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Abbott Laboratories v. CVS Pharmacy

May 15, 2002

ABBOTT LABORATORIES, ZENECA, INC., AND MERCK & CO., INC., PLAINTIFFS-APPELLANTS,
v.
CVS PHARMACY, INC., CVS CORP., AND CVS REVCO D.S., INC., DEFENDANTS-APPELLEES.



Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 01 C 2772 and 01 C 2784--Charles P. Kocoras, Judge.

Before Bauer, Posner, and Easterbrook, Circuit Judges.

The opinion of the court was delivered by: Easterbrook, Circuit Judge.

Argued April 19, 2002

This is another installment in the Brand Name Prescription Drugs saga. Many purchasers of prescription drugs accused the manufacturers and wholesalers of violating the antitrust laws. Some of the claims have been tried; others have been the subject of summary judgment. See In re Brand Name Prescription Drugs Antitrust Litigation, No. 00-2464 (7th Cir. May 6, 2002); In re Brand Name Prescription Drugs Antitrust Litigation, 186 F.3d 781 (7th Cir. 1999). In 1996 two of the defendants (Zeneca and Merck) settled with the class, and in 1998 a third defendant (Abbott Laboratories) settled on similar terms. Because the class had been certified under Fed. R. Civ. P. 23(b)(3), any member was free to opt out and litigate separately. Today's case concerns claims by Revco Drug Stores, Hook-SupeRx, and Brooks Drug, three retail chains that opted out. (Revco has acquired both Hook-SupeRx and Brooks Drug, so for simplicity we speak only of Revco.)

Revco's suit is pending in the United States District Court for the Middle District of Pennsylvania. Nonetheless, Abbott Laboratories and the other two manufacturers (collectively "Abbott") asked the United States District Court for the Northern District of Illinois, which approved the 1996 and 1998 settlements, to issue a declaratory judgment to the effect that the settlements block Revco's action. The ground of relief? That in 1997 CVS Corp., the parent of CVS Pharmacy, Inc., which had not opted out, acquired Revco as a subsidiary. Each settlement includes a release of all claims by every class member, including its affiliates. Because Revco has become CVS Corp.'s subsidiary, and thus CVS Pharmacy's affiliate, Abbott contends that Revco's claims are blocked by the release.

The district judge ruled against Abbott, explaining that the reference to affiliates must be reconciled with another provision in the settlement allowing opt outs to pursue their claims. Neither of these has linguistic priority; but as a functional matter the clause preserving opt outs' rights must prevail when an opt-out plaintiff also is an affiliate of a settling plaintiff, the judge thought. 2001 U.S. Dist. Lexis 17620 (N.D. Ill. Oct. 24, 2001). Read together, these clauses prevent class members from using affiliates to smuggle the class member's own claims back into court, the judge found. Bottom line: Revco's claims are distinct from those of CVS Pharmacy and thus are outside the release.

Asking one federal court to resolve an issue that is before another is problematic. Only one federal court at a time should handle a case, see Colorado River Water Conservation District v. United States, 424 U.S. 800, 817 (1976), and a release, as an affirmative defense, see Fed. R. Civ. P. 8(c), is ordinary business for the court before which the main action is pending. See Lucille v. Chicago, 31 F.3d 546, 549 (7th Cir. 1994). "Declaratory judgment should not be granted . . . to interfere with an action already instituted." Sears, Roebuck & Co. v. American Mutual Liability Insurance Co., 372 F.2d 435, 438 (7th Cir. 1967). Cf. Pettibone Corp. v. Easley, 935 F.2d 120, 122, 123-24 (7th Cir. 1991). We appreciate the good sense of having Judge Kocoras, who has handled the Brand Name Drugs litigation for many years and who approved the settlements, determine whether a particular suit violates the terms of those settlements. See Lynch, Inc. v. SamataMason Inc., 279 F.3d 487 (7th Cir. 2002). There was a simple way for him to do this. All of the suits, including Revco's, had been transferred to Judge Kocoras by the Panel on Multidistrict Litigation for pretrial management under 28 U.S.C. sec.1407. Judge Kocoras could have ruled on this affirmative defense before asking the Panel to send Revco's suit back to its original district. Revco wanted him to do this, but he denied its motion without giving a reason, so Revco's suit returned to Pennsylvania with the effect of the releases unresolved. Only after the remand did the judge turn to Abbott's independent suit asking him to declare that the release blocks Revco's suit. This sequence has caused more than a procedural imbroglio, with the subject potentially before two district courts simultaneously. It has created a problem with federal subject-matter jurisdiction.

