On December 31, 2015, the US Court of Appeals for the Seventh Circuit held, in CFE Group, LLC v. FirstMerit Bank, N.A., that the district court correctly refused to enjoin a state court from adjudicating a case that the state-court plaintiff had voluntarily dismissed in an earlier action in federal court ( (7th Cir. Dec. 31, 2015)). The Seventh Circuit also held that appealing the district court's determination was sanctionable under FRAP 38 because the result was obvious, especially in light of the district court's ruling that the federal case was "an unreasonable and vexatious multiplication of proceedings."

In the initial action, FirstMerit Bank filed a complaint in federal court against CFE Group and related parties to enforce a promissory note and guaranties. CFE moved to dismiss that complaint on jurisdictional grounds. The district court dismissed the "present complaint," specifically stating that the dismissal was "without prejudice" and allowing leave to amend. Rather than amending the complaint and remaining in federal court, FirstMerit filed a notice under FRCP 41(a)(1)(A)(i) voluntarily dismissing the action without prejudice.

FirstMerit then filed a new action in Illinois state court, alleging the same claims. CFE moved to dismiss the state action based on theories of claim and issue preclusion, and the state court rejected CFE's arguments. After the state court refused to dismiss FirstMerit's action, CFE filed a new federal action under the All Writs Act and the relitigation exception to the Anti-Injunction Act (28 U.S.C. § 1651(a) and 28 U.S.C. § 2283) to enjoin FirstMerit's state action. The district court dismissed CFE's case with prejudice stating that it was an "unreasonable and vexatious multiplication of proceedings" because it was "abundantly clear that there never was a judgment on the merits" in the first federal case.

The Seventh Circuit affirmed the district court's ruling and imposed sanctions on CFE for bringing the appeal. First, the court noted that an action may be enjoined under the relitigation exception to the Anti-Injunction Act only if preclusion by prior court proceedings is clear. Federal common law borrows the preclusion principles of the laws of the state in which the federal court that dismissed the diversity suit sat. Here, under Illinois law, the dismissal of the initial federal case did not preclude a later suit because the dismissal was without prejudice and therefore not final. A non-final decision is not subject to preclusion defenses. FirstMerit was free to file its new suit in state court.

The Seventh Circuit rejected CFE's argument that the dismissal of the first complaint should be treated as preclusive because the company filed its notice of dismissal after an "adverse" ruling from the district court. Because the ruling that preceded the dismissal was expressly without prejudice and explicitly permitted the filing of an amended complaint, there was no final judgment that would constitute an adverse ruling. The Seventh Circuit also rejected the argument that the doctrine of "springing finality" ended the case on the merits because FirstMerit failed to amend the initial federal complaint. The court held that because the dismissal of the first federal case was without prejudice and FirstMerit filed a notice of voluntary dismissal before the period for ending the complaint had expired, the dismissal did not ripen into a final order.

Moreover, the court held that CFE's Anti-Injunction Act claim could not authorize the district court to issue an injunction because CFE took its claim-preclusion defense to the state court first. Because the state court ruled that preclusion did not apply, and the Full Faith and Credit Act requires the federal courts to abide by the state court's ruling, the court held that CFE's proper recourse would have been to appeal the state court's decision in the state system.

FirstMerit moved for sanctions under FRCP 11. However, because sanctions on appeal are governed by FRAP 38, the court considered the motion under that standard. The Seventh Circuit found that there would be no prejudice to CFE by its consideration of the motion under the FRAP 38 standard because CFE had notice of the arguments in favor of the motion and an opportunity to respond. Although sanctions should not be imposed lightly, they are appropriate "when the result is obvious or when the appellant's argument is wholly without merit." It was clear in this case that the dismissal of a federal action without prejudice would not bar a plaintiff from commencing a new action in state court under Illinois law on preclusion. The district court warned CFE that its argument was entirely without merit and was "an unreasonable and vexatious multiplication of proceedings already pending in state court." Because CFE had persisted in litigating its meritless preclusion arguments by filing an appeal, had failed to address Illinois preclusion law in its briefs, and offered misleading arguments and inapposite citations in its briefing, the court held that sanctions were warranted.

Counsel should carefully consider whether there is merit to an appeal before bringing it in order to avoid sanctions.