First Circuit Finds an “Exception to the Exception” of the Merger Rule to Review Interlocutory Order

In Commonwealth Sch. Inc. v. Commonwealth Acad. Holdings, No. 20-1112 (1st Cir. Apr. 14, 2021), the First Circuit holds that it has appellate jurisdiction over an interlocutory order denying enforcement of a settlement, in a case testing the length of an exception to the merger rule.

The parties, two private schools, were locked in a Lanham Act dispute over the use of the name “Commonwealth.” The plaintiff School and defendant Academy then “seemingly achieved a settlement through court-attached mediation. The settlement was based on an oral agreement reached at a mediation session held on August 3, 2016. The material terms of the agreement are straightforward: the School agreed to pay $25,000 to the Academy in exchange for the Academy changing its name to ‘Springfield Commonwealth Academy.’” The settlement amount was placed in escrow. The case was dismissed, then reopened by the School when there was a dispute over the settlement terms.

The case remained opened for three years while court supervised implementation of the agreement. Then, in a sharp reversal, the district court found the settlement unenforceable “because there had not been a ‘meeting of the minds’ . . . . Despite indicating that it was vacating the settlement and the order of dismissal, the district court stated in the same order that either side could reopen the case by filing a notice to that effect within thirty days.” The plaintiff School took no action to reactivate the case, as it got nearly all the relief it sought without ever paying the $25,000, and the district court dismissed with prejudice.

On the defendant Academy’s appeal, there arose the question of the whether the panel had appellate jurisdiction to review the interlocutory order vacating the settlement. The First Circuit holds that it does, working around an exception to the merger rule.

“Once a district court enters final judgment . . . antecedent interlocutory orders typically merge into the judgment and become subject to appellate review . . . . [But] this general rule, familiarly known as the ‘merger doctrine,’ admits of exceptions. Particularly pertinent for present purposes is the exception which provides that interlocutory orders do not merge with a final judgment when that judgment is premised upon the failure to prosecute a case.”

The panel concedes that this exception of the merger rule ought to apply here, defeating appellate jurisdiction. “Literally, the exception would seem to apply: the order that the Academy seeks to challenge is plainly interlocutory, and the final judgment in this case is based on a failure to prosecute. But as we explain below, we believe that the peculiar circumstances of this case give rise to an exception to the exception and, thus, bring the appeal within the encincture of our appellate jurisdiction.”

This exception, the First Circuit observes, has arisen exclusively in “dismissals for want of prosecution all involved plaintiffs who sought to appeal interlocutory orders following such dismissals . . . . The case at hand deviates from this pattern. The School, as the plaintiff, was the party that would naturally be expected to prosecute the action. Yet, it is the [defendant] Academy that seeks to appeal the interlocutory order. And this deviation from the usual pattern makes a dispositive difference: given this altered posture, the Academy would effectively have no avenue at all for appellate review of the challenged order if that order did not merge with the final judgment.”

The panel recognizes under these circumstances, if the exception to the merger rule applied, the Academy would have had no means of obtaining review of the order vacating the settlement. “The School, as the plaintiff, held the reins as to whether to prosecute the case that it had brought: only the School could elect to pursue its claims.” Moreover, “the concern that a plaintiff may drag his heels and substantially delay the progress of the litigation in order to secure a dismissal for want of prosecution that he then can use as a lever for obtaining review of an adverse interlocutory ruling.” Unlike a plaintiff that can always take a voluntary dismissal under Fed. R. Civ. P. 41(a), “no such process is available to a defendant. Here, for instance, the Academy had no opportunity to voluntarily dismiss the School’s claims in order to seek immediate appellate review of the interlocutory order.”

Thus, “[w]e hold that the exception to the merger doctrine does not apply and, thus, we have jurisdiction to hear and determine this appeal.”

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