Greg Manning v. Merrill Lynch Pierce Fenner Sm

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 13-3693
_____________
GREG MANNING; CLAES ARNRUP; POSILJONEN
AB; POSILJONEN AS; SVEABORG HANDEL AS;
FLYGEXPO AB; LONDRINA HOLDING LIMITED,
Appellants
v.
MERRILL LYNCH PIERCE FENNER & SMITH, INC.;
KNIGHT CAPITAL AMERICAS, a/k/a Knight Equity
Markets L.P.; UBS SECURITIES LLC; E TRADE
CAPITAL MARKETS LLC; NATIONAL FINANCIAL
SERVICES LLC; CITADEL DERIVATIVES GROUP
LLC; JOHN DOES 1-10 (names being fictitious); ABC
COMPANIES (names being fictitious), jointly, severally
or in the alternative, individually
________________________
On Appeal from the United States District Court
for the District of New Jersey
District Court No. 2-12-cv-04466
District Judge: The Honorable Jose L. Linares
Submitted Pursuant to Third Circuit L.A.R. 34.1(a)
July 10, 2014
Before: SMITH, VANASKIE, and SLOVITER,
Circuit Judges
(Filed: November 10, 2014)
Neal H. Flaster, Esq.
Suite 230
30A Vreeland Road
P.O. Box 21
Florham Park, NJ 07932
Counsel for Appellants
Brad M. Elias, Esq.
Andrew J. Frackman, Esq.
Abby F. Rudzin, Esq.
O'Melveny & Myers
7 Times Square
Time Square Tower, 33rd Floor
New York, NY 10036
Thomas R. Curtin, Esq.
Graham Curtin
4 Headquarters Plaza
P.O. Box 1991
Morristown, NJ 07962
Counsel for Appellee Merrill Lynch Pierce Fenner
2
& Smith Inc.
James H. Bilton, Esq.
David G. Cabrales, Esq.
Edwin R. DeYoung, Esq.
W. Scott Hastings, Esq.
Locke Lord
2200 Ross Avenue
Suite 2200
Dallas, TX 75201
Joseph N. Froehlich, Esq.
Locke Lord
Three World Financial Center
New York, NY 10281
Counsel for Appellee Knight Capital Americas,
L.P.
Andrew B. Clubok, Esq.
Beth A. Williams, Esq.
Kirkland & Ellis
655 15th Street, N.W.
Suite 1200
Washington, DC 20005
Brian M. English, I, Esq.
Tompkins, McGuire, Wachenfeld & Barry
100 Mulberry Street
Four Gateway, Suite 5
3
Newark, NJ 07102
Counsel for Appellee UBS Securities LLC
Rebecca Brazzano, Esq.
Michael G. Shannon, Esq.
Thompson Hine
335 Madison Avenue
12th Floor
New York, NY 10017
Jennifer S. Roach, Esq.
Thompson Hine
3900 Key Center
127 Public Square
Cleveland, OH 44144
Counsel for Appellee National Financial Services,
LLC.
Melissa Steedle Bogad, Esq.
James S. Richter, Esq.
Winston & Strawn
The Legal Center
One Riverfront Plaza, 7th Floor
Newark, NJ 07102
Stephen J. Senderowitz, Esq.
Winston & Strawn
35 W. Wacker Drive
Chicago, IL 60601,
4
Counsel for Appellee Citadel Derivatives Group,
LLC
Kurt A. Kappes, Esq.
Greenberg Traurig
Suite 1100
1201 K Street
Sacramento, CA 95814
David E. Sellinger, Esq.
Greenburg Traurig
200 Park Avenue
Florham Park, NJ 07932
Counsel for Appellee E Trade Capital Markets
_____________________
OPINION
_____________________
SMITH, Circuit Judge.
