"One Man's Ceiling Is Another Man's Floor". A paper unsuitable for one kind of journal might be suited to another. While non unethical, submitting the same paper suggest a lack of critical thinking by, at least, the submitting author.
[EDIT] I do undertand, though, that, depending on the domain, authors may consider their paper could be resubmitted, without changing a line, to another journal. This really also depends on the reasons for rejection.
[EDIT] I agree that the peer review system requires confidentiality, and independence. Authors deserve several chances to get published.
[EDIT] Yet, some misconducts are becoming apparent. Redundant publications, plagiarism, for instance. This is not the case here. However, some authors do not hesitate to resubmit again and again, sometimes to journals with putative lower expectations, with hope they will finally go through, with some chance and unwary editors and reviewers.
Such practice floods the peer review system.
Since the paper already made it to the reviewers (and was already reviewed in the past), there are two options:
- let it flow without interference,
I am in favor, in the OP case, of the second option. I feel important to let the editor know about the situation, while performing the review. This would warn him from accepting the paper solely based on other lacky reviewers (which might be the intend of the submitting author: to get lucky with reviewers). I do feel an editor should be, at his place, capable of critical judgement on such a warning.
- What would be optimal is to have Journal 1 editor inform Journal 2 editor that he got aware of the situation, and inform Journal 2 editor about his decision for rejection. It is possible if you know well Journal 1 editor.
- Summmarize the main traits of the evaluation (including those from your co-reviewers for Journal 1), to save some time for your colleague, and invite him to write these concerns in the section "information to the editor only". I believe non-so-ethical to provide all the initial reviews to your colleague, yet, in extreme cases...