Ninth Circuit Affirms: SLUSA Does Not Provide Independent Basis for Federal Question Jurisdiction

January 04, 2017

By William F. Sullivan, D. Scott Carlton, Timothy D. Reynolds & Serli Polatoglu

The jurisdictional scope of the Securities Litigation Uniform Standards Act (“SLUSA”) has developed into a hot legal topic. The U.S. Supreme Court has taken under consideration a petition for a writ of certiorari in Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439, to determine whether SLUSA bars state court jurisdiction over lawsuits that allege violations of the Securities Act of 1933.[1] On December 21, 2016, the Ninth Circuit decided a different, but related question. In Rainero v. Archon Corporation, the Ninth Circuit further limited federal jurisdiction, holding that SLUSA does not provide an independent basis for federal question jurisdiction over “covered class actions.”

Securities Litigation Uniform Standards Act

By way of background, SLUSA was enacted in response to the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). The Reform Act “impos[ed] a number of limitations on federal securities class actions.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006). “To avoid the ‘special burdens’ associated with federal securities fraud class actions established by the Reform Act, plaintiffs ‘began bringing class actions under state law, often in state court.’” Campbell v. Am. Int’l Group, Inc., 760 F.3d 62, 63 (D.C. Cir. 2014) (quoting Merrill Lynch, 547 U.S. at 82). “Congress then enacted SLUSA to stem the migration from federal to state court and to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the Reform Act.” Campbell, 760 F.3d at 63 (internal quotation marks and citation omitted). In practical terms, SLUSA permits defendants faced with a state court action involving a covered security to remove the action to federal court and seek dismissal of the state law claims.

Background of Rainero v. Archon Corporation

In 1993, Archon Corporation issued a class of equity securities designated as Exchangeable Redeemable Preferred Stock (“preferred stock”). Per the Certificate of Designation (“Certificate”) Archon filed with the Nevada Secretary of State, Archon had the right to redeem the preferred stock, in whole or in part, at its election and upon providing notice to the shareholders. The Certificate also stated that, upon redemption, shareholders were entitled to $2.14 per share in addition to accrued, unpaid dividends.

On July 31, 2007, Archon notified shareholders that it intended to redeem all outstanding shares of the preferred stock on August 31, 2007 at $5.241 per share. Rainero, an Archon shareholder, claimed to own 9,140 shares of the preferred stock at the time of redemption. On November 20, 2007, he filed a lawsuit on behalf of himself and other outstanding preferred stock holders in the U.S. District Court for the District of Nevada for breach of contract. Rainero alleged that, under the Certificate’s terms, the redemption price should have been $8.69 per share.

The case was consolidated for discovery purposes with two other matters against Archon alleging similar claims. After favorable decisions were entered in the other lawsuits, Rainero sought partial summary judgment, which the district court granted. Shortly thereafter, in 2014, Archon filed a motion to dismiss for lack of subject matter jurisdiction, and the district court ordered Rainero to show cause why his action should not be dismissed on this ground. Rainero sought leave to amend the complaint, but the district court dismissed for lack of subject matter jurisdiction. Rainero timely appealed.

The Ninth Circuit Affirms Dismissal of Rainero’s Claim for Lack of Subject Matter Jurisdiction

Rainero alleged three bases for federal subject matter jurisdiction: (1) diversity jurisdiction over class actions under 28 U.S.C. § 1332(d)(2); (2) diversity jurisdiction over his individual claim under section 1332(a), and supplemental jurisdiction over the class members’ claims under section 1367; and (3) federal question jurisdiction under section 1331, arguing SLUSA provided an independent basis for jurisdiction over his suit.

