Interstate Petroleum Corp. v. Morgan

WILKINS, Circuit Judge,

dissenting:

The majority vacates the judgment in favor of Interstate Petroleum Corporation *337(Interstate) and against Robert C. Morgan and Vickie L. Morgan, holding that the district court lacked subject matter jurisdiction. Because the declaratory judgment defendants here, the Morgans, could have initiated a coercive action to determine the federal rights at issue, I would hold that the district court properly concluded that it possessed subject matter jurisdiction. Accordingly, I would affirm.

I.

Interstate brought this action against the Morgans, alleging that they breached a franchise agreement under which Interstate, the franchisor, was to sell gasoline and related products to the Morgans. Interstate sought damages, injunctive relief, and any other relief that the district court deemed appropriate, including an award of attorneys’ fees and costs. Interstate’s complaint asserted that subject matter jurisdiction existed based on the existence of a federal question, see 28 U.S.C.A. § 1331 (West 1993), under the Petroleum Marketing Practices Act (PMPA), see 15 U.S.C.A. §§ 2801-2841 (West 1998).1

The Morgans moved to dismiss the case, asserting that the district court lacked subject matter jurisdiction because the PMPA does not permit a franchisor to sue a franchisee in federal court under any circumstances. The court rejected this argument and denied the motion to dismiss. Subsequently, the Morgans moved unsuccessfully for partial dismissal of Interstate’s complaint on the basis that the Declaratory Judgment Act, see 28 U.S.C.A. § 2201 (West 1994), did not permit Interstate to recover money damages. Importantly, in this motion the Morgans acknowledged that Interstate was seeking a declaratory judgment concerning whether its termination of the franchise agreement violated the PMPA. At trial, the Morgans moved for judgment as a matter of law regarding Interstate’s claim for money damages, reiterating their position that while the district court properly had jurisdiction to hear the case because Interstate sought a declaration of its rights under the PMPA, Interstate was not entitled to recover damages. The district court agreed that the declaratory judgment sought by Interstate provided the basis for federal jurisdiction but denied the Morgans’ motion.

A jury subsequently found that the Morgans had violated the franchise contract and awarded Interstate damages of $42,-901.50. The Morgans again moved for judgment as a matter of law on the basis of lack of subject matter jurisdiction, alleging for the first time that Interstate’s complaint did not seek a declaratory judgment. Finding that this allegation conflicted with the Morgans’ repeated recognition of the existence of the declaratory judgment action, the district court denied the motion. The district court also denied a motion by Interstate for reconsideration of an earlier ruling denying Interstate the right to recover attorneys’ fees under the PMPA.

II.

The Morgans argue that the district court lacked jurisdiction to hear this action because Interstate could establish federal question jurisdiction under the PMPA only by asserting a claim for declaratory relief and no such claim was ever asserted. I disagree. Notwithstanding Interstate’s failure to specifically request declaratory relief of the Morgans’ rights under the PMPA in its complaint, it is abundantly clear from the record that both parties recognized that Interstate’s entitlement to such relief was an issue before the court, and accordingly that the complaint had *338been constructively amended.2 See Fed. R.Civ.P. 15(b) (“When issues not raised by the pleadings are tried by express ... consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings.”).

Having determined that the case at bar included a request by Interstate for the adjudication of the Morgans’ rights against Interstate under the PMPA, the only question remaining is whether the district court had jurisdiction over such an action. The district court correctly determined that it did. Section 1331 of Title 28 provides, “The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.” 28 U.S.C.A. § 1331. When federal law creates the cause of action, the action “arises under” federal law. See Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804, 808, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986).

When declaratory relief is sought, the jurisdictional inquiry is complicated somewhat. Although the Declaratory Judgment Act does not broaden federal jurisdiction, see Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, 70 S.Ct. 876, 94 L.Ed. 1194 (1950), it does “allow parties to precipitate suits that otherwise might need to wait for the declaratory relief defendant to bring a coercive action,” Gulf States Paper Corp. v. Ingram, 811 F.2d 1464, 1467 (11th Cir.1987); see Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 19 & n. 19, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). That the federal right actually litigated when declaratory relief is sought may belong to the declaratory judgment defendant rather than the declaratory judgment plaintiff does not change the fact that the action arises under federal law. See Lowe v. Ingalls Shipbuilding, a Div. of Litton Sys., Inc., 723 F.2d 1173, 1179 (5th Cir.1984). See also Ingram, 811 F.2d at 1467 (explaining that the declaratory judgment remedy “allows a party to bootstrap its way into federal court” (internal quotation marks omitted)). Accordingly, “[a] per,son may seek declaratory relief in federal court if the one against whom he brings his action could have asserted his own rights there.” Standard Ins. Co. v. Saklad, 127 F.3d 1179, 1181 (9th Cir.1997); see, e.g., Public Serv. Comm’n v. Wycoff Co., 344 U.S. 237, 248, 73 S.Ct. 236, 97 L.Ed. 291 (1952) (explaining that “[wjhere the complaint in an action for declaratory judgment seeks in essence to assert a defense to an impending or threatened ... action, it is the character of the threatened action ... which will determine whether there is federal question jurisdiction”); TTEA v. Ysleta del Sur Pueblo, 181 F.3d 676, 681 (5th Cir.1999) (holding that to establish an independent basis for jurisdiction, a declaratory judgment plaintiff “may show that there would be jurisdiction over a claim against it”); 12 James Wm. Moore et al., Moore’s Federal Practice § 57.21 [2], at 57-34 (3d ed.2000) (describing the appropriate inquiry as “whether the issue of federal law would have appeared on the face of a hypothetical complaint seeking affirmative relief filed by the defendant in the declaratory judgment action”); 10B Charles Alan Wright et al., Federal Practice and Procedure § 2767, at 650-51 (1998) (explaining that if the deelara-*339tory judgment defendant could bring a coercive action under a federal statute, the federal court has subject matter jurisdiction over the plaintiffs declaratory judgment action).

