In Kamal v. Eden Creamery, LLC, No. 21-56260 (9th Cir. Dec. 21, 2023), the panel holds that voluntary dismissal must, as a matter of course, be granted without prejudice under Fed. R. Civ. P. 41(a)(2) unless the defendant can establish that it would suffer legal prejudice, meaning “prejudice to some legal interest, some legal claim, some legal argument” and not merely the uncertainty of the dispute not being resolved or the threat of future litigation.
Plaintiffs sued Eden Creamery for allegedly underfilling pints of Halo Top brand ice cream, “asserting various state law fraud, consumer protection, and unfair business practice claims.” As discovery progressed, though, the plaintiffs’ claim shifted from underfilling to a “fraud by omission” theory, i.e., Halo Top was “inherently defective” because the “ingredients and production methods render the product extremely vulnerable ‘to changes in temperature and altitude,’ such that it cannot ‘withstand the ordinary distribution and retail practices within the ice cream industry.’”
When the plaintiffs moved to amend their complaint a second time to allege the fraud theory, the district court denied leave under Fed. R. Civ. P. 15 on the grounds “that (1) Plaintiffs were not diligent . . . and therefore failed to show ‘good cause’ to extend the deadline to amend the pleadings, and (2) allowing amendment would prejudice Defendants because discovery would have to be reopened, which would increase the cost of litigation and delay resolution of the case.” It held that under the Fed. R. Civ. P. 16(b) standard, there was no good cause to reopen the schedule in the case. (Plaintiffs appealed this order, but the panel unanimously affirmed the decision; this post omits further discussion of the issue.)
Shortly after the court denied leave to amend, “Plaintiffs moved to voluntarily dismiss their claims without prejudice under Federal Rule of Civil Procedure 41(a)(2). They candidly acknowledged that they sought dismissal to pursue their new fraud theory ‘in a separate lawsuit.’” The district court denied the motion to dismiss without prejudice, which the judge perceived as an attempt to circumvent its prior decision denying leave to amend the complaint. The judge entered dismissal with prejudice, instead.
The Ninth Circuit (2-1) reverses, holding that “because Defendants failed to demonstrate that they would suffer legal prejudice if the court dismissed Plaintiffs’ claims without prejudice, the district court abused its discretion by denying Plaintiffs’ motion to dismiss without prejudice.”
“Generally, Rule 41(a)(2) grants a district court discretion to dismiss a case with or without prejudice . . . . But we have cabined that discretion by repeatedly holding that ‘[w]here the request is to dismiss without prejudice, ‘[a] District Court should grant a motion for voluntary dismissal under Rule 41(a)(2) unless a defendant can show that it will suffer some plain legal prejudice as a result.’’”
“’Legal prejudice’ is a term of art: it means ‘prejudice to some legal interest, some legal claim, some legal argument’ . . . . But ‘[u]ncertainty because a dispute remains unresolved is not legal prejudice,’ . . . and “the threat of future litigation which causes uncertainty is insufficient to establish plain legal prejudice” . . . . Additionally, ‘the mere inconvenience of defending another lawsuit does not constitute plain legal prejudice,’ . . . and ‘plain legal prejudice does not result merely because the defendant will be inconvenienced by having to defend in another forum or where a plaintiff would gain a tactical advantage by that dismissal[.]’”
“. . . Plaintiffs argue that the district court abused its discretion by denying their motion for dismissal without prejudice because Defendants failed to show that they would suffer legal prejudice as a result. Defendants counter that ‘Plaintiffs err from the outset by misstating the test for whether a voluntary dismissal of claims may be made with or without prejudice.’ Defendants argue that Plaintiffs ‘conflate’ the separate determinations the court must make when ruling on a motion for voluntary dismissal.”
The panel majority agrees with plaintiffs. “We conclude that Plaintiffs correctly state the standard that applies to voluntary dismissal under Rule 41(a)(2), and we reject Defendants’ argument that dismissal may be with prejudice, even if the defendant would suffer no legal prejudice from a dismissal without prejudice, because it is directly refuted by our [Circuit] case law.”
“In sum, we have never held that the legal prejudice inquiry applies only when determining whether voluntary dismissal should be allowed at all, with or without prejudice; nor have we held that dismissal under Rule 41(a)(2) may be with prejudice, even when no legal prejudice would result from a dismissal without prejudice. We decline to do so now. Instead, as our case law makes clear, the district court must determine whether granting a motion for dismissal without prejudice would result in legal prejudice to the defendant and, if not, the motion should be granted.”
The panel majority also rejects the defendant’s assertion of legal prejudice. “Defendants do not suffer legal prejudice merely because Plaintiffs sought leave to amend their complaint before moving for voluntary dismissal, rather than moving for dismissal without first seeking leave to amend. In either circumstance, the burden on Defendants—defending against a new or revised claim—is the same. And to the extent Defendants incurred expenses opposing the motion to amend, the district court can impose costs and fees as a condition of dismissal.”
Moreover, defendant’s assertion “that they would lose their ‘legal interest’ in avoiding Plaintiffs’ claims or, in other words, that they would lose a res judicata defense . . . does not amount to legal prejudice. Instead, a dismissal without prejudice under Rule 41(a)(2) anticipates the loss of a potential res judicata defense; that is the nature of a voluntary dismissal without prejudice.”
Dissenting in part, Judge R. Nelson would have affirmed the dismissal order with prejudice, holding that Rule 16 conferred a legal interest on the defendant for an orderly adjudication of the claim. “Rule 16(b) imposes a ‘good cause’ standard that protects all parties from baselessly departing from scheduling orders . . . . We should guarantee that Rule 16(b)’s good-cause requirement continues to impose reasonable limitations on the ability of plaintiffs and defendants alike to skirt a court’s scheduling order. We agreed with the district court that Plaintiffs had not shown good cause to amend their complaint because of their lack of diligence. The majority’s separate reversal of the dismissal with prejudice undermines our first holding. It would legally prejudice Defendants to allow Plaintiffs to dismiss their suit to avoid the results of the district court’s conclusion vis-à-vis amendment.”
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