After the District Court denied Plaintiffs’ motion
to remand this case to New Jersey state court, we granted
their petition for an interlocutory appeal. The issue
before us is whether there is federal-question jurisdiction
over Plaintiffs’ state-law claims, which allege that
defendants manipulated the price of a stock via abusive
“naked” short sales. Short sales are subject to detailed
5
federal regulation under Regulation SHO. New Jersey
does not have an analogous provision. However, the
question of whether the naked short selling at issue in
this case violates New Jersey law (including the state’s
general securities fraud provisions) need not be answered
by reference to Regulation SHO. Because the success of
Plaintiffs’ state-law causes of action does not
“necessarily” depend upon the contents of federal law,
this case does not “arise under” the laws of the United
States. The presence of an exclusive jurisdiction
provision governing Regulation SHO does not change the
analysis, as such provisions cannot independently
generate jurisdiction.
We hold that there is no federal-question
jurisdiction over this suit. Accordingly, we will reverse
the order denying remand, and direct the District Court to
remand this case to the Superior Court of New Jersey.
I.
Plaintiffs are shareholders in Escala Group, Inc.
(“Escala”). Named Defendants are financial institutions
that engage in equity trading. Plaintiffs filed this lawsuit
in the Superior Court of New Jersey alleging that
Defendants participated in “naked” short selling of
Escala stock, which “increased the pool of tradable
shares by electronically manufacturing fictitious and
unauthorized phantom shares.” (Am. Compl. ¶ 4.)
Plaintiffs also refer to these shares as “counterfeit.” (Am.
6
Compl. ¶ 37.) Plaintiffs claim that this alleged increase
in Escala shares diluted their voting rights and caused
their shares to decline in value. The Amended Complaint
pleads ten causes of action, with all claims asserted under
New Jersey law. These causes of action address: (i)
claims under the New Jersey Racketeer Influenced and
Corrupt Organizations (“RICO”) Act based on predicate
acts of New Jersey securities fraud and theft; and (ii)
common law claims for unjust enrichment, interference
with economic advantage and contractual relations,
breach of contract, breach of the covenant of good faith
and fair dealing, and negligence.
A normal (i.e., non-naked) short sale is usually
accomplished in six steps: (1) “[t]he short seller
identifies securities she believes will drop in market
price;” (2) arranges to “borrow[] these securities from a
broker;” (3) “sells the borrowed securities on the open
market;” (4) waits some period of time hoping the
securities decline in value; (5) “purchases replacement
securities on the open market;” and (6) “returns them to
the broker—thereby closing the short seller’s position.”
Elec. Trading Grp., LLC v. Banc of Am. Sec. LLC, 588
F.3d 128, 132 (2d Cir. 2009). “The short seller’s profit
(if any) is the difference between the market price at
which she sold the borrowed securities and the market
price at which she purchased the replacement securities,
less [transaction costs].” Id. Usually a buyer takes
delivery of the borrowed securities within three days
7
following the purchase. Amendments to Regulation
SHO, SEC Release No. 34-58773, 73 Fed Reg. 61706,
61707 n.8 (Oct. 14, 2008).
However, “[i]n a ‘naked’ short sale . . . the short
seller does not borrow securities in time to make delivery
to the buyer within the standard three-day settlement
period. As a result, the seller fails to deliver securities to
the buyer when delivery is due (known as a ‘fail’ or ‘fail
to deliver’). Sellers sometimes intentionally fail to
deliver securities as part of a scheme to manipulate the
price of a security, or possibly to avoid borrowing costs
associated with short sales, especially when the costs of
borrowing stock are high.” Id. at 707-08. Naked short
selling is not per se illegal under federal law. However,
some naked short selling schemes may run afoul of
federal antifraud laws, as well as Regulation SHO.
‘Naked’ Short Selling Antifraud Rule, SEC Release No.
34-58774, 73 Fed. Reg. 61666, 61667 (Oct. 14, 2008).
