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JAAAT Technical Services, LLC, v. Tetra Tech Tesoro, Inc.

United States District Court, E.D. Virginia, Richmond Division

September 11, 2017



          M. HANNAH LAUCK United States District Judge.

         This matter is before the Court on its sua sponte reconsideration of subject-matter jurisdiction. For the reasons that follow, the Court finds that it does not have subject-matter jurisdiction over this action. The Court will dismiss the action without prejudice.[1]

         I. Relevant Background[2]

         A. The Contract Dispute

         The dispute in this case arises from Defendant Tetra Tech Tesoro, Inc.'s ("Tesoro") alleged breach of five subcontracts regarding five construction projects at three military bases (the "Military Base Projects")'[3] At each Military Base Project, Plaintiff J AAAT Technical Services, LLC ("JAAAT") acted as the general contractor and Tesoro acted as a subcontractor. Both parties are Virginia companies. JAAAT alleges that Tesoro breached its duties under five subcontracts by "fail[ing] to adequately perform the work required" and incurring "substantial delays in the performance of its work on each project." (Am. Compl. ¶ 28, ECF No. 16.) JAAAT alleges that it has suffered damages as a result of Tesoro's breaches and seeks damages, costs and expenses, and pre- and post-judgment interest.

         Tesoro filed an answer, which included ten counterclaims. Tesoro alleged its own breach of contract claims against JAAAT as to the same five subcontracts. Tesoro also included an unjust enrichment or quantum meruit claim (Count 6), a constructive trust or breach of fiduciary duty claim (Count 7), an accounting claim (Count 8), a conversion claim (Count 9), and a fraud claim (Count 10). In its counterclaims, Tesoro seeks damages, costs and expenses, and pre- and post-judgment interest.

         Two facts are crucial to the question of subject-matter jurisdiction here. First, each of the Military Bases is a federal enclave and is therefore governed not by simple state or federal law but, as discussed more fully later, by "federalized" state law. Second, each subcontract contains a choice-of-law clause stating that "all disputes under [the subcontracts] shall be determined and interpreted pursuant to the laws of the Commonwealth of Virginia." (Am. Compl. ¶ 54.) Thus, if no enforceable choice-of-law provision governs the parties' subcontracts, federalized state law would likely govern these claims.

         B. The Court Revisits Subject-Matter Jurisdiction Because Federal Question Jurisdiction Exists Only When Federal Law Creates the Cause of Action or When Plaintiffs Relief Necessarily Depends on the Resolution of a Substantial Federal Question

         The Court revisits subject-matter jurisdiction because federal question subject-matter jurisdiction exists when federal law creates the cause of action or when plaintiffs relief necessarily depends on the resolution of a substantial federal question. See Aegis Def Servs., LLC v. Chenega-Patriot Grp., LLC, 141 F.Supp.3d 479, 483-84 (E.D. Va. 2015) (citing Interstate Petroleum Corp. v. Morgan, 249 F.3d 215, 219 (4th Cir. 2001)). Neither circumstance exists here.

         As a court of limited subject-matter jurisdiction, United States ex rel. Vuyvuru v. Jadhav, 555 F.3d 337, 347 (4th Cir. 2009) (citing Exxon Mobile Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 552 (2005)), this federal court must determine whether it has jurisdiction over the claims at issue, see Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94-95 (1998) ("The requirement that jurisdiction be established as a threshold matter 'spring[s] from the nature and limits of the judicial power of the United States' and is 'inflexible and without exception.'" (quoting Mansfield, C. & L.M.R. Co. v. Swan, 111 U.S. 379, 382 (1884))). "The objection that a federal court lacks subject-matter jurisdiction ... may be raised by a party, or by a court on its own initiative, at any stage in the litigation" Arbaugh v. Y&HCorp., 546 U.S. 500, 514 (2006) (citing Fed.R.Civ.P. 12(b)(1)). "Subject-matter jurisdiction cannot be conferred by the parties, nor can a defect in subject-matter jurisdiction be waived by the parties. Accordingly, questions of subject-matter jurisdiction may be raised at any point in the proceedings and may (or, more precisely, must) be raised sua sponte by the court." Brickwood Contractors, Inc. v. Datanet Engineering, Inc., 369 F.3d 385, 390 (4th Cir. 2004) (internal citations omitted); see also Fed. R. Civ. P. 12(h)(3) ("If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.").