Revco's suit against Abbott arises under the federal antitrust laws; there is no need for any additional grant of jurisdiction to adjudicate the defense of release in Revco v. Abbott.*fn1 But Abbott's independent suit against Revco does not arise under the antitrust laws--and, because both Revco and one manufacturer are incorporated in Delaware, it cannot rest on the diversity jurisdiction either.*fn2 Although the class action that ended in settlement was within federal-question jurisdiction, the settlement is just a contract, so a suit on the settlement needs an independent basis of federal jurisdiction, see Kokkonen v. Guardian Life Insurance Co., 511 U.S. 375 (1994), which here is lacking because parties on both sides have the same corporate citizenship. Kokkonen implies, and Jessup v. Luther, 277 F.3d 926 (7th Cir. 2002), holds, that interpretation of a settlement contract is governed by state law even if the settled claim arose under federal law; otherwise a suit directly on the settlement agreement also would arise under federal law, and the holding of Kokkonen would be overthrown.

Kokkonen observes that a district judge may retain jurisdiction to enforce a settlement. 511 U.S. at 381. Then the supplemental jurisdiction supports later adjudication. Both settlement agreements provide for such a retention of jurisdiction, and by incorporating these agreements into his orders the district judge set the stage for later litigation to enforce their terms. Oddly, however, Abbott did not file motions in the Brand Name Prescription Drugs class action, the suit whose jurisdiction had been retained by the settlement. Instead Abbott filed an independent action, which has been docketed separately. (Actually there are two independent actions, one by Abbott and the other by Zeneca and Merck, but recall that we are simplifying the exposition.) By choosing to proceed separately, Abbott may have surrendered the benefit of the supplemental jurisdiction. See Peacock v. Thomas, 516 U.S. 349 (1996). Yet there would be little point in vacating the judgment, only to have Abbott file a new motion in the Brand Name Prescription Drugs class action, in the same district court before the same judge. We shall treat the independent suit as equivalent to that motion.

Still, Abbott is not out of the jurisdictional woods. The district court's reservation of jurisdiction to enforce the settlement entitled it to adjudicate a dispute between Abbott and CVS Pharmacy, which was in the class at the time of the settlement. But it does not create jurisdiction of claims against Revco (now formally "CVS Revco D.S., Inc."), which had opted out, or CVS Corp., a holding company that has never been in the pharmacy business and lacks any claim under the antitrust laws. As Peacock holds, a suit involving Party A does not permit a district court to enter a judgment against Party B, even when A and B are affiliated. In Peacock, A was a corporation and B its dominant shareholder. Here, A is a corporation that indirectly (through C) owns all of the shares in B. The principle is the same. Unless it is possible to collapse the legal identities of the parties--and Abbott does not contend that the requirements for "piercing the corporate veil" and treating all of the CVS entities as a single person have beensatisfied--each litigant is entitled to separate handling. See Phillip I. Blumberg, The Law of Corporate Groups sec.8.03 (1987). Compare Sears, Roebuck & Co. v. CIR, 972 F.2d 858 (7th Cir. 1992), with NLRB v. International Measurement and Control Co., 978 F.2d 334 (7th Cir. 1992). That a judgment binds one corporation does not allow a court to ad judicate claims against its shareholders, subsidiaries, or other juridically distinct entities. See Holmes v. SIPC, 503 U.S. 258 (1992); Teamsters Health and Welfare Trust Fund v. Philip Morris Inc., 196 F.3d 818 (7th Cir. 1999); Mid-State Fertilizer Co. v. Exchange National Bank, 877 F.2d 1333 (7th Cir. 1989); Carter v. Berger, 777 F.2d 1173 (7th Cir. 1985). Each corporation's interests are distinct, and its legal attributes do not leak to investors or subsidiaries. This norm applies fully to fraternal corporations in holding-company groups, as Blumberg's treatise shows. The settle ment and release binds CVS Pharmacy but not CVS Corp. or Revco, so the reservation of jurisdiction is limited to disputes involving CVS Pharmacy.