Regulation SHO, 17 C.F.R. § 242.200 et seq., was
adopted in 2004 by the Securities and Exchange
Commission (“SEC” or “Commission”), pursuant to its
authority under the Securities Exchange Act of 1934
(“Exchange Act”), 15 U.S.C. § 78a et seq. See Short
Sales, SEC Release No. 34-50103, 69 Fed. Reg. 48008
(July 28, 2004). Among other restrictions, Regulation
SHO imposes “locate” and “close out” requirements on
broker-dealers in an attempt to minimize fails to deliver.
Under the locate requirement, before executing a short
8
sale order, a broker-dealer must have “reasonable
grounds” to believe that the security can be borrowed and
delivered within three days. 17 C.F.R. § 242.203(b)(1).
If a fail to deliver has occurred and persists for thirteen
days, under the “close out” requirement broker-dealers
may be required to purchase and deliver securities “of
like kind and quantity.” 17 C.F.R. § 242.203(b)(3); Elec.
Trading Grp., 588 F.3d at 135-36.
Although Plaintiffs’ causes of action are all
brought under state law, the Amended Complaint
repeatedly mentions the requirements of Regulation
SHO, its background, and enforcement actions taken
against some Defendants regarding Regulation SHO. It
also cites data maintained to assist broker-dealers in
complying with Regulation SHO’s close out requirement,
and at times couches its allegations in language that
appears borrowed from Regulation SHO. Further,
plaintiffs plead that “Defendants violated the trading
rules and regulations requiring that they actually deliver
shares . . . to settle short sale transactions.” (Am. Compl.
¶ 33.) There is no question that Plaintiffs assert in their
Amended Complaint, both expressly and by implication,
that Defendants repeatedly violated federal law.
Moreover, there is no New Jersey analogue to Regulation
SHO.
Defendants removed the suit from the Superior
Court of New Jersey to the United States District Court
for the District of New Jersey, premised on the existence
9
of federal-question jurisdiction. Plaintiffs sought
remand. On December 31, 2012, the Magistrate Judge
issued a Report and Recommendation suggesting that
Plaintiffs’ motion to remand be granted: “because
[Plaintiffs] may succeed on their New Jersey RICO
claims . . . and state common law claims . . . without
establishing liability under federal law, the Amended
Complaint, on its face, does not raise necessarily a
substantial issue of federal law.” Manning v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 12–4466, 2012 WL
7783142, at *4 (D.N.J. Dec. 31, 2012). The District
Court disagreed in a March 20, 2013 opinion: “the case
at bar is premised upon and its resolution depends on the
alleged violation of a regulation promulgated under the
[Exchange] Act.” Manning v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., No. 12–4466, 2013 WL 1164838,
at *4 (D.N.J. Mar. 20, 2013).
Noting “substantial ground for difference [of
opinion] here, as evinced by the different outcome
reached by this Court and [the] Magistrate Judge . . . in
this case,” on May 23, 2013, the District Court certified
an interlocutory appeal to this Court, pursuant to 28
U.S.C. § 1292(b), to answer “the question of whether
remand is appropriate in this case.” Manning v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., No. 12–4466, 2013
WL 2285955, at *2 (D.N.J. May 23, 2013). On August
28, 2013, we granted Plaintiffs’ petition to appeal.
II.
10
Defendants removed this suit to federal court
pursuant to 28 U.S.C. § 1441, asserting federal
jurisdiction under 28 U.S.C. §§ 1331 and 1337 and 15
U.S.C. § 78aa. We have jurisdiction over this
interlocutory appeal pursuant to 28 U.S.C. § 1292(b).
“We exercise plenary review over [a] district
court’s order denying [a] motion for remand.” Werwinski
v. Ford Motor Co., 286 F.3d 661, 665 (3d Cir. 2002).
III.
The sole issue on appeal is whether there is
federal-question jurisdiction over Plaintiffs’ claims.
