Thompson v. Paul

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
PAMELA THOMPSON, an individual 
as guardian of Gabriella, Matthew,
Marcus and Michael Thompson
and The Thompson Group P.C., an
Arizona corporation,
Plaintiff-Appellant, No. 06-15515
v.
 D.C. No.
CV-05-00990-MHM
GEORGE PAUL; KAREN PAUL; TOM
MORGAN; SCOTT DEWALD; OPINION
DEBORAH JAMIESON; LEWIS AND
ROCA LLP, an Arizona Limited
Liability Partner; CAPITOL
DETECTIVE AGENCY, INC.,
Defendants-Appellees.

Appeal from the United States District Court
for the District of Arizona
Mary H. Murguia, Distict Judge, Presiding
Argued and Submitted
January 17, 2008—San Francisco, California
Filed October 27, 2008
Before: William A. Fletcher and Carlos T. Bea,
Circuit Judges, and Jeffrey T. Miller,* District Judge.
Opinion by Judge William A. Fletcher
*The Honorable Jeffrey T. Miller, United States District Judge for the
Southern District of California, sitting by designation.
14955
14958 THOMPSON v. PAUL
COUNSEL
William M. Balin, Balin & Kotler, San Francisco, California,
James LaGanke, Phoenix, Arizona, and Charles Weller, La
Jolla, California, for the appellant.
Hal Michael Clyde, Paul F. Eckstein, and Todd Kerr, Perkins
Coie Brown & Bain, Phoenix, Arizona, for appellee Lewis
and Roca.
David S. Rosenthal, Rosenthal Law Office, Phoenix, Arizona,
and Gregory Alan Rosenthal, Arboleda Brechner, Phoenix,
Arizona, for appellee Capitol Detective Agency.
THOMPSON v. PAUL 14959
OPINION
W. FLETCHER, Circuit Judge:
Plaintiff Pamela Thompson and her four children (collec-
tively “Thompson”) sued defendants for alleged violations of
Section 10(b) of the Securities Exchange Act of 1934, 15
U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, and
various provisions of state law. The district court dismissed
Thompson’s Section 10(b) claim with prejudice under Federal
Rule of Civil Procedure 12(b)(6). After the district court had
entered final judgment of dismissal of all of her claims,
including her state-law claims, Thompson asked the district
court to certify a question of state law to the Arizona Supreme
Court. The district court denied the request.
Thompson contends that the district court erred by applying
state law rather than federal law in dismissing her claim under
Section 10(b). We agree with this contention. We reverse and
hold that under the federal law applicable to her Section 10(b)
claim Thompson has stated a claim upon which relief can be
granted. Thompson also contends that the district court erred
in denying her request to certify the question to the Arizona
Supreme Court. We disagree with this contention. We affirm
the district court on this issue.
I. Factual Allegations
The following narrative is taken from the allegations in
Thompson’s complaint. Because the district court dismissed
the complaint under Rule 12(b)(6), we assume that all of the
allegations in the complaint are true.
From January 2001 through May 2002, Thompson worked
as the Chief Financial Officer (“CFO”) of YP.Net, a publicly
traded company. Thompson resigned from YP.Net in May
2002 because of “highly questionable accounting and auditing
practices at the company. More specifically, . . . [she]
14960 THOMPSON v. PAUL
resigned because of the refusal of YP.Net officers and direc-
tors to make proper disclosures to the Securities and
Exchange Commission.” Compl. ¶ 17. When Thompson
resigned, “she forwarded her resignation from YP.Net to the
Securities and Exchange Commission Enforcement Division
because of her concerns of illegal conduct at YP.Net.” Id.
¶ 18.
Immediately after Thompson resigned as CFO in May
2002, YP.Net filed a civil suit against her. The suit was filed
in an attempt to protect the Chief Executive Officer (“CEO”)
of YP.Net, Angelo Tullo, who was then subject to criminal
investigation by several federal agencies. Id. ¶ 34. Thompson
filed counterclaims in September 2003. YP.Net and Tullo
were both represented by the Arizona law firm Lewis and
Roca (“L&R”).