Abbott observes that the supplemental jurisdiction sometimes allows the resolution of disputes that are closely related to the original litigation. Controversies about attorneys' fees for work in the underlying suit are prime examples. See, e.g., Dale M. v. Board of Education, 282 F.3d 984 (7th Cir. 2002); Baer v. First Options of Chicago, Inc., 72 F.3d 1294, 1301 (7th Cir. 1995). Ever since 28 U.S.C. sec.1367(a) overturned Finley v. United States, 490 U.S. 545 (1989), the supplemental jurisdiction has been capacious enough to include claims by or against third parties. See Stromberg Metal Works, Inc. v. Press Mechanical, Inc., 77 F.3d 928 (7th Cir. 1996). All this is true enough, but Revco is not CVS Pharmacy's lawyer, or any other kind of agent. Revco and CVS Pharmacy are distinct corporations--parts of the same corporate group, to be sure, but as we have already explained this affiliation is not enough to justify a rule that ability to sue one of the corporations authorizes suit against the others. See Richard A. Posner, The Rights of Creditors of Affiliated Corporations, 43 U. Chi. L. Rev. 499 (1976). Peacock holds that the supplemental jurisdiction does not allow vertical veil-piercing (between a corporation and its investors or managers); no more does the supplemental jurisdiction warrant lateral veil-piercing (between fraternal corporations). Abbott does not have even a claim against CVS Corp. just because it is CVS Pharmacy's parent, so it would be inappropriate to bring CVS Corp. in under the supplemental jurisdiction. What is more, the point of allowing opt outs is to separate the claims of class members from those of others. See, e.g., Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367, 385 (1996); Premier Electrical Construction Co. v. National Electrical Contractors Ass'n, Inc., 814 F.2d 358, 362-63 (7th Cir. 1987). If parties that have opted out could be dragged back in under the supplemental jurisdiction, a core function of Rule 23(b) would be nullified. So whatever scope may be left, after Peacock, for the adjudication of claims by or against third parties other than attorneys, that power cannot be asserted against an entity that has opted out of a class action. Revco must be dismissed as a defendant in Abbott's independent actions.

CVS Pharmacy is not a party to Revco's antitrust suit, now pending in Pennsylvania. This leads CVS Pharmacy to contend that, although the district judge has reserved jurisdiction with respect to its disputes with Abbott, no case or controversy exists between CVS Pharmacy and Abbott. On this view Abbott's only option is to plead the release as a defense to Revco's antitrust suit. Yet although CVS Pharmacy cannot reach out its finger and deliver a Zeus-like bolt that will end Revco's suit, it may be able to influence Revco to dismiss the suit. Whether CVS Pharmacy must exercise such influence as it possesses is a justiciable controversy. President Nixon could not summarily revoke the subpoena that Special Prosecutor Cox had procured, and could not fire Cox either; but he could direct the Attorney General, who had the power to replace the special prosecutor, to exercise that authority, and, when Attorney General Richardson resigned rather than comply, the President could and did replace him with someone who would follow orders. Just so with a parent corporation. Only the subsidiary's board of directors or ceo can dismiss Revco's suit against Abbott, but the parent may (if necessary) replace the subsidiary's directors and managers. So we shall ask whether Abbott is entitled to an order compelling CVS to use the instruments at its disposal to ensure that Revco dismisses the pending litigation. This is not the precise relief for which Abbott has asked, but it likely would come to the same thing and must be considered--for a prevailing party obtains the relief to which it is entitled, whether it asked for that relief or not. Fed. R. Civ. P. 54(c).

Both settlement agreements provide that

all manner of claims . . . any class plaintiff or plaintiffs or any member or members of the Class who have not timely excluded themselves from the Class Action (including any of their past, present or future officers, directors, stockholders, agents, employees, legal representatives, trustees, parents, associates, affiliates, subsidiaries, partners, heirs, executors, administrators, purchasers, predecessors, successors, and assigns) . . . ever had, ...


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