“The removing party . . . carries a heavy burden of
showing that at all stages of the litigation the case is
properly before the federal court. Removal statutes are to
be strictly construed, with all doubts to be resolved in
favor of remand.” Brown v. Jevic, 575 F.3d 322, 326 (3d
Cir. 2009) (internal citations omitted). Defendants point
to two principal statutory provisions they believe confer
jurisdiction here: 28 U.S.C. § 1331 and 15 U.S.C. § 78aa
(“§ 27” of the Exchange Act).1 Section 1331, the
“general federal-question statute,” Michigan v. Bay Mills
Indian Cmty., 134 S. Ct. 2024, 2030 n.2 (2014), gives
1
28 U.S.C. § 1441(a) authorizes removal of “any civil
action” over which district courts “have original
jurisdiction.”
11
district courts original jurisdiction over “all civil actions
arising under the Constitution, laws, or treaties of the
United States.” Section 27 gives district courts
“exclusive jurisdiction . . . of all suits in equity and
actions at law brought to enforce any liability or duty
created by [the Exchange Act] or the rules and
regulations thereunder.”
A.
Section 1331 “is invoked by and large by plaintiffs
pleading a cause of action created by federal law.”
Grable & Sons Metal Prods., Inc. v. Darue Eng’g &
Mfg., 545 U.S. 308, 312 (2005); see also Gunn v.
Minton, 133 S. Ct. 1059, 1064 (2013) (“Most directly, a
case arises under federal law when federal law creates the
cause of action asserted.”) (citing Am. Well Works Co. v.
Layne & Bowler Co., 241 U.S. 257, 260 (1916)).
However, causes of action under state law may
nonetheless “arise under” federal law for purposes of §
1331 if the four-pronged Grable test is met. “[F]ederal
jurisdiction over a state law claim will lie if a federal
issue is: (1) necessarily raised, (2) actually disputed, (3)
substantial, and (4) capable of resolution in federal court
without disrupting the federal-state balance approved by
Congress.” Gunn, 133 S. Ct. at 1065 (applying Grable).
Only a “slim category” of cases satisfy the Grable test.
Empire Healthchoice Assurance, Inc. v. McVeigh, 547
U.S. 677, 701 (2006). Because we conclude that no
federal issue has been necessarily raised here, we need
12
not decide whether the other three Grable requirements
are met.
For a federal issue to be necessarily raised,
“vindication of a right under state law [must] necessarily
turn[] on some construction of federal law.” Franchise
Tax Bd. of State of Cal. v. Constr. Laborers Vacation
Trust for S. Cal., 463 U.S. 1, 9 (1983). Grable presented
one of the rare instances where a federal issue was
necessarily raised. Grable sued under state law to quiet
title. Five years prior to the suit, the Internal Revenue
Service (“IRS”) seized Grable’s land to satisfy a tax
deficiency. The IRS then sold that land to the defendant.
Grable argued that the IRS did so without giving
sufficient notice as required by federal law. Because
“whether Grable was given notice within the meaning of
the federal statute is . . . an essential element of its quiet
title claim,” the Supreme Court held that the issue of
what notice was required under federal law was
necessarily raised. Grable, 545 U.S. at 315 (emphasis
added).
The “classic example,” id. at 312, of this type of
arising under jurisdiction similarly required a
determination of federal law as an essential element of
the plaintiff’s state law claim. In Smith v. Kansas City
Title & Trust Co., 255 U.S. 180 (1921), plaintiff sued
under a state law which forbade the defendant from
investing in illegal securities. The alleged source of
illegality was that the federal bonds purchased by the
13
defendant were unconstitutional (on the theory that
Congress did not have the power to issue them). Because
the “decision depend[ed] upon the determination of [the
constitutional] issue,” “which [was] directly drawn in
question,” federal jurisdiction was proper. Id. at 245-46.