         Federal district courts commonly exercise jurisdiction over civil actions in two circumstances. First, federal district courts exercise jurisdiction in "federal question" cases- "civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. "[I]n order for federal question jurisdiction to exist[:] (i) federal law must create the cause of action[;] or[, ] (ii) the plaintiffs right to relief must necessarily depend on the resolution of a substantial federal question." Aegis Def. Servs., LLC, 141 F.Supp.3d at 483-84 (emphasis added) (citing Interstate Petroleum Corp., 249 F.3d at 219). Second, federal district courts exercise jurisdiction in "diversity" cases-when the parties are, inter alia, citizens of different states and the amount in controversy exceeds $75, 000. 28 U.S.C. § 1332(a)(1).

         Thus, in order to exercise jurisdiction over this case, the Court must find that one of three circumstances exists-either: (1) federal law creates JAAAT's cause of action; (2) JAAAT's right to relief necessarily depends on the resolution of a substantial federal question;[4] or, (3) JAAAT and Tesoro are citizens of different states and the amount in controversy exceeds $75, 000. Because, given the parties' citizenship and the enforceability of their choice-of-law provision, none of these circumstances are present, the Court lacks subject-matter jurisdiction over this action and must dismiss it.

         C. When, as Here, Congress Fails to Enact New Civil Contract Law, the Federal Enclave Doctrine Provides that State Contract Law at Time of Cession Governs the Dispute

         This apparently straightforward breach-of-contract case involves an unusual and knotty legal issue because the Military Bases qualify as federal enclaves and, therefore, would typically be governed by "federalized" state law. Under this doctrine, contract law in place in early 1900s North Carolina and Georgia-the time these Military Bases were ceded-would govern this dispute.

         As this Court noted in its March 2016 Opinion, "[a] federal enclave is created when a state cedes jurisdiction over land within its border to the federal government and Congress accepts that cession." Allison v. Boeing Laser Tech. Servs., 689 F.3d 1234, 1235 (10th Cir. 2012). The federal enclave doctrine, which grants Congress the exclusive right to regulate properties acquired from state governments, arises from Article I, section 8, clause 17 of the United States Constitution (the "Federal Enclave Clause"):

Congress shall have the Power ... 7b exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the Acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings....

U.S. Const, art. I, § 8, cl. 17 (emphasis added). Under the federal enclave doctrine, when "the United States acquires with the 'consent' of the state legislature land within the borders of that State ... the jurisdiction of the Federal Government becomes 'exclusive.'" Paul v. United States, 371 U.S. 245, 264 (1963). This legislative "power of Congress over federal enclaves ... is obviously the same as the power of Congress over the District of Columbia" and "by its own weight, bars state regulation without specific congressional action." Id. at 263.

         In the absence of subsequent federal legislation displacing state law, "the [state] law in effect at the time of the transfer of jurisdiction [from the state to United States] continues in force" on the federal enclave. James Stewart & Co. v. Sadrakula, 309 U.S. 94, 100 (1940).[5]Importantly, "future statutes of the state are not a part of the body of laws in the ceded area, " and "Congressional action is necessary to keep [the laws of the federal enclave] current." Id. at 100; see also Paul, 371 U.S. at 268 ("Since a State may not legislate with respect to a federal enclave unless it reserved the right to do so when it gave its consent to the purchase by the United States, only state law existing at the time of the acquisition remains enforceable, not subsequent laws."). Subsequent state common law also does not apply. Allison, 689 F.3d at 1240 (explaining that "[w]hen a state speaks through its courts, it creates new law no less than when it speaks through the legislature").

         Thus, the law in force on federal enclaves, although derived from state law, becomes exclusively federal law once the enclave is ceded to the federal government.[6] See Pac. Coast Dairy v. Dep't of Ag. of Cal, 318 U.S. 285, 294 (1943); see also Allison, 689 F.3d at 1237 ("The central principle of [the] federal enclave doctrine is that Congress has exclusive legislative authority over these enclaves."). And as the Court discussed in its March 2016 Opinion, this so-called "federalized" state law can confer on federal courts subject-matter jurisdiction over claims that would otherwise be matters of state law, such as the contract disputes at issue here. See March 2016 Opinion, at *3 (citing Allison, 689 F.3d at 1235).