In about June 2000, while representing an alter ego of
YP.Net in an attempt to purchase assets of a company in
bankruptcy, attorneys at L&R became aware “that Tullo was
a target of a criminal investigation with several federal law
enforcement agencies.” Id. ¶ 21. Tullo’s “criminal matters
were never disclosed in any Securities and Exchange Com-
mission filings.” Id. ¶ 24. During the pendency of the civil lit-
igation between Thompson and YP.Net, from May 2002
through April 2004, attorneys at L&R “vehemently denied
any and all knowledge of a criminal investigation targeted at
Angelo Tullo.” Id. ¶ 35. See id. ¶ 39.
Thompson and YP.Net entered into settlement negotiations
to resolve YP.Net’s civil suit against Thompson. On April 22,
2004, the parties “entered into a settlement memorandum.” Id.
¶ 37. Under the settlement, Thompson was to receive a sub-
stantial amount of common stock in YP.Net. In part, the
agreement was “based upon” the “false representation” by
L&R attorneys that “[t]here in fact was no criminal investiga-
tion targeted at the CEO of YP.Net, Angelo Tullo.” Id. Yet on
April 22, 2004, L&R attorneys “knew that there was a crimi-
THOMPSON v. PAUL 14961
nal investigation targeting Tullo.” Id. ¶ 39. On that day,
Thompson “made it clear to all parties, including the LEWIS
AND ROCA DEFENDANTS that she intended to sell as
much of her stock as soon as possible.” Id. ¶ 40. According
to the memorandum, the settlement was to be executed on
April 26, 2004.
“Moments before the final settlement documents in the YP
[civil] litigation could be executed,” the L&R attorneys “with-
drew from the YP litigation due to an undisclosed conflict that
they had purportedly just discovered.” Id. ¶ 41. Because of the
last-minute withdrawal of the L&R attorneys, YP.Net was
required to obtain new counsel and to postpone the execution
of the settlement. A settlement was “ultimately finalized” on
May 24, 2004, with the assistance of new YP.Net counsel.
Three days later, on May 27, Tullo was “indicted on 29
counts of fraud, conspiracy, money laundering, and orches-
trating a ponzi scheme.” Id. ¶ 43. As a result of Tullo’s indict-
ment, the value of the YP.Net common stock that Thompson
received under the settlement “plummeted in value.” Id. ¶ 44.
The L&R attorneys made their false representations that
Tullo was not subject to criminal investigation “with knowl-
edge of their falsity.” Id. ¶ 50. However, Thompson “did not
know of the falsity of the communications and representa-
tions” by the L&R attorneys. Id. ¶ 51. “[A]s a result, [she]
relied upon the communications and representations of the
[L&R attorneys] and thought they had been truthful.” Id. If
the stock Thompson received under the settlement had not
lost value as a result of Tullo’s indictment, it “could have
been valued at more than one million dollars.” Id. ¶ 49.
II. Proceedings in the District Court
In April 2005, Thompson and her four children filed suit in
federal district court against the law firm of Lewis and Roca,
three individual partners in Lewis and Roca, and two spouses
of those partners (collectively “the L&R defendants”), and
14962 THOMPSON v. PAUL
against the Capitol Detective Agency. Thompson brought one
federal claim under Section 10(b) and Rule 10b-5 (“the Sec-
tion 10(b) claim”), and numerous claims under state law. The
district court dismissed the Section 10(b) claim and several of
the state-law claims with prejudice under Federal Rule of
Civil Procedure 12(b)(6). The district court dismissed several
other state-law claims without prejudice under Rule 12(b)(6).
Finally, the district court dismissed the last remaining state
law claim under 28 U.S.C. § 1367(c). Thompson v. Paul, 402
F. Supp. 2d 1110, 1119 (D. Ariz. 2005). After the district
court had entered an order dismissing all of her claims but
before entry of final judgment, Thompson moved for recon-
sideration asking the district court to certify a question of state
law to the Arizona Supreme Court. The district court denied
the motion.
Thompson raises two questions on appeal. These questions
are relevant only to possible liability of the L&R defendants.
No question relevant to liability of defendant Capitol Detec-
tive Agency is before us on appeal. First, Thompson contends
that the district court erred in dismissing her claim under Sec-
tion 10(b) because it incorrectly relied on state rather than
federal law. Second, Thompson contends that the district
court erred in denying her request to certify the question of
state law. We discuss her contentions in turn.