By contrast, Regulation SHO is not an element of
any of Plaintiffs’ claims. The claims, therefore, could be
decided without reference to federal law. Plaintiffs
alleged a market manipulation scheme and sued
exclusively under New Jersey law, including its common
law. The District Court, “noting that Plaintiffs do not
point to a New Jersey law or regulation which similarly
prohibits the type of alleged conduct at issue here,” found
that the claims were necessarily predicated on the
violation of Regulation SHO. Manning, 2013 WL
1164838, at *5. We conclude it was improper for the
District Court to foreclose the possibility that particular
state causes of action could permit recovery solely under
state law. It is true that New Jersey’s laws are not as
robust as federal laws. But we have previously held that
even where “[t]here may be some basis to agree with
defendants that [plaintiffs’] view of the state law is
incorrect and will be so found[, i]t is . . . for the state
court to make the determination as to the applicability of
its state law.” United Jersey Banks v. Parell, 783 F.2d
360, 367 (3d Cir. 1986).
Indeed, even under federal law, a claim based on
“abusive ‘naked’ short selling as part of a manipulative
14
scheme,” can be maintained without a predicate violation
of Regulation SHO, because such schemes are “always
illegal under the general antifraud provisions of the
federal securities laws . . . .” ‘Naked’ Short Selling
Antifraud Rule, 73 Fed. Reg. at 61667. Such
manipulative schemes may “drive down a company’s
stock price” and “undermine the confidence of
investors,” which may, in turn, make investors more
“reluctant to commit capital.” Id. at 61670. If naked
short selling can result in a violation of federal general
antifraud provisions independently of Regulation SHO, it
is difficult to imagine why naked short selling cannot
similarly result in a violation of state general antifraud
provisions independently of Regulation SHO. Moreover,
the Supreme Court of New Jersey, exercising its
common-law authority over New Jersey’s general
securities fraud provisions, has not shied away from
deviating from federal law. See Kaufman v. i-Stat Corp.,
165 N.J. 94, 97 (2000) (“Even though the theory of fraud
on the market has a place in the securities law of this
nation, it is a stranger to New Jersey’s securities laws. It
is also not consistent with the current requirements for a
common-law action for fraud in New Jersey.”).
As we read the Amended Complaint, no causes of
action are predicated at all on a violation of Regulation
SHO. Cf. Lippitt v. Raymond James Fin. Servs., Inc.,
340 F.3d 1033, 1037 (9th Cir. 2003), as amended (Sept.
22, 2003) (no jurisdiction even where the complaint
15
“unnecessarily describes the alleged conduct of the
defendants in terms that track almost verbatim the
misdeeds proscribed by [federal law]”). For example,
Plaintiffs do not plead a violation of Regulation SHO as a
predicate violation for purposes of New Jersey RICO.
Nor, for the reasons above, do we think Plaintiffs’ causes
of action necessarily need to be predicated on a violation
of Regulation SHO for Plaintiffs to have a chance at
recovering under state law.
But even if Plaintiffs’ claims were partially
predicated on federal law, federal law would still not be
necessarily raised. See Christianson v. Colt Indus.
Operating Corp., 486 U.S. 800, 810 (1988) (“[A] claim
supported by alternative theories in the complaint may
not form the basis for [federal] jurisdiction unless
[federal] law is essential to each.”).2 Where “[p]laintiffs’
state [law] RICO claims allege both federal and state
predicate acts,” no federal question is necessarily raised
because a Plaintiff could “prevail upon their New Jersey
RICO claims or any of their other state-law claims
2
Although Christianson concerned 28 U.S.C. § 1338
(dealing with actions “arising under” the patent laws)
rather than § 1331, the Supreme Court noted the
“identical language” in the two provisions and applied
the “same test” to both. 486 U.S. at 808. See also Gunn,
133 S. Ct. at 1064-65 (citing Christianson and applying
the Grable § 1331 analysis to § 1338).
16
without any need to prove or establish a violation of
federal law.” Fairfax Fin. Holdings Ltd. v. S.A.C.
Capital Mgmt., LLC, No. 06-4197, 2007 WL 1456204, at
*2-3 (D.N.J. May 15, 2007) (applying Christianson to
RICO claims premised on manipulative short selling).