         D. This Court Erred in its March 2016 Opinion When Finding that Federal Question Jurisdiction Existed Because It Applied Tenth Circuit Dicta Without Considering Choice-of-Law Issues First

         In March 2016, the Court held, as a matter of first impression, that it had federal question subject-matter jurisdiction over the breach of contract claims at bar because federalized state law governed causes of action that arose on these federal enclaves and the parties could not "contract around" the Constitution. However, on review, the Court sees that it jumped the gun in relying on nonbinding dicta about federalized law operating as a choice-of-law doctrine from the United States Court of Appeals for the Tenth Circuit, see Allison, 689 F.3d at 1235, before fully analyzing, as a threshold matter, the effect of the parties' choice-of-law clause. See Fransmart, LLC v. Freshii Dev., LLC, 768 F.Supp.2d 851, 858 (E.D. Va. 2011) (explaining that "the choice-of-law question is a threshold issue"). Unlike this Court, the Allison court had no choice-of-law clause to evaluate in the first instance.[7]

         In March 2016, the Court mistakenly began with the "longstanding position" that the federal enclave doctrine requires courts to apply federalized state law to causes of action that arise on federal enclaves. See, e.g., Stokes v. Adair, 265 F.2d 662, 665-66 (4th Cir. 1959) (finding federal district court possessed jurisdiction over non-diverse parties for personal injuries on a federal enclave); accord Durham v. Lockheed Martin Corp., 445 F.3d 1247, 1250 (9th Cir. 2006) (finding removal proper where tort claims allegedly occurred on a federal enclave); Akin v. Ashland Chem. Co., 156 F.3d 1030, 1034 (10th Cir. 1998) (finding that "[p]ersonal injury actions which arise from incidents occurring in federal enclaves may be removed to federal district court as part of federal question jurisdiction"); Mater, 200 F.2d at 124-25 (finding that federal courts have jurisdiction over torts committed on federal enclaves). Relying on the wide body of law supporting that position, the Court concluded that "it is undisputed that 'claims arising on a federal enclave provide a separate and independent basis for federal question jurisdiction.'" Id. (footnote omitted) (quoting Federico v. Lincoln Military Hous., 901 F.Supp.2d 654, 663 n.2 (E.D. Va. 2012).

         Misapplying dicta from a United States Court of Appeals for the Tenth Circuit opinion, the Court stated that the "'[f]ederal enclave doctrine operates as a choice of law doctrine that dictates which law applies to causes of action arising on these lands."' March 2016 Opinion, at *6 (quoting Allison, 689 F.3d at 1235). Proceeding on this principle-that the federal enclave doctrine operates as a choice-of-law doctrine-the Court explained that "[i]n light of the Supremacy Clause [of the United States Constitution[8], only federal law may apply to JAAAT's claims." March 2016 Opinion, at *7. In essence, the Court concluded that the parties' choice-of-law provision was invalid because the Supremacy Clause prevented the parties from contracting around the application of federal law to their breach of contract claims. See Id. ("The parties' election [to apply Virginia, not federal law] does not override the Constitution."). Because federalized state law governed the breach of contract claims at issue, the Court ruled that "only federal law may apply to JAAAT's claims ...., the claims arise under federal law, and subject matter jurisdiction is appropriate here." March 2016 Opinion, at *7.

         The upshot of the Court's ruling that the parties' choice-of-law provision was invalid and it had subject-matter jurisdiction over JAAAT's breach of contract claims was the following: (1) federalized Georgia contract law (i.e., Georgia contract law as of 1917 or 1922) governed the cause of action that occurred on federal enclaves in Georgia; and, (2) federalized North Carolina contract law (i.e., North Carolina contract law as of 1919) governed the causes of action that occurred on federal enclaves in North Carolina. (See Sept. 26 Mem. O. 5, ECF No. 73.) But the parties did not see it that way.

         E. The Parties' Submissions Relying Only on Current Virginia Law Required this Court to Revisit the Issue of Federal Question Jurisdiction

         After the Court found subject-matter jurisdiction through the federal enclave doctrine, Tesoro filed its answer and counterclaims. JAAAT then moved to dismiss Counts 7 through 10 of Tesoro's counterclaims, asserting, under current Virginia law, that the causes of action failed to state a claim for which relief can be granted. Tesoro responded, likewise relying on current Virginia law. Of course, as discussed, the basis for the Court's finding that it had subject-matter jurisdiction was the Court's conclusion that the parties' choice-of-law provision electing Virginia law was unenforceable, meaning that North Carolina and Georgia federalized state law governed the causes of action in this case. See March 2016 Opinion, at *5-7.

         Sensing confusion from the parties regarding this novel and complex legal issue, the Court expressed a willingness to "reconsider its earlier holding upon briefing by the parties." (Sept. 26 Mem. O. 5-6, ECF No. 73.) Reminding the parties that "a finding that Virginia law governs the substantive causes of action in this case would necessarily affect this Court's earlier holding that it has subject matter jurisdiction, " the Court ordered additional briefing on the basis for this Court to exercise subject-matter jurisdiction over these contract disputes.[9] (Id. at 5-6.) The parties submitted additional briefing. (ECF Nos. 76, 79, 85, 86.) The Court, with this additional input from the parties, now reconsiders whether subject-matter jurisdiction exists in this case. It does not.

         II. ...

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