There were competing state and federal court derivative actions, and the state court complaint was dismissed failure to plead either demand on the corporation’s board of directors or the futility of such a demand. That generated the question in In re Sonus Networks, Inc., 2007 U.S. App. LEXIS 19471 (1st Cir. Aug. 16, 2007), as to whether the state court dismissal operated as a res judicata bar to the federal court action. The plaintiffs argued that the two actions were not identical, even though both arose out of the same nucleus of operative facts, because the federal complaint was better pled. The federal complaint contained ‛substantially all the allegations made in the state complaint, plus some allegations regarding events that had taken place before the state suit was filed or while it was pending, but which had not been included in the state complaint, and some allegations regarding events that occurred after the state suit was dismissed.“

The First Circuit held that the earlier state court dismissal precluded the federal action, even though the state court’s decision may not have been ‛upon the merits“( within the meaning of Fed.R.Civ.P. 41(b)) for all purposes, because ‛dismissal for failure to satisfy a precondition to suit precludes relitigation of the very same issues actually decided in the first litigation“ (citation omitted). ‛In sum, we hold that the Massachusetts state court judgment was ‘on the merits’ in the sense that it is entitled to issue-preclusive effect, but we reject the defendants' argument that the Rule 23.1 dismissal was ‘on the merits’ in the sense that no further suit could be brought on the same claim.“

As for the fact that the federal complaint contained allegations missing from the dismissed state court pleading, the First Circuit held that this distinction would be persuasive only to the extent that the unpled matter was unavailable to the state court plaintiffs — that their inadequate pleading was irrelevant to the res judicata analysis.

Our rationale for distinguishing dismissal for failure to comply with the demand and futility pleading requirements from dismissal for failure to state a claim is that the existence vel non of a precondition is dynamic and may change. This is a rationale for allowing a plaintiff (or his privies) to plead new events that happened after the first litigation was dismissed, but not for allowing him to plead facts that had already occurred and could have been pleaded in the first suit. Facts excusing a failure to make demand that could have been pleaded in the first complaint, or by amendment before dismissal, should be barred for the very same reasons that support applying claim preclusion to dismissals for failure to state a claim. 9 Moreover, even under the doctrine of issue preclusion, a party who has litigated an ultimate fact may not bring forward different evidentiary facts in order to relitigate the finding.

Finally, the First Circuit dismissed the federal plaintiffs’ argument that they were not in privity with the state court plaintiffs, observing that the client was in fact the same in both actions — the corporation. Dismissal affirmed.