Defendants also assert jurisdiction under § 1331 on
the basis of a Frequently Asked Questions (“FAQ”) page
on the SEC’s website. The website is clear from the
outset that the FAQ responses are “not rules, regulations,
or statements of the [SEC],” nor has the Commission
approved them.3 This website, which we are told refutes
Plaintiffs’ theory of damages, says that naked short
selling does not create “counterfeit shares”—a term
Plaintiffs employ liberally in the Amended Complaint.
But the phrase “counterfeit shares” does not appear a
single time anywhere in the United States Code or the
Code of Federal Regulations. Defendants simply cannot
carry their burden of establishing jurisdiction based on a
“disputed issue of federal . . . law,” Grable, 545 U.S. at
310, without identifying a particular source of federal law
for the judiciary to interpret.
3
Division of Market Regulation: Responses to
Frequently Asked Questions Concerning Regulation
SHO,
http://www.sec.gov/divisions/marketreg/mrfaqregsho120
4.htm (last visited October 24, 2014).
17
Even if Plaintiffs’ theories are factually
contradicted by actual rules with the force of law, as the
Eighth Circuit thought similar theories were in Pet
Quarters, Inc. v. Depository Trust & Clearing Corp., 559
F.3d 772, 781 (8th Cir. 2009) (referencing National
Securities Clearance Corporation rules), Defendants
would at best be entitled to a preemption defense.
“Federal pre-emption is ordinarily a federal defense to
the plaintiff’s suit. As a defense, it does not appear on the
face of a well-pleaded complaint, and, therefore, does not
authorize removal to federal court.” Metro. Life Ins. Co.
v. Taylor, 481 U.S. 58, 63, (1987).4
4
The Eighth Circuit in Pet Quarters held that state law
claims against SEC-registered clearing agencies for
maintaining a program under rules approved by the SEC
(which allowed some naked short selling to occur) were
all conflict preempted. Although ostensibly recognizing
the rule that preemption does not usually give rise to
federal-question jurisdiction, the Eighth Circuit held that
the Grable test was satisfied as the complaint “presents a
substantial federal question because it directly implicates
actions taken by the Commission . . . .” 559 F.3d at 779.
Although Defendants argue that the identity of the
defendant is not relevant to the Grable inquiry, were we
to expand the Eighth Circuit’s holding in Pet Quarters to
all private defendants anytime a plaintiff’s claim was
uncomfortably juxtaposed with federal regulations,
18
Defendants do not purport to cite a single case
regarding § 1331 (other than Grable and Gunn) in
support of their contention that a question of federal law
is necessarily raised here. Nonetheless, defendants do
cite D’Alessio v. New York Stock Exchange, Inc., 258
F.3d 93, 101-102 (2d Cir. 2001),5 which held that there
was jurisdiction under § 1331 where a court was
“require[d] . . . to construe federal securities laws,”
because the plaintiff alleged that the New York Stock
Exchange “failed to perform its statutory duty, created
under federal law, to enforce its members’ compliance
with those laws.” The instant case is distinguishable as
Plaintiffs’ claims could rise or fall entirely based on the
construction of state law.
We conclude that § 1331 does not provide a basis
to exercise jurisdiction over Plaintiffs’ claims.
B.
preemption-like arguments would always create federal-
question jurisdiction.
5
Defendants contend D’Alessio supports jurisdiction
under § 27. But it was plainly decided under § 1331, id.
at 101, and § 27 was only mentioned in the context of
what is now prong three of Grable (substantiality) after
the necessarily raised issue was resolved. 258 F.3d at
104.
19
Having concluded that there is no arising under
jurisdiction here pursuant to § 1331, we must decide
whether the exclusive jurisdiction provision in § 27 of the
Exchange Act might nonetheless provide a more
expansive basis for federal-question jurisdiction.
Although Defendants, in advancing this argument,
contend that “every circuit court has reached the same
conclusion,” Appellees’ Br. 2, the issue has actually split
the two circuits that have most directly addressed it.
