Tarazi v. Truehope Inc., No. 13 Civ. 1024 (S.D.N.Y. July 24, 2013) [click for opinion]

Truehope Inc. ("Truehope"), a Canadian corporation, entered into an exclusivity agreement with the Stringams, Canadian citizens residing in Idaho, which allowed the Stringams an "exclusive, perpetual license to market, sell and distribute" throughout the United States "private label versions" of Truehope's vitamin mineral supplements.  The exclusivity agreement was governed by the laws of Alberta, Canada, where Truehope was incorporated.  A few weeks later, the Stringams, through their company, Open Mind Consulting ("Open Mind"), entered into a joint venture agreement with Micronutrient Solutions, Inc. ("MSI") and MSI's CEO and shareholder, Nadia Tarazi.  In so doing, the Stringams assigned to MSI the exclusivity agreement with Truehope. 

Truehope allegedly did not consent to this assignment and filed a statement of claim in Alberta, Canada, alleging breach of the exclusivity agreement.  In particular, Truehope's statement of claim alleged that the Stringams, Tarazi, Open Mind and MSI were "utilizing the trademarks in a fashion as to damage the reputation of and the sales of the branded product and the trademarks" without authorization.  Truehope sought a declaration from the Alberta court that: (1) the Stringams breached the exclusivity agreement; (2) the Stringams' assignment of the exclusivity agreement to the joint venture with Open Mind was void; and (3) the joint venture infringed on Truehope's trademarks.  Truehope also sought an injunction forbidding the Stringams, Open Mind, MSI and Tarazi from using Truehope's trademarks.  On a parallel path, Truehope entered into a separate distribution agreement with Quintessential Biosciences, LLC ("Q Sciences"), which allowed Q Sciences to market the "branded product" in the United States "through its sales network of independent business owners." 

Within two weeks of Truehope's claim filing in Canada, Tarazi and MSI filed an action in the Southern District of New York alleging that Truehope breached the exclusivity agreement by virtue of having entered into the separate agreement with Q Sciences—naming both Truehope and Q Sciences as defendants.  Tarazi and MSI also named the Stringams and Open Mind on the grounds that they breached the joint venture agreement with Tarazi and MSI as a result of their alleged agreement to become "independent business owners" under the separate Q Sciences-Truehope distribution agreement.  In response, Truehope and the other defendants ("Defendants") invoked the doctrine of international comity in the New York action and filed a motion to stay the proceeding pending the Alberta Court's resolution of the "fundamental issues underlying the plaintiffs' claims against [the defendants] in this action."  The Truehope defendants claimed, more specifically, that it must first be established through the Canadian action that the Stringams had the authority to transfer the assignment of the exclusivity agreement to Tarazi and MSI ("Plaintiffs"), and in turn that Plaintiffs received a valid assignment of those rights, in order to succeed in the New York action. 

In an opinion authored by Magistrate Judge Francis, the U.S. District Court for the Southern District of New York granted Defendants' request for a stay on the grounds of international comity.  The court began by citing the definition of international comity as the "proper respect for litigation in and the court of a sovereign nation, fairness to litigants, and judicial efficiency."  Against these concerns, however, weighed the "virtually unflagging obligation of the federal courts to exercise the jurisdiction given them."  As such, the task for the district court in evaluating whether to stay or dismiss a case on international comity grounds is "not to articulate a justification for the exercise of jurisdiction, but rather to determine whether exceptional circumstances exist that justify the surrender of that jurisdiction."

The court then identified two points of analysis that should be used to determine whether such "exceptional circumstances" exist: (1) whether the proceedings are "parallel," and (2) whether a select list of other "important factors" are "sufficiently exceptional to justify abstention" as set forth in the Second Circuit case of Royal and Sun Alliance Co. of Canada v. Century Int'l Arms, Inc. 

