The Fourth Circuit clarified last week that after a case is filed in state court, a defendant desiring a federal forum should seek removal rather than file a separate declaratory judgment action in its federal district court of choice. In VRCompliance v. HomeAway, Inc., the court noted that the federal removal statute is the primary avenue for obtaining federal court review of already pending state law claims, and allowing a party to file a case in a federal forum when the same claims are pending in state court would result in a “regime of forum shopping.”
HomeAway, Inc. operates websites that facilitate vacation home rentals. These rentals, unlike the booking of hotel rooms, tend to deprive localities of tax revenue. Eye Street Solutions has developed computer software that can identify vacation homeowners who have not paid locality taxes. Eye Street licensed the software to VRCompliance, LLC, and VRCompliance uses the software to investigate tax compliance on behalf of localities such as the Colorado Association of Ski Towns (“CAST”).
Believing that Eye Street’s software was impermissibly accessing its websites and “scraping” data, HomeAway sent a letter to Eye Street and CAST demanding that CAST’s members stop using the software. HomeAway asserted that the software’s access of HomeAway’s websites violated the terms of conditions of use of the sites and constituted unlawful interference with contractual relations as well as a deceptive and unfair trade practice in violation of state law. HomeAway sent a second letter to CAST and copied CAST’s members, and it sent a letter to Eye Street and VRCompliance reiterating its allegations and threatening legal action unless the companies ceased scraping data from HomeAway’s websites and turned over any data already obtained.
HomeAway sued Eye Street, VRCompliance and CAST in the District Court of Travis County, Texas asserting Texas state-law claims. The Defendants asserted various state-law counterclaims, and Eye Street filed its own action against HomeAway in the U.S. District Court for the Eastern District of Virginia seeking declaratory judgments that it was not violating state common law and statutory law as asserted in HomeAway’s Texas complaint and that it was not violating the federal Computer Fraud and Abuse Act nor federal copyright law. Eye Street also asserted nondeclaratory Virginia state-law claims. HomeAway moved to dismiss the federal action for improper venue or, alternatively, to transfer venue to the U.S. District Court for the Western District of Texas. The district court stayed the action pending the resolution of Home Away’s Texas lawsuit, and Eye Street challenged the decision to stay.
The district court based its decision to stay on factors set forth in case law that district courts use to decide whether to stay declaratory judgment actions in deference to parallel state proceedings. The district court found that (1) Texas had a strong interest in deciding the issues raised, (2) the Texas Court would likely resolve the issues more efficiently, and (3) allowing the federal case to go forward would result in unnecessary entanglement between the federal and state court systems. The Fourth Circuit found the district court’s analysis to be thorough and accurate, but held that the stay was justified for the additional reason that Eye Street failed to seek removal of the Texas action to federal court.
The court noted that Eye Street insisted on proceeding with its federal action even after HomeAway indicated that it would not oppose removal. This demonstrated to the court that Eye Street did not just desire a federal forum but one that it believed would approach the dispute on Eye Street’s terms. The court called Eye Street’s strategy “procedural fencing” that federal case law has attempted to prevent. The court held that the federal removal statute is the primary avenue for obtaining federal court review of claims already pending in a state court. Under that statue, a defendant in a state court action can seek to remove the action only to the federal district court for the district and division within which the action is pending. The court reasoned that if a defendant could secure a federal forum in any district with personal jurisdiction over the plaintiffs simply by filing a federal action recasting the claims against it as declaratory claims, the removal statute would be rendered ineffective and would be supplanted with a “regime of forum shopping.” Therefore, district courts have discretion to consider a litigant’s deliberate decision to forego removal as a reason to stay a federal declaratory action. Given the strong case for a stay as analyzed by the district court and Eye Street’s deliberate choice to forgo removal, the Fourth Circuit affirmed the district court’s decision to stay.