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VRCompliance LLC v. HomeAway, Inc., No. 12-1143

Decided:  May 24, 2013

The Fourth Circuit held that the United States District Court for the Eastern District of Virginia properly stayed the appellants’ action in light of a parallel state lawsuit filed earlier by the appellees, finding that the appellants’ action was based on “procedural gamesmanship.”

HomeAway, Inc. operates websites facilitating the rental of private residences by vacationers who choose such residences over hotel rooms.  HomeAway’s websites post rental advertisements by homeowners who wish to be contacted for reservations.  However, many localities have discovered that, whether out of ignorance or intentional evasion, homeowners often fail to pay local taxes assessed on room rentals.  Eye Street Solutions LLC (“Eye Street”) developed computer software to combat this problem:  The software purportedly identifies homeowners who fail to pay taxes after renting their homes.  Eye Street licensed its software to VRCompliance LLC, which conducts investigations for localities such as the Colorado Association of Ski Towns (“CAST”).  HomeAway, in the belief that the Eye Street software was impermissibly accessing its websites, wrote a letter to CAST and Eye Street on December 10, 2010, telling CAST members to stop using the software and alleging violations of state and federal law.  HomeAway wrote another round of letters to CAST, Eye Street, and VRCompliance on September 29, 2011, and filed suit against these parties on October 3 in the District Court of Travis County, Texas.  Eye Street made no attempt to remove the Texas suit to federal court; instead, Eye Street filed a separate action against HomeAway and its subsidiaries on October 6 in the U.S. District Court for the Eastern District of Virginia, stating claims for both declaratory and non-declaratory relief.  HomeAway moved to either dismiss this action for improper venue or transfer it to the relevant federal district court in Texas.  The district court stayed the action pending the resolution of the Texas suit, and Eye Street appealed, challenging the stay.

The Fourth Circuit noted that the parties heavily debated the proper standard governing stays of “mixed actions”—that is, actions involving declaratory and non-declaratory claims.  On the one hand, Colorado River Water Conservation District v. United States, 424 U.S. 800, aims to ensure that parties have access to a federal forum when this forum is available, allowing stays only in “exceptional circumstances”; on the other hand, Brillhart v. Excess Insurance Co. of America, 316 U.S. 491, and Wilton v. Seven Falls Co., 515 U.S. 277, give district courts broad discretion to stay declaratory actions pending resolution of parallel state proceedings.  However, the Fourth Circuit held that a stay was warranted in this case, regardless of the standard used.  The court found that, by filing a new action in the Virginia district court instead of trying to remove HomeAway’s suit to a federal court in Texas, Eye Street had engaged in “procedural gamesmanship”—in other words, Eye Street had attempted to gain advantage in the suit by shopping for a strategically favorable forum.  Furthermore, HomeAway indicated it would not resist removal of its lawsuit.  Thus, the Fourth Circuit found the concerns underlying the stricter Colorado River standard to be ameliorated here, as Eye Street could have simply removed the original suit to federal court in Texas.  The Fourth Circuit also found that the district court, which proceeded under the Brillhart/Wilton framework, properly weighed the factors relevant to this standard due to Eye Street’s “procedural gamesmanship,” however, the district court could have properly proceeded under Colorado River as well.

Full Opinion

-Stephen Sutherland