In evaluating the first prong, the court observed that the proceedings "need not be identical," but must be "substantially the same."  The court found the Alberta action and the present action to meet this threshold.  The court first pointed out the similarity of the parties in the two cases, explaining that "affiliates" or a "similarly close relationship" were sufficient to be "substantially the same."  Although the plaintiffs argued that the presence of Q Sciences solely in the New York action destroyed this sameness, the court ruled that Q Sciences' interest in the Canadian action, "to the extent it has one, is aligned with Truehope's in that both entities seek a ruling that allows for the enforceability of the Q Sciences Agreement."  That is, Q Sciences "remains a defendant in this case against whom the plaintiffs here may proceed, unless and until they are barred by the preclusive operation of a judgment from the Canadian court." 

The court also emphasized that there was a sufficient similarity of issues between the two actions.  The court explained that "if the Canadian court rules in favor of Truehope as to the meaning of the exclusivity agreement, this action will be resolved: the assignment to the Joint Venture will be void and MSI will have no rights under the exclusivity agreement, completely undermining the claims here."  On the other hand, if the Canadian court rules against Truehope on that issue, "its ruling will be instructive on the ultimate resolution of this action because it will have determined the meaning of the exclusivity agreement under Alberta law."

In evaluating the second prong—the list of other "important factors" as set forth in Royal and Sun Alliance—the court evaluated the following instructive (though not singularly dispositive) factors: (1) the case's underlying connection with Canada versus the U.S.; (2) the order of filing between the two actions; (3) convenience; (4) adequacy of the Canadian forum; and (5) potential prejudice.  With respect to the first factor, the court emphasized that "the root question in both of these litigations is the construction of the exclusivity agreement."  Because that document has a "close connection with the foreign forum and is to be interpreted according to the laws of the foreign forum, it is appropriate to defer to that forum."  As for the second factor—order of filing—the court noted that discovery had already begun in the Alberta action but not yet in the New York action.  The court thus concluded that the Alberta action's earlier filing weighed in favor of a stay. 

With respect to the third factor—convenience—the court rejected Plaintiff's invitation to accord deference to a plaintiff's choice of forum in the same way as in a forum non conveniens analysis.  The court held that the abstention doctrine—the doctrine justifying the imposition of a stay—is of a "distinct historical pedigree" from forum non conveniens such that deference to Plaintiffs' choice of forum must be weighed in light of the fact that Truehope filed its action in its forum of choice prior to the filing of this case.  The court added that international comity concerns generally do not enter into a forum non conveniens analysis.  In establishing the legal backdrop, the court rejected Plaintiffs' argument that, by virtue of the witnesses being U.S. domiciliaries, convenience favored New York.  The witnesses "necessary for the determination of the meaning of the exclusivity agreement … are Canadian citizens, one of whom lives in Alberta."  The court thus concluded that convenience weighed "slightly in favor of a stay."

With respect to the fourth item—the Canadian forum's adequacy—the court distinguished outright dismissal from a stay.  In acknowledging the "unsettled question of the jurisdiction of the Canadian court over the subject matter of the action," the court held that a stay would enable the case to "go forward with this Court" if the case in Canada is dismissed there for lack of jurisdiction.  On the other hand, if the Alberta court proves to have proper jurisdiction over the Canadian action, then the validity of the exclusivity agreement at the heart of the case "will be instructive to the ultimate resolution" of the New York action.  As such, the court determined that the Canadian forum was adequate under the scenario of a stay of the New York action.  The court then addressed the fifth item—prejudice—by ruling that neither party has identified any prejudice that factors for or against a stay. 

Finally, the court stated that the "interests of judicial economy will be best served by a stay, which will allow the Alberta court to address the meaning of the exclusivity agreement under Alberta law without duplication of effort by this Court and without the need for expert testimony."  The court also recognized the practical safeguard in place should the Canadian court dismiss the case—the stay "will dissolve and this action can proceed with little delay."  The court thus concluded that international comity justified the imposition of a stay pending the outcome of the related Alberta action.  The court entered an order to that end, and instructed the parties to submit a joint status report every 60 days to notify the court of any material change in the status of the Alberta action.  If that action proved not to move "expeditiously toward resolution," the court noted that it may "revisit" whether a stay in the New York action should remain intact.