Compare Barbara v. N. Y. Stock Exch., Inc., 99 F.3d 49,
55 (2d Cir. 1996) (“Our determination that [plaintiff]’s
state court complaint did not ‘arise under’ federal law
within the meaning of section 1331 effectively resolves
our inquiry under section 27 of the Exchange Act as well.
. . . We think that [section 27] plainly refers to claims
created by the Act or by rules promulgated thereunder,
but not to claims created by state law.”)6 with Cal. ex rel.
Lockyer v. Dynegy, Inc., 375 F.3d 831, 841 (9th Cir.
2004)7 (“Sparta [Surgical Corp. v. National Association
of Securities Dealers, 159 F.3d 1209 (9th Cir. 1998)]
establishes, however, that the exclusive jurisdiction
6
See also Marel v. LKS Acquisitions, Inc., 585 F.3d 279,
280-81 (6th Cir. 2009) (“As the controversy in this case .
. . was one to enforce a state law claim, this grant of
exclusive jurisdiction [in § 27] does not apply. See
Barbara.”).
7
Opinion amended on other grounds on denial of
rehearing, 387 F.3d 966 (9th Cir. 2004).
20
provision takes the case outside of the rule . . . which
otherwise might bar the action if the only jurisdictional
provision implicated were [section] 1331. . . . [In Sparta]
there would have been no jurisdiction predicated solely
on [section] 1331. Yet the claim lay ‘not under [section]
1331, but under [section 27].’”) (internal citations
omitted). The Second Circuit recently acknowledged this
split in NASDAQ OMX Grp., Inc. v. UBS Sec., LLC, No.
13-2657, 2014 WL 5486457, at *17 (2d Cir. Oct. 31,
2014).8
We believe the Supreme Court all but answered
this question in Pan American Petroleum Corp. v.
Superior Court of Delaware In & For New Castle
County, 366 U.S. 656 (1961). There, the Supreme Court
considered an exclusive jurisdiction provision
8
In an “odd[] . . . discuss[ion],” id. at *33 (Straub, J.
dissenting), on substantially different facts than at issue
here, the Second Circuit considered Sparta and similar
decisions relevant to its analysis of the fourth prong of
Grable (whether exercising jurisdiction under § 1331
would upset the federal-state balance of judicial
responsibilities). Specifically, that court declared that
exercising jurisdiction under § 1331 would not upset the
federal-state balance given that jurisdiction could be
exercised in other circuits under § 27, even though it
acknowledged that its own decision in Barbara “declined
to adopt such a broad reading of [§ 27]”—a decision it
was not revisiting. Id. at *17.
21
substantially identical to § 27 of the Exchange Act: § 22
of the Natural Gas Act. Cf. Tafflin v. Levitt, 493 U.S.
455, 471 (1990) (noting similarities in the specific
language used in § 22 of the Natural Gas Act and § 27 of
the Exchange Act, in contrast to other “governing
statutes” “[i]n the standard fields of exclusive federal
jurisdiction”). “[In § 22 of the Natural Gas Act,
‘e]xclusive jurisdiction’ is given the federal courts but it
is ‘exclusive’ only for suits that may be brought in the
federal courts. Exclusiveness is a consequence of having
jurisdiction, not the generator of jurisdiction because of
which state courts are excluded.” Pan Am., 366 U.S at
664. We see no reason to treat the two provisions
differently.
Accordingly, we disagree with the line of Ninth
Circuit cases which have held that there can be
jurisdiction under § 27 (and other exclusive jurisdiction
provisions) even when there is not under § 1331.9 We
note that the Ninth Circuit in its seminal decision in
Sparta did not consider the Supreme Court’s holding in
Pan American. The incongruity between Sparta and Pan
9
Hawkins v. National Ass’n of Securities Dealers Inc.,
149 F.3d 330, 331-32 (5th Cir. 1998) (per curiam),
although not as explicit as Sparta and Dynegy, could be
read as holding that § 27 can provide subject-matter
jurisdiction independently of § 1331. To the extent
Hawkins so holds, we disagree with it.
