MEMORANDUM*

Joseph Ryan appeals the district court's entry of summary judgment against him. The court concluded that Ryan's claims are barred by res judicata because he had already litigated them in state court. We conclude that the district court's application of res judicata was error. We reverse and remand.

The doctrine of res judicata requires that there be a final judgment in a prior action. Caldeira v. County of Kauai, 866 F.2d 1175, 1178-79 (9th Cir.), cert. denied, 110 S.Ct. 69 (1989). The state court's order dismissing Ryan's counterclaim, however, was not a final judgment.

Rather than deciding this case on the basis of res judicata, the district court could have decided it on its merits, or it might have elected to defer to the state court. See Travelers Indem. Co. v. Madonna, 914 F.2d 1364, 1367-68 (9th Cir.1990) (citing Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976)). Should the district court choose to defer, the proper course is to stay the federal action pending final judgment by the state courts. See Attwood v. Mendocino Coast Dist. Hosp., 886 F.2d 241, 243 (9th Cir.1989). In that event, when a final judgment is rendered by the state courts, res judicata might be appropriate.

Accordingly, we reverse and remand to allow the district court either to decide this case on its merits or to consider staying the action. McKenna's request for sanctions is premature and therefore is denied.

REVERSED and REMANDED for further proceedings.