Exceptions to Exceptions to the Merger Doctrine

Under the merger doctrine, all of a district court’s interlocutory decisions merge into the final judgment. That means all of those decisions can be reviewed in an appeal from a final judgment. But there are exceptions to the merger rule, such as when a party invites a dismissal by ceasing its prosecution of a case. And as the First Circuit explained in this week’s Commonwealth School, Inc. v. Commonwealth Academy Holdings LLC, there are exceptions to those exceptions, too.

The district court in Commonwealth School dismissed the plaintiff’s action for failure to prosecute. The defendant then wanted to appeal one of the district court’s interlocutory rulings. The just-mentioned exception to the merger doctrine—for failure-to-prosecute dismissals—would normally bar that appeal. But the First Circuit concluded that the situation warranted an exception to that exception. There was nothing the defendant could have done to otherwise secure an appeal. Nor was there any risk of manufactured or piecemeal appeals. So the interlocutory decision merged into the final judgment, and the court of appeals had jurisdiction to review it.

The Commonwealth School Litigation

Simplifying a bit, Commonwealth School involved a trademark dispute between two private schools. The plaintiff had trademarked the name “Commonwealth School,” and it thought that the defendant’s calling itself “Commonwealth Academy” infringed on that trademark. The parties eventually appeared to agree to settle their dispute—the plaintiff would pay the defendant $25,000, and the defendant would change its name. But they failed to reduce that agreement to writing. When a dispute over the enforceability of the settlement arose, the district court held a hearing and concluded that the parties had agreed to settle.

The plaintiff then put $25,000 in escrow while the defendant took steps to change its name. After about three years, the defendant had fulfilled nearly all of its obligations under the settlement. But the $25,000 was never released. And a dispute remained concerning the defendant’s basketball jerseys, which the plaintiff thought remained infringing. At a hearing on this jersey issue, the district court reversed its earlier conclusion that the parties had agreed to settle. The district court accordingly vacated the settlement. The district court also invited the parties to reopen the case (thought it did not explain why the case needed to be reopened, seeing as the court had vacated the settlement). Neither party did so, and the district court dismissed the case with prejudice.

The Merger Doctrine and Its Exceptions

The First Circuit faced a threshold question of jurisdiction: did it have jurisdiction over the district court’s decision vacating the settlement?

Although the order vacating the settlement was interlocutory, the district court had entered a final judgment. And under the merger doctrine, interlocutory decisions merge into a final judgment. So once the district court enters a final judgment, an aggrieved party can appeal and challenge those interlocutory decisions. (A pending amendment to Federal Rule of Appellate Procedure 3(c) relies on the merger doctrine in providing that litigants need designate only the final judgment in their notices of appeal to effectively appeal all interlocutory decisions.)

But exceptions to the merger doctrine exist. One concerns dismissals for failure to prosecute: “interlocutory orders do not merge with a final judgment when that judgment is premised upon the failure to prosecute a case.” In cases applying this exception, plaintiffs seek to appeal an interlocutory decision by dragging their feet until the district court dismisses the case. Plaintiffs in these cases are essentially manufacturing an interlocutory appeal, much like when plaintiffs try to voluntarily dismiss some of their claims without prejudice. So the exception guards against piecemeal appeals. It also prevents parties from benefiting from their dilatory tactics that waste everyone’s time.

An Exception to the Exception

The defendant’s appeal in Commonwealth School looked to fall under this exception for failure-to-prosecute dismissals: “the order that the [defendant] seeks to challenge [was] plainly interlocutory, and the final judgment in this case [was] based on a failure to prosecute.” But the First Circuit saw a few reasons for applying an exception to this exception.

For one thing, application of the exception would effectively deprive the defendant of any opportunity to challenge the order vacating the settlement. There was nothing else the defendant could do in the district court. And the defendant was not the one that invited the dismissal. There was therefore no reason to preclude the defendant from appealing.

For another thing, there was no risk of piecemeal appeal. The case was more or less over, and the defendant simply wanted the settlement to be enforced.

Finally, the defendant was not at fault in failing to ask the district court to reopen the case. The plaintiff argued that the defendant’s doing so showed “a deliberate abandonment of any challenge to” the vacatur. That argument, the First Circuit responded, “mixes plums with pomegranates”:

The question is not whether the defendant could have kept the case alive by filing a notice to reopen but, rather, whether the defendant had any control over the plaintiff’s decision qua plaintiff not to prosecute the action that it had brought.

(Cleaned up.) The First Circuit accordingly concluded that the merger doctrine applied, giving the court jurisdiction over the settlement vacatur.

On the merits, the First Circuit reversed, concluding that the settlement was enforceable.

Commonwealth School, Inc. v. Commonwealth Academy Holdings LLC, 2021 WL 1398268 (1st Cir. Apr. 14, 2021), available at the First Circuit and Westlaw.