The First Circuit recently held that where a final judgment has been reached in a declaratory judgment action, res judicata does not preclude a later action for damages arising from the same operative facts.
In Andrew Robinson Int’l, Inc. v. Hartford Fire Ins. Co., 547 F.3d 48 (1st Cir. 2008), lead-laden dust leaked into the offices of the plaintiffs (“Robinson”), causing severe property damage and forcing them to relocate temporarily. Robinson filed a claim for coverage with its insurer (“the Hartford”), but the Hartford denied the claim, asserting that the dust constituted a pollutant under a policy exclusion. Robinson then sued in state court for a declaration of rights and liabilities under its insurance policy. The court concluded the policy exclusion had not been triggered and the Hartford paid Robinson’s claim. Eight months later, Robinson again sued the Hartford in state court, this time claiming that the Hartford’s initial refusal to pay its claim constituted an unfair and deceptive trade practice under Massachusetts law and seeking treble damages and attorneys’ fees. The Hartford removed the action to federal district court based on diversity of citizenship and moved to dismiss on res judicata grounds. The district court granted the motion.
The First Circuit reversed. Applying Massachusetts law, the court first considered whether the three elements of res judicata had been satisfied: (1) whether the parties to the present and prior actions were identical; (2) whether the causes of action arose from the same transaction and sought redress for the same wrong; and (3) whether a final judgment on the merits had been reached in the first action. The Court concluded that these three elements were present but held that the doctrine was rendered inapplicable by Section 33 of the Restatement (Second) of Judgments (“Section 33”), which provides that “normal principles of claim preclusion will not operate when the original action was for declaratory relief.”
Although neither the First Circuit nor Massachusetts state courts had previously adopted Section 33, the First Circuit concluded that the Supreme Judicial Court of Massachusetts would do so if it were ever faced with the issue. Several considerations factored heavily into the First Circuit’s conclusion. First, Massachusetts cases have cited Section 33 approvingly. Second, a vast majority of state courts and federal courts applying state law have adopted Section 33. Third, the leading treatises addressing this issue accord less preclusive effect to declaratory judgments than final judgments in other types of actions. Fourth, judicial resources are preserved by allowing litigants to bring declaratory judgment actions without also having to assert all possibly related claims lest they later be barred. Lastly, the Massachusetts statute authorizing declaratory actions specifically contemplates the possibility of subsequent proceedings.
Under Robinson, a party may now choose to “dip its toe in the water” by bringing a declaratory judgment action without surrendering its right to plunge into full blown damages litigation if it later chooses to do so.