On January 9, 2015, the US Court of Appeals for the Second Circuit in AngioDynamics, Inc. v. Biolitec, Inc. held that substitution under FRAP 43(b) is permissible only when an original party to the suit is unable to continue litigating, and not when it has voluntarily chosen to stop litigating, such as when it settles the action (No. 12-4364, (2d Cir. Jan. 9, 2015)).

Plaintiff AngioDynamics brought a lawsuit against Biolitec alleging failure to fulfill its contractual obligation to defend or indemnify AngioDynamics for litigation expenses and losses resulting from AngioDynamics's distribution of Biolitec's products. Biolitec responded by filing counterclaims seeking to recoup litigation expenses it claimed to have incurred in defending AngioDynamics. The US District Court for the Northern District of New York granted partial judgment to AngioDynamics and certified the judgment for immediate appeal under FRCP 54(b). Biolitec appealed.

Biolitec later filed for bankruptcy and the parties entered into a settlement agreement subject to the bankruptcy court's approval. Both parties later stipulated to withdraw the appeal. On the same day the parties filed their stipulation, non-party Biolitec FZ, Biolitec's corporate parent, moved under FRAP 43(b) to be substituted for or joined with Biolitec. Biolitec FZ claimed that it had received a 75% interest in Biolitec's counterclaims in exchange for an amount given to Biolitec's corporate parent to cover legal fees in the bankruptcy action. Biolitec FZ argued that its interest in the appeal and Biolitec's desire to withdraw were sufficient to permit substitution. AngioDynamics and Biolitec opposed the motion.

After Biolitec FZ's substitution motion was fully briefed, the bankruptcy court approved the settlement of all claims and the purchase of most of Biolitec's assets by AngioDynamics. AngioDynamics and Biolitec again stipulated to withdraw this appeal, this time with prejudice and with no provision for reinstatement.

The Second Circuit denied Biolitec FZ's substitution motion. The court held that substitution is not warranted because Biolitec FZ has not shown that it "needs to be substituted" within the meaning of FRAP 43(b). In reaching its decision, the Second Circuit agreed with the District of Columbia Circuit's interpretation of Rule 43(b) in finding that the rule allows substitution of a party only when a particularly compelling reason prevents a party from proceeding, such as death or removal from office. The court noted that while Rule 43(b) permits substitution when a transfer of interest in the property involved in the suit has occurred, Biolitec FZ's purported assignment was expunged by the bankruptcy court.

Practitioners in the Second Circuit should be aware that the court has clarified when substitution of a party may be permitted under FRAP 43(b).