III. Standard of Review
We review de novo a dismissal under Rule 12(b)(6), and
we can affirm on any ground supported by the record. See
Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 403 F.3d
1050, 1055, 1058 (9th Cir. 2005). We take all well pleaded
allegations of material fact as true and construed in Thomp-
son’s favor. Maduka v. Sunrise Hosp., 375 F.3d 909, 911 (9th
Cir. 2004). See also Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 127 S. Ct. 2499, 2508 (2007) (describing the Private
Securities Litigation Reform Act’s (“PSLRA”) heightened
THOMPSON v. PAUL 14963
pleading requirements for Section 10(b) misrepresentation
claims, citing 15 U.S.C. § 78u-4(b)(1), (2)).
We review for abuse of discretion the district court’s denial
of a request to certify a question to a state supreme court.
Eckard Brandes, Inc. v. Riley, 338 F.3d 1082, 1087 (9th Cir.
2003).
IV. Discussion
A. Thompson’s Section 10(b) Claim
1. Attorney Liability under Section 10(b)
In dismissing with prejudice Thompson’s claim under Sec-
tion 10(b), as well as her state-law claims for fraudulent mis-
representation, negligent misrepresentation and third-party
professional negligence, the district court wrote:
A cause of action against opposing counsel for
statements made during litigation is strictly limited
to actions alleging malicious prosecution, also
known as wrongful institution of civil proceedings.
Linder v. Brown & Herrick, 189 Ariz. 398, 943 P.2d
758, 766 (1997) (dismissing claims of fraud and
intentional infliction of emotional distress against
opposing counsel for failure to state a claim). An
attorney’s duty to a nonclient arises only if the non-
client is an “intended beneficiary” of the attorney’s
services. Wetherill v. Basham, 197 Ariz. 198, 3 P.3d
1118, 1128 (2000). “An adverse party is not an
intended beneficiary of the adverse counsel’s client.”
Lewis v. Swenson, 126 Ariz. 5561, 617 P.2d 69, 72
(1980) (internal quotation omitted). Imposition of a
duty to an individual, other than an “intended benefi-
ciary” would offend public policy by “plac[ing] an
attorney in a position where his own interests would
conflict directly with his client’s interests.” Id. Addi-
14964 THOMPSON v. PAUL
tionally, “as a matter of law and common sense, [Ms.
Thompson] had no right to rely on statements made
by the attorneys opposing [her].” Linder, 943 P.2d at
765.
A section 10(b) action requires justifiable reliance
on alleged misrepresentations. Atari Corp. v. Ernst
& Whinney, 981 F.2d 1025 (9th Cir. 1992). The
securities laws create liability for misrepresentation
only in the event of a “substantial likelihood that the
misrepresentation significantly altered the total mix
of information that the investor possesse[d].” Id. at
1030. “If the investor already possesses information
sufficient to call the representations into question, he
cannot claim later that he relied on or was deceived
by the lie.” Id. As noted above, Ms. Thompson
[“]had no right to rely on statements made by the
attorneys opposing [her].” Linder, 943 P.2d at 765.
402 F. Supp. 2d at 1115 (all brackets, except the second-to-
last, in the original).
It is apparent from this passage that the district court dis-
missed Thompson’s Section 10(b) claim because, in the
court’s view, she had no right under Arizona law to rely on
opposing counsel’s statements, even though those statements
were made “in connection with the purchase or sale of any
security.” 17 C.F.R. § 240.10b-5. The district court’s reliance
on state law in deciding the Section 10(b) claim may be seen
clearly in the last sentence in the second quoted paragraph,
the only paragraph specifically directed to Section 10(b) lia-
bility. Relying on Linder, a state-law decision of the Arizona
Supreme Court, the district court wrote, “Ms. Thompson
[‘]had no right to rely on statements made by the attorneys
opposing [her].’ ” For the reasons that follow, we hold that
the district court erred in relying on Arizona law in deciding
whether Thompson had a right under Section 10(b) to rely on
THOMPSON v. PAUL 14965
the statements of the L&R attorneys. We hold, further, that
Thompson has stated a claim for relief under Rule 12(b)(6).
