the preclusive concept of res judicata, does not seem as persuasive, or even as appropriate, as the interpretations of other circuits.
 
The Ninth Circuit's approach offers distinctions between the Rooker-Feldman doctrine and inter-jurisdictional preclusion as codified in 28 U.S.C. § 1738. In Noel v. Hall, the Ninth Circuit noted "[i]n decisions both before and after Feldman, § 1738 requires a federal district court to give the same — not more and not less — preclusive effect to a state court judgment as that judgment would have in the state courts of the state in which is was rendered." Noel v. Hall, 341 F.3d 1148, 1160 (9th Cir. 2003). Identical claims may be pursued in federal and state courts; the Rooker-Feldman doctrine applied too broadly would have "conflicted with either the rule permitting parallel state and federal litigation or the rule of § 1738 requiring federal courts to follow state preclusion rules." Id. at 1161.
 
The Sixth and Seventh Circuits follow a similar approach to the Ninth Circuit. The Seventh Circuit case, GASH Assocs. v. Vill. Of Rosemont, iterates a similar principle to that of the Ninth Circuit:
 
"The Rooker-Feldman doctrine. . . has nothing to do with § 1738. It rests on the principle that district courts have only original jurisdiction. . . . The Rooker-Feldman doctrine asks: is the federal plaintiff seeking to set aside a state judgment, or does he present some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was party? If the former, then the district court lacks jurisdiction; if the latter, then there is jurisdiction and state law determines whether the defendant prevails under principles of preclusion."
GASH Assocs. v. Vill. Of Rosemont, 995 F.2d 726, 728 (7th Cir. 1993).
 
The Fourth Circuit, in its quite similar interpretations of the doctrine and res judicata, reiterates the general rule that parallel actions may proceed in both federal and state courts until one becomes preclusive of the other. Vulcan Chem. Techs., Inc. v. Barker, 297 F.3d 332 (4th Cir. 2002). The Fourth Circuit court stated that "[i]t would be a novel application of the already beleaguered Rooker-Feldman doctrine to divest a federal court of subject matter jurisdiction simply because a parallel case was later filed in State court seeking to decide the same question." Id. at 338. This argument seems to point to a weakness in the Third Circuit's decision in Exxon Mobil Corp.; the decision clearly fails to address the accepted general principle of parallel claims in two courts.

Conclusion 

The Supreme Court will likely rule in favor of the petitioners, Exxon Mobil Corp.  and  its  subsidiaries,  because the Third Circuit's understanding of the Rooker-Feldman doctrine is seemingly inconsistent with the Supreme Court decisions upon which the doctrine is based. Also, the Third Circuit's decision ignores the established general principle that parallel claims may be available in both state and federal court where the claims brought in federal court are not adverse to the outcome in the state court.

Acknowledgments