Here, it is undisputed that the district court would have had jurisdiction over an action initiated by the Morgans to enforce their rights under the PMPA. Accordingly, it follows that the district court also had jurisdiction to hear an action seeking a declaration that Interstate did not violate the Morgans’ rights under the PMPA. See Franchise Tax Bd., 463 U.S. at 19 & n. 19, 103 S.Ct. 2841; Standard Ins. Co., 127 F.3d at 1181.

The majority concludes that the district court had no jurisdiction over Interstate’s declaratory judgment action, reasoning that Interstate had no right of action under the PMPA and the Declaratory Judgment Act does not enlarge federal court jurisdiction. See ante, at 334-35. For the reasons already discussed, this conclusion is squarely at odds with federal jurisdictional principles relating to the Declaratory Judgment Act.

The majority also asserts that Franchise Tax Board dictates that the district court lacked jurisdiction here. I disagree. In Franchise Tax Board, the California Franchise Tax Board (Board) filed a complaint in state court against the Construction Laborers Vacation Trust (Trust), a trust established to administer a collective-bargaining agreement granting annual paid leave to construction workers. See Franchise Tax Bd., 463 U.S. at 4-5, 103 S.Ct. 2841. The Board’s complaint sought collection of unpaid tax levies as well as a state-law declaratory judgment that the Trust must honor the Board’s levies. See id. at 6-7, 103 S.Ct. 2841. The Trust was governed by the Employee Retirement Income Security Act (ERISA) of 1974, see 29 U.S.C.A. §§ 1001-1461 (West 1999 & Supp.2000), because it was an “employee welfare benefit plan.” See Franchise Tax Board, 463 U.S. at 5, 103 S.Ct. 2841. The Trust claimed that ERISA pre-empted state law, depriving the Trust of authority to honor the Board’s tax levies. See id. at 6, 103 S.Ct. 2841. The Trust removed the case to federal court, and the district court denied the Board’s motion to remand back to state court. See id. at 7, 103 S.Ct. 2841.

In analyzing whether removal was proper, the Court began by holding that to support federal jurisdiction in a state-law declaratory judgment action, a federal question must appear on the face of the well-pleaded complaint. See id. at 16-18, 103 S.Ct. 2841. The Court then observed with approval that federal courts “have regularly taken original jurisdiction over declaratory judgment suits in which, if the declaratory judgment defendant brought a coercive action to enforce its rights, that suit would necessarily present a federal question.” Id. at 19, 103 S.Ct. 2841. The Court assumed without deciding that the Trust could have sought to adjudicate the issue of whether the state regulations were preempted by bringing a coercive action under ERISA seeking to enjoin application of the regulations. See id. at 20 & n. 21, 103 S.Ct. 2841. The Court, however, also observed that it interprets federal court jurisdictional statutes “with an eye to practicality and necessity” and that “[t]here are good reasons why federal courts should not entertain suits by the States to declare the validity of their regulations despite possibly conflicting federal law.” Id. at 20-21, 103 S.Ct. 2841. In particular, the Court noted that states have a variety of methods by which they may enforce their own laws in state courts and are therefore not significantly prejudiced by the unavailability of the federal court forum. See id. at 21, 103 S.Ct. 2841. The Court explained that “[t]he situation presented by a State’s suit for a declaration of the validity of state law is sufficiently removed from the spirit of necessity and careful limitation of district court jurisdiction” that informed prior Court decisions. Id. at 21-22, 103 S.Ct. 2841. The Court therefore held that such suits are not with*340in the original jurisdiction of the district courts. See id. at 19-22, 103 S.Ct. 2841.

In addition to examining whether federal court jurisdiction could exist if the declaratory judgment defendant, the Trust, could have adjudicated the preemption issue in federal court in a coercive action, the Court also considered whether jurisdiction existed because the Board’s causes of action for enforcement of the tax levy and for a declaration of its rights were, “in substance,” federal claims. Id. at 22, 103 S.Ct. 2841; see id. at 22-27, 103 S.Ct. 2841. As is relevant here, the Court held that, although resolution of the declaratory judgment action would have required the adjudication of ERISA issues, the action could not properly be considered an ERISA claim “in substance” because only a participant, beneficiary, or fiduciary could sue under ERISA and the Board was not one of the enumerated parties. See id. at 25-27, 103 S.Ct. 2841. Having rejected both possible bases for federal jurisdiction, the Court held that removal was improper. See id. at 28, 103 S.Ct. 2841.