Before we proceed with the substance of our analysis, we
pause to say that the district court was not well served by the
attorneys who appeared before it. The attorneys representing
the L&R defendants argued in the district court that the stan-
dard governing alleged misrepresentations by attorneys in
Section 10(b) cases is a state-law standard, and that Arizona
law does not provide for attorney liability to third parties. The
attorneys representing Thompson spent most of their brief in
the district court, and all of their oral argument in that court,
contending that Arizona law does provide for attorney liabil-
ity to third parties. Thompson’s attorneys argued in their dis-
trict court brief that the L&R attorneys were liable under
Section 10(b) under federal law, but the only cases they cited
were Chiarella v. United States, 445 U.S. 222 (1980), gener-
ally dealing with liability under Section 10(b), and Paracor
Finance, Inc. v. G.E. Capital Corp., 96 F.3d 1151 (9th Cir.
1996), setting forth the factors for determining whether a per-
son has a duty under Section 10(b) to disclose information.
Neither Chiarella nor Paracor discusses the circumstances
under which attorneys can be liable under Section 10(b).
Sometime after losing in the district court and before writ-
ing their appellate brief, Thompson’s attorneys discovered a
number of cases that deal directly with attorney liability under
Section 10(b). If they had cited to the district court the cases
they now cite to us, that court may well have (indeed, likely
would have) reached the correct conclusion in this case. Thus,
it is apparent to us that by erroneously framing the question
of attorney liability under Section 10(b) as one basically con-
trolled by state law and then failing to cite the federal cases
on point, the parties invited the district court to engage in its
state law analysis. Because, however, Thompson’s attorneys
briefly argued that the liability of the L&R attorneys should
be determined under federal law, we conclude that Thompson
has not waived on appeal the argument that federal law pro-
14966 THOMPSON v. PAUL
vides the proper standard by which to determine attorney lia-
bility. Indeed, the L&R defendants do not contend that the
argument has been waived in this court.
[1] Section 10(b) makes it “unlawful . . . [t]o use or
employ, in connection with the purchase or sale of any secur-
ity . . . , any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the Commis-
sion may prescribe as necessary or appropriate in the public
interest or for the protection of investors.” 15 U.S.C. § 78j(b).
Rule 10b-5 implements Section 10(b). The rule “encompasses
only conduct already prohibited by § 10(b).” Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, 128 S. Ct. 761, 768
(2008). Under Rule 10b-5, it is “unlawful”
(a) To employ any device, scheme, or artifice to
defraud,
(b) To make any untrue statement of a material fact
or to omit to state a material fact necessary in order
to make the statements made, in light of the circum-
stances under which they were made, not mislead-
ing, or
(c) To engage in any act, practice, or course of busi-
ness which operates or would operate as a fraud or
deceit upon any person, in connection with the pur-
chase or sale of any security.
17 C.F.R. § 240.10b-5. To state a claim under Section 10(b),
a plaintiff “must prove (1) a material misrepresentation or
omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase
or sale of a security; (4) reliance upon the misrepresentation
or omission; (5) economic loss; and (6) loss causation.”
Stoneridge, 128 S. Ct. at 768.
[2] “The principle is well settled that federal law, rather
than state law, governs the construction of all aspects of Rule
THOMPSON v. PAUL 14967
10b-5[.]” Huddleston v. Herman & MacLean, 640 F.2d 534,
557 n.40 (5th Cir. 1981) (citations and internal quotations
omitted), rev’d in part on other grounds, 459 U.S. 375(1983). Section 10(b) is not an exception to the general rule
that “[a] claim which arises under a federal statute and impli-
cates federal policy is appropriately decided under federal
law.” In re Nucorp Energy Sec. Litig., 772 F.2d 1486, 1489
(9th Cir. 1985). See also In re Columbia Gas Sys. Inc., 997
F.2d 1039, 1055 (3rd Cir. 1993) (similar). “Federal statutory
rights could be easily defeated if state law could be used to
control the incidents of those rights and the defenses to them.”
Petro-Ventures, Inc. v. Takessian, 967 F.2d 1337, 1340 (9th
Cir