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When Pre-Litigation Mediation Fails Does it Become a Race to the Courthouse?

Race to CourthouseWe hope all of our readers have had an enjoyable summer, and relaxing Labor Day weekend. Alas, the wheels of justice ground well into August, and courts have continued to issue interesting mediation-related decisions.

We have previously written (here and here) about decisions addressing dispute resolution clauses that obligate parties to take a stab at mediation before commencing arbitration or litigation in the event of a dispute. Courts will generally enforce those provisions. See, e.g., Salinas Valley Mem’l Healthcare Sys. v. Monterey Peninsula Horticulture, Inc., 2019 WL 2569545 (N.D. Cal. June 21, 2019).

But what if pre-litigation mediation fails, and there is no forum selection clause — does it become a race to the courthouse? A Minnesota federal court recently addressed such a scenario. See Artic Cat, Inc. v. Speed RMG Partners, LLC, 2019 WL 3858649 (D. Minn. Aug. 16, 2019).

In Arctic Cat, a manufacturer of side-by-side off-road vehicles (Arctic Cat), and a designer of such vehicles (Speed RMG), agreed to collaborate on the design and production of new models. Relations between the parties soured, however, over various patent-related issues.

The parties’ agreement obligated them to participate in non-binding mediation “before litigation is commenced.” After Artic Cat wrote to Speed RMG proposing to terminate the relationship, Speed RMG sent Artic Cat written notice of breach and requested mediation in accordance with the procedures in the agreement. Artic Cat agreed to mediate the parties’ disputes without suggesting any breach by Speed RMG.

However, on March 27, 2019, the night before the scheduled mediation, Artic Cat sent written notice of breach to Speed RMG. Artic Cat obviously had a lawsuit up its sleeve, and not surprisingly, the mediation the following morning was unsuccessful.

Later that same day, Artic Cat filed a complaint against Speed RMG in Minnesota federal court alleging breach of contract and other claims. Two hours later, Speed RMG filed a complaint against Artic Cat in California federal court also alleging breach of contract and other claims.

The parties rushed to file in their preferred forums because the agreement did not contain a forum selection clause. It appeared that Artic Cat had won the race. Or did it?

Speed RMG moved to dismiss Artic Cat’s complaint. Artic Cat opposed dismissal under the “first-filed rule,” which provides that “where two courts have concurrent jurisdiction, the first court in which jurisdiction attaches has priority to consider the case.” Artic Cat argued that because it had filed its complaint in Minnesota two hours before Speed RGM filed its complaint in California, its action should take priority under the first-filed rule.

The Court disagreed, and held that the California filing should take priority under an exception to the first-filed rule where the party that filed first knew that a lawsuit by the other party was imminent. Applying this exception, the Court stressed that Speed RMG had requested mediation before commencing litigation. Accordingly, Artic Cat was put on notice that Speed RMG intended to sue if the mediation was unsuccessful. In contrast, Artic Cat only put Speed RMG on notice of its claims the night before the mediation. In short, while Artic Cat was on notice of impending litigation well before Speed RMG filed, Speed RMG was not expecting Artic Cat’s lawsuit until the night before the mediation.

The Court rejected the contention that it was announcing a “first-to-threaten” rule, noting that Speed RMG had simply followed the procedures in the agreement and should not be penalized for doing so (while Artic Cat should not be rewarded for failing to follow those procedures). It thus appears that had the parties exchanged written notices of breach and requests to mediate in close proximity, the Court might have applied the first-filed rule.

Had the parties agreed to a forum in the agreement, the issue addressed by the Court would never have arisen. But since the parties could not agree on a forum, perhaps the better solution would have been for the parties to choose a forum that was inconvenient to both of them. Together with the dispute resolution clause requiring mediation before litigation, such a choice would have further incentivized the parties to resolve the dispute through mediation before commencing litigation.

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