It is beyond dispute that a state court must accord full faith and credit to “the judicial proceedings of the federal courts.” Supreme Lodge, K.P. v. Meyer, 265 U.S. 30, 33 (1924). As a consequence, “when an issue has been fully litigated and decided” in federal court, it cannot be “contested again between the same parties” in state court—the doctrine of collateral estoppel. King v. Grindstaff, 284 N.C. 348, 359, 200 S.E.2d 799, 807 (1973).
If an issue is decided in connection with a dismissal with prejudice under Rule 12(b)(6), has that issue been “fully litigated and decided”? Generally, the answer is “yes.” If an issue is decided in Federal Case #1 in the context of a Rule 12(b)(6) dismissal, then the issue may not be re-litigated in Federal Case #2. Likewise, if an issue is decided in N.C. Case #1 in the context of a Rule 12(b)(6) dismissal, then the issue may not be re-litigated in N.C. Case #2.
But if an issue is decided in Federal Case #1 in the context of a Rule 12(b)(6) dismissal, is re-litigation of that issue precluded in N.C. Case #2?
“No,” the Court of Appeals held this week in Fox v. Johnson. The Court reasoned that, because the federal courts apply the “heightened” pleading standard set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), but our state courts apply a lesser, “notice pleading” standard, a federal dismissal of a claim in response to a 12(b)(6) motion is not “on the merits” such that North Carolina courts must accord it preclusive effect. In so ruling, the Court rejected appellants’ arguments that “full faith and credit” means little if a sister court’s determination that an issue is final can be disregarded in subsequent litigation in North Carolina state court.