Some Tricky Stuff About Privity

Cal. Sierra Dev., Inc. v. George Reed, Inc., No. C080397 (D3 Aug. 22, 2017)

MineCo and SurfaceCo share rights to some land. Under their agreement, MineCo has the right to mine for gold and SurfaceCo has the right to the surface. SurfaceCo licenses its right to OppCo to build a plant on the surface. Problem is, that interferes with MineCo’s operations. 

MineCo won a big arbitration award against SurfaceCo for breach of their agreement. The arbitrator awarded nothing on the tort theories. SurfaceCo paid off the judgment right away. But then MineCo sued OppCo and its parent for basically the same harm, but based on the tort theories it lost in the arbitration, plus for interference with contract. The trial court dismissed on res judicata grounds, and MineCo appeals.

Recently, in DKN Holdings, the California Supreme Court reiterated that for res judicata—claim preclusion—both parties need to be the same as the parties in the prior case, or at list in privity with one of them. This identity of the parties, plus identity of the claims and finality of the judgment make up the elements of res judicata.

The key question here is whether OppCo’s license with SurfaceCo renders the two companies privy for preclusion purposes. Relying on DKN Holdings, the court explains that privity can occur when one party’s liability is derivative of another’s. So, for instance, an agent is in privity with a principal, or an heir with a decedent, or a trustee with a beneficiary. The court here finds that the license arrangement created just such a situation, and thus that OppCo should be effectively treated like it were a party to the arbitration.

Affirmed.

I’m not so sure it’s so easy. As a licensee, it doesn’t seem controversial that OppCo assumes some of the contractual obligations that SurfaceCo has to MineCo. And under the way assignments work, if OppCo breaches, MineCo is on the hook as the primary obligor. So in a case between MineCo and SurfaceCo derivatively based on OppCo’s alleged breaches, a judgment in favor of SurfaceCo would likely bar liability against OppCo. But whether that result should arise from res judicata, collateral estoppel, or both, is not 100 percent clear. It doesn’t really matter, however, because MineCo didn’t sue OppCo on the contract.

It’s quite a bit more complicated for the torts that MineCo did sue on. There are definitely theories under which SurfaceCo could be liable for OppCo’s torts, such as if SurfaceCo were principal and OppCo an agent who committed the tort within the scope of its agency. But it’s not clear to me that a license—OppCo’s contractual right to use rights that would otherwise be possessed by SurfaceCo—would really create vicarious tort liability like that, given that the license doesn’t seem to have permitted SurfaceCo with rights to exercise control over OppCo. 

And this analysis seems especially fraught when it comes to the tortious interference claim, where it would be, to say the least, pretty odd to hold that a contract-breaching party is vicariously liable for a third party’s tortious interference with the contract. Particularly given that it is legally impossible to interfere with a contract to which one is a party. 

And even if there is vicarious liability, the “same party” rules aren’t quite so straight as what the court is laying out here. California law on the issue of who is bound to a judgment generally follows the Restatement (Second) of Judgments. Indeed, DKN Holdings cites pretty liberally to that part of the Restatement and its commentary in explaining its rule. 

Section 51 of the Restatement sets out rules for when defendants subject to vicarious liability are bound to each other’s judgments. In particular, when a judgment is rendered against an injured person and in favor of a defendant who is the subject of a vicarious liability setup, the judgment is generally binding as to both, except when “(a) The claim asserted in the second action is based upon grounds that could not have been asserted against the defendant in the first action; or (b) The judgment in the first action was based on a defense that was personal to the defendant in the first action.” 

So again, if there’s vicarious liability, based on this rule, a judgment against MineCo in the arbitration might be preclusive on most of the tort claims against OppCo. Note that MineCo likely couldn’t have actually sued OppCo into the arbitration, since it wasn’t a party to the SurfaceCo/MineCo arb agreement. Not sure how that shakes out in the analysis. But in any event, given that a tortious interference claim cannot be brought against a party to the contact, the exception in (a) seems to apply to that claim. Moreover, the court doesn’t do any analysis to see if (b) might apply to the other claims.

For what it’s worth, it seems like mostly you would get the the same result under a collateral estoppel/issue preclusion analysis. MineCo actually litigated and actually lost its tort claims in the arbitration against SurfaceCo. There’s no need to gin up privity, because both-sides mutuality isn’t required for collateral estoppel. This would seemingly dispose of all of the tort claims except the interference claim. That one would depend on what issues were actually litigated in the arbitration. If there’s some overlap in elements that MineCo couldn’t prove, that claim too would be barred.