The Court quickly disposed of Rainero’s first two arguments. First, the Court found that 28 U.S.C. § 1332(d)(2) did not provide subject matter jurisdiction over Rainero’s class action because his claim “relate[d] to the rights, duties . . . and obligations relating to or created by or pursuant to [a] security” per section 1332(d)(9)(C). An action falling under section 1332(d)(9)(C) cannot receive jurisdiction under section 1332(d)(2). Second, the Court held that section 1332(a) did not confer subject matter jurisdiction over Rainero’s individual claim because Rainero’s original complaint failed to allege diversity of citizenship and that the amount in controversy exceeded $75,000. Though the parties conceded diversity, Rainero’s proposed amended complaint conclusorily alleged that the $75,000 amount in controversy threshold was met. The Court held the proposed amended complaint, like Rainero’s original complaint, was facially deficient to allege diversity because the number of shares Rainero alleged to hold (9,140 shares) and the dollar per share amount Rainero alleged he was owed ($3.45) was far below the $75,000 minimum threshold. Accordingly, the Court concluded that it would be improper to exercise supplemental jurisdiction over the class members’ claims.

Rainero predicated his federal question jurisdiction argument on a section of SLUSA, which states that “a covered class action described in subparagraph (B) of this paragraph that is based upon the statutory or common law of the State in which the issuer is incorporated . . . may be maintained in a State or Federal court by a private party.” 15 U.S.C. § 77p(d)(1)(A). Section 77p(d)(1)(B), in fact, indicates that a “covered class action” includes a case involving “the purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer.”

The district court conceded that “[v]iewing these statutory provisions in a vacuum, Plaintiff’s argument appears to have merit.” Rainero v. Archon Corp., 2014 U.S. Dist. LEXIS 137218, *5 (D. Nev. 2014). However, the district court, and ultimately the Ninth Circuit, adopted the interpretation of SLUSA delineated in the D.C. Circuit’s opinion in Campbell v. Am. Int’l Group, Inc.

The D.C. Circuit, in Campbell, held that permitting federal question jurisdiction under SLUSA was untenable when reading section 77p(d) in conjunction with the section as a whole. 760 F.3d at 65. The Ninth Circuit agreed, holding that section 77p(d) “does not provide an independent basis for federal jurisdiction over Rainero’s state-law claim.” The Court reasoned that a plain reading of SLUSA supported the Campbell court’s interpretation of section 77p(d). That is,

[t]here is no indication [] that Congress intended subsection (d)(1)(A) to go substantially further, so as to create federal jurisdiction over a category of state-law securities class actions. To the contrary, the introductory clause of subsection (d)(1)(A)—’Notwithstanding subsection (b) or (c)’—confirms that the provision responds to subsections (b) and (c). It does not embark on a wholly independent mission to confer federal-court jurisdiction on state-law actions.

Campbell, 760 F.3d at 65.

Federal Question Jurisdiction Post-Rainero & Campbell

The Ninth Circuit decision in Rainero adopts a narrow reading of SLUSA that denies federal question jurisdiction over certain covered class actions. Indeed, it is easy to understand how confusion may arise from the Court’s ruling; SLUSA was enacted to deter plaintiffs from forum shopping in state courts. Now, the Ninth Circuit joins the D.C. Circuit in denying federal question jurisdiction over certain covered class actions.

While Rainero’s argument offered superficial appeal, the Ninth Circuit, like its sister circuit’s decision in Campbell, stays consistent with the policy of SLUSA to proactively diminish lawsuits filed in state courts asserting claims that should be—or could be—brought under the federal securities laws. It permits removal to federal court of those securities cases Congress intended to regulate under the federal laws of the national securities markets, while allowing states to retain jurisdiction over traditionally state law matters. After Rainero, defendants in state court matters involving certain covered class actions can remove the action to federal court and the federal district court may sua sponte—or on motion by a defendant—dismiss the case for lack of federal subject matter jurisdiction.

While both cases raise interesting federal jurisdictional questions, unless and until another circuit disagrees, it is unlikely the Supreme Court will weigh in. In the interim, securities lawyers litigating these matters will pay close attention to the U.S. Supreme Court’s decision whether to accept certiorari in Cyan, Inc., for which the Supreme Court recently invited briefing from the U.S. Solicitor General. That decision very well may impact jurisdictional issues under SLUSA, including those considered by the courts in Rainero & Campbell.

[1] The Securities Act of 1933 confers concurrent jurisdiction over actions brought by plaintiffs alleging violations of the Securities Act. 15 U.S.C. § 77v(a).

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