I strongly disagree with the conclusion of the majority that Franchise Tax Board is “nearly on all fours” with the present case, and that it mandates a determination of no jurisdiction here. Ante, at 334-35. Indeed, it is apparent that the holding in Franchise Tax Board was decided on the narrow basis that district courts do not have original jurisdiction over suits brought by a state for a declaration that federal law does not preempt its regulations. See Franchise Tax Bd., 463 U.S. at 19-22, 103 S.Ct. 2841; see TTEA, 181 F.3d at 681-82 (explaining that Franchise Tax Board was decided on the narrow ground that there is no federal jurisdiction over a suit brought by a state for a declaration that federal law did not preempt its regulations and concluding that the Franchise Tax Board Court approved of the general rule that a party can seek declaratory relief in federal court if the declaratory judgment defendant could have asserted his own rights there). The declaratory judgment plaintiff in the present case is not a state seeking a declaration that its own regulations are valid, and therefore the narrow holding of Franchise Tax Board does not control here.

In defending its determination of no jurisdiction, the majority also relies on the discussion in Franchise Tax Board concluding that the Board’s declaratory judgment action was not “in substance” an ERISA action, and therefore could not be said to arise under federal law in that manner. See ante, at 335 (“The Court stated that ‘[a] suit for similar relief by some other party does not “arise under” that provision.’ 463 U.S. at 27, 103 S.Ct. 2841.”). To the extent that the majority concludes that Interstate’s declaratory judgment action is not “in substance” a PMPA action, and therefore does not arise under federal law in that manner, I most certainly agree. That question is wholly separate, however, from the question of whether the declaratory judgment action arises under federal law because the Morgans’ coercive PMPA action against Interstate would have arisen under federal law. Compare Franchise Tax Bd., 463 U.S. at 19-22, 103 S.Ct. 2841, with id. at 22-27, 103 S.Ct. 2841.

Finally, I would note that the Morgans maintain that because the PMPA provides a remedy of money damages only for franchisees and because the PMPA is the sole basis for federal jurisdiction, the district court erred in allowing the jury to consider Interstate’s damages claim. I disagree. Once the court had jurisdiction • over the question of whether Interstate violated the PMPA in terminating the contract, it gained supplemental jurisdiction over Interstate’s state-law claim for breach of contract. See 28 U.S.C.A. § 1367(a) (West 1993). Accordingly, I would affirm the judgment in Interstate’s favor.

In sum, because the Morgans could have sued Interstate in federal court alleging that Interstate violated the PMPA, I would hold that the district court correctly *341determined that it had jurisdiction over Interstate’s action for a declaration that it did not violate the PMPA, and would affirm the judgment of the district court.3

. As is pertinent here, the PMPA specifies the conditions under which a franchisor may terminate or refuse to renew a franchise agreement and provides the franchisee with a private cause of action for violations of the Act. See 15 U.S.C.A. §§ 2804-2805. The primary purpose of the PMPA "is to protect petroleum franchisees from arbitrary or discriminatory terminations and nonrenewals.'' Mobil Oil Corp. v. Virginia Gasoline Marketers & Automotive Repair Ass'n, Inc., 34 F.3d 220, 223 (4th Cir.1994).

. For example, the Morgans’ memorandum in support of their motion for partial dismissal stated that "in this case where there is a complaint to construe a party’s rights under a federal statute, i.e., [the PMPA], there is jurisdiction for declaratory judgment under 28 U.S.C. § 1331 because the declaration of rights under the federal statute is involved in the Declaratory Judgment sought by the plaintiff.” J.A. 61 (internal quotation marks & emphasis omitted). Moreover, in arguing their motion for judgment as a matter of law during the trial, the Morgans' counsel further stated, “[Tjhere is no question in my mind that the Declaratory Judgment Act ... allows the construction of a federal statute, which the [PMPA] is; so as far as termination [of the contract] is concerned, the plaintiff was properly before this Court.” J.A. 30-31.

. The district court ruled that Interstate could not recover attorneys' fees under the PMPA, and Interstate argues in its cross-appeal that the district court erred in this ruling. I would find no error. A successful party in a declaratory judgment action may recover attorneys' fees only when the fees "are recoverable under non-declaratory judgment circumstances,” such as when tire substantive law permits an award of attorneys' fees. Mercantile Nat'l Bank v. Bradford Trust Co., 850 F.2d 215, 216 (5th Cir.1988). Under the PMPA, a franchisor is entitled to attorneys' fees only when a frivolous action is brought against it. See 15 U.S.C.A. § 2805(d)(3). Because Interstate filed this action, I would hold that it is not entitled to recover attorneys’ fees.