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7. Is the court likely to grant the motion?
An accounting firm brought a federal diversity action against a former client for failing to pay for the firm's audit of the client's financial statements. After the client answered, the parties settled, and the court dismissed the action with prejudice. The client subsequently sued the firm for negligently performing the audit. The firm moved to dismiss the negligence action on the basis of res judicata (claim preclusion).
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Moreover, claim preclusion applies only if the earlier case and the latter case are brought by the same claimant against the same defendant. It is not sufficient for claim preclusion that the same litigants were also parties and privies in the first case, like they are here, the parties must have been in the same configuration as in the prior lawsuit. In this question, the accounting firm sued the client in the first action, and then the client sued the accounting firm in the second action. Because the configuration of the parties in the second suit does not match the first, claim preclusion does not apply.
A is incorrect. Claim preclusion prevents the presentation of claims that ought to have been asserted and decided in an earlier action, not just those that were asserted. Here, the client should have asserted the negligence claim in the first action as a compulsory counterclaim because the claim that the client asserted in the second action (negligence) arose out of the same audit that was the subject of the dispute in the first action.
B is incorrect. Once a final judgment on the merits has been rendered on a particular cause of action, the claimant is barred by claim preclusion from asserting the same cause of action in a later lawsuit. Dismissal with prejudice pursuant to a settlement agreement constitutes a final judgment on the merits for the purposes of claim preclusion. See Arizona v. California, 530 U.S. 392, 414 (2000); 18A Wright, Miller & Cooper, Federal Practice and Procedure § 4443. Here, the judgment entered as the result of the settlement is entitled to preclusive effect under compulsory counterclaim principles.
C is incorrect. A dismissal with prejudice in a first action may be preclusive of a second action if the claims in the second action arise out of the same transaction as the first action. By itself, the fact that the first action was dismissed with prejudice is not sufficient to determine that claim preclusion applies.