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The accepted formulation of res judicata for federal court use teaches that a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action. The elements of res judicata are (1) a final judgment on the merits in an earlier suit, (2) sufficient identicality between the causes of action asserted in the earlier and later suits, and (3) sufficient identicality between the parties in the two suits.
Several duped purchasers of worthless real estate filed suit against the land developers and the banks that financed the project. The suit included state law fraud claims and alleged violations of various federal statutes. Because they were not permitted to join the initial suit, the claimants, who were also duped purchasers, filed their own complaint against the same land developers and banks and alleged essentially the same claims. After final judgment was entered in the initial suit in favor of the land developers and the banks, the claimants' suit was dismissed on grounds of res judicata. The claimants appealed.
Did the doctrine of res judicata bar the claimants' suit?
The court held that although the doctrine of res judicata could operate to bar the maintenance of an action by nonparties, the doctrine of res judicata did not bar the claimants' suit. The claimants did not exercise any meaningful degree of control over the course of the initial litigation and were not virtually represented by the purchasers in the initial suit despite the identity of interests between the two groups. Moreover, the claimants never consented, either explicitly or constructively, to be bound by the verdict entered in the initial suit.