Absence of Parallel State Court Proceedings Does Not Require Federal Court to Exercise Jurisdiction Under Declaratory Judgment Act

A federal appellate court has held that a lower court did not abuse its discretion in declining to exercise jurisdiction under the Declaratory Judgment Act even though there was not a parallel state court proceeding because the litigation addressed issues of state law that were better suited to be resolved in the state court system.  Rox-Ann Reifer v. Westport Ins. Corp., No. 13-2880 (3d Cir. April 29, 2014).

The insured, a law firm, was sued by one of its clients for malpractice and sought coverage under its claims-made insurance policy.  The insurer denied coverage because the insured provided notice after the policy had expired.  The insured admitted liability and assigned its rights under the policy to its client.  The client filed a declaratory judgment action in state court seeking a declaration that the insurer “must pay” the judgment.  The insurer removed to federal court, and the federal court declined to exercise jurisdiction and remanded the case to state court.

In the appeal that followed, the appellate court first determined that a remand order entered pursuant to the Declaratory Judgment Act is a “final decision” under 28 U.S.C. § 1291 and is reviewable on appeal.  Next, the court determined that the Declaratory Judgement Act applied, explaining that although the complaint sought a declaration that the insurer “must pay” the judgment, in substance the complaint sought a declaration that the insured was covered under the policy.  The primary question, according to the court, was one of coverage, and the fact that additional recovery may flow from the court’s declaration did not render the Declaratory Judgment Act inapplicable.

The court held that the district court did not abuse its discretion in declining jurisdiction because the insured’s client raised issues of state law that were particularly within the purview of and better decided in the state court system.  In reaching its decision, the court determined that the absence of a parallel state proceeding did not prohibit the district court from declining to exercise jurisdiction.  According to the court, the existence or non-existence of parallel state court proceeding is only one of the factors that a lower court should consider when deciding whether to decline jurisdiction under the Declaratory Judgment Act.  The appellate court also set forth a non-exhaustive list of seven other factors that a lower court should consider.