Circuits Split on Indispensable Parties
By Angela Foster, Litigation News Contributing Editor – November 15, 2013

The standard of review applied when appealing a determination that a party is indispensable may dramatically affect the outcome of a case. Rule 19 of the Federal Rules of Procedure provides a two-step inquiry to determine whether a party should be joined in an action. First, the district court must determine whether the party is “necessary” to the action under Rule 19(a). If the court determines that the party is necessary, it must then determine whether the party is “indispensable” to the action under Rule 19(b). Applying the abuse of discretion standard, the U.S. Court of Appeals for the Second Circuit in Marvel Characters, Inc. v. Kirby[PDF], a lengthy copyright ruling, concluded that out-of-state defendants were not indispensable parties and the case could proceed on its merits against the remaining parties.


The Characters and Copyright Battle in Kirby
After the death of their father, Jack Kirby, a famous comic book illustrator, the Kirby heirs served Marvel with notices to terminate copyrights for Jack Kirby’s comics published between 1958 and 1963. The iconic comic book characters included the Fantastic Four, Thor, the Hulk, Nick Fury, the Avengers, the X-Men, and Spider-Man. The heirs based their copyright claim on a provision of the Copyright Act of 1976 that provides creators and their heirs the right to terminate a previous transfer of copyright. An exception to this law is that creators and their heirs cannot reclaim work originally made for hire.


Marvel filed a lawsuit in the U.S. District Court for the Southern District of New York challenging the validity of the Kirby copyright termination. Marvel claimed that the Kirby comics were works made for hire, thus making the termination notices invalid. Two of the heirs, both residents of California, moved to dismiss the lawsuit on the grounds that they were not subject to personal jurisdiction in New York and that they were indispensable parties to the action under Rule 19.


On the substantive copyright issue, the district court concluded that because Marvel controlled and supervised all of Kirby’s work between 1958 and 1963, and Kirby was compensated for his work, Kirby’s creations were works made for hire. The district court also concluded that it had personal jurisdiction over the two California heirs under the New York long-arm statute and did not reach the question of whether the heirs were indispensable. Specifically, the court found by virtue of the heirs dispatching copyright termination notices and licenses to Marvel entities in New York, their actions constituted transacting business in New York.      


On appeal, the Second Circuit reversed on jurisdiction and indispensability, concluding that the district court lacked personal jurisdiction over the California heirs and that they were not indispensable parties to the lawsuit.


Different Outcome Outside the Second Circuit
“Circuit courts vary in the standard of review applied to a district court’s Rule 19 determination,” notes Joan K. Archer, Kansas City, MO, cochair of the ABA Section of Litigation’s Pretrial Practice and Discovery Committee. For example, the Sixth Circuit reviews a Rule 19(b) determination that a party is indispensable to an action de novo, and a Rule 19(a) finding that a party is necessary to an action is reviewed under the abuse of discretion standard. The Fourth, Ninth, and Tenth Circuits apply an abuse of discretion standard to the district court’s determination for both necessary and indispensable parties.The First, Third, Fifth, Eighth, Eleventh and D.C. Circuits do not have a standard for a district court’s determination under 19(a) and apply an abuse of discretion standard to its determination under 19(b). The Seventh Circuit has expressly declined to adopt a standard of review at all.


In Kirby, the Second Circuit reviewed the district court’s conclusion on the indispensability of the California heirs under the abuse of discretion standard, focusing its analysis on the Rule 19(b) determination. “The court first assumed the California heirs were necessary parties,” states Archer. “The court then determined because the interests of all the heirs were identical, the California heirs would be adequately represented by the other heirs, and thus were not indispensable.”


“Although the Second Circuit stated it applied the abuse of discretion standard, it actually applied a de novostandard because the district court never reached a determination of indispensability,” says Daniel D. Quick, Troy, MI, cochair of the Section’s Intellectual Property Litigation Committee. Quick explains, “de novo review is applied when the appellate court is considering the question for the first time and therefore affording no deference to the decision below.”


“Regardless of the de novo or abuse of discretion standard of review, the results here would be the same,” says Archer. In this instance, “the outcome of the work-made-for-hire analysis ultimately determined how the court would handle the case.”


“Marvel was mindful of the Second Circuit forum,” states Quick. He advises attorneys to know the circuits and different applicable standards of review. “Marvel and Kirby had a relationship that spanned over 50 years. Kirby presented factual reports and supplemented the record with expert reports, but the court struck the evidence. In another jurisdiction, an attorney may have gotten the evidence admitted.”


Keywords: Rule 19, indispensable party, work made for hire, abuse of discretion, de novo

 
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