22
American was brought squarely before the Ninth Circuit
in Dynegy. At issue in Dynegy was the import of § 317
of the Federal Power Act—an exclusive jurisdiction
provision substantially identical to both § 27 (which was
at issue in Sparta) and § 22 (which was at issue in Pan
American). Although the Ninth Circuit, in a footnote,
acknowledged that Pan American made clear that such
provisions were not “‘generator[s] of jurisdiction,’” it
nonetheless “fe[lt] bound . . . by Sparta’s subsequent
interpretation.”10 Dynegy, 375 F.3d at 843, n.10. We are
10
Although the Ninth Circuit acknowledged in that
footnote that the Supreme Court’s holding in Pan
American actually meant something relevant, the text of
its opinion belies that admission: “The Pan American
court’s holding is unremarkable insofar as it held that
cases falling outside the scope of the exclusive
jurisdiction provision are not subject to it.” Dynegy, 375
F.3d 831 at 843. In reality, Pan American stands for the
proposition that cases otherwise falling outside the scope
of the district courts’ original jurisdiction are not brought
within it by virtue of an exclusive jurisdiction provision.
See In re W. States Wholesale Natural Gas Antitrust
Litig., 346 F. Supp. 2d 1123, 1130 (D. Nev. 2004). Such
is the doctrinal disarray created by Dynegy and Sparta,
that a district court “reluctant[ly] . . . conclu[ded]” that it
could not follow the Supreme Court’s holding in Pan
American even with respect to § 22 of the Natural Gas
Act—the very provision at issue in Pan American. See
23
not confronted with such a problem, as this Court has
faithfully applied Pan American to other exclusive
jurisdiction provisions. See Exxon Corp. v. Hunt, 683
F.2d 69, 74 (3d Cir. 1982) (applying Pan American to §
113(b) of the Comprehensive Environmental Response,
Compensation and Liability Act).
Although it does not appear that any court has
expressly relied on Pan American to hold that § 27 does
not authorize a departure from the Grable line of cases,
courts have cited Pan American in holding that § 27 does
not depart from § 1331 in other ways. See Calvert Fire
Ins. Co. v. Am. Mut. Reinsurance Co., 600 F.2d 1228,
1231 (7th Cir. 1979) (§ 27 does not prevent state courts
from hearing Exchange Act defenses); Gold v. Blinder,
Robinson & Co., 580 F. Supp. 50, 54 (S.D.N.Y. 1984) (§
27 “does not bar a plaintiff from pursuing at its option
cognate remedies based entirely upon state law”);
McMahon Chevrolet, Inc. v. Davis, 392 F. Supp. 322,
324-25 (S.D. Tex. 1975) (“This Court is of the opinion
that the exclusive jurisdiction of the federal courts under
[§ 27] is like the exclusive jurisdiction of the federal
courts under . . . the Natural Gas Act . . . in that such
Pacificorp v. Nw. Pipeline GP, No. 10–99, 2010 WL
3199950, at *6 n.3 (D. Or. June 23, 2010) report and
recommendation adopted, 2010 WL 3219533 (Aug. 9,
2010).
24
jurisdiction does not bar a plaintiff from pursuing at his
option remedies based solely on state law. Pan Am.”).
We agree with the Second Circuit’s holding in
Barbara that § 27 is coextensive with § 1331 for
purposes of establishing subject-matter jurisdiction—the
exclusive jurisdiction provision merely serves to divest
state courts of jurisdiction.11 Accordingly, § 27 does not
provide an independent basis to exercise jurisdiction over
Plaintiffs’ claims.
IV.
Having concluded that federal-question
jurisdiction is lacking, we will reverse the District
Court’s March 20, 2013 order, and remand with
instructions that the District Court remand this case to the
Superior Court of New Jersey.
11
The District of New Jersey already reached this
conclusion in a prior short selling case by relying on
Barbara. Fairfax, 2007 WL 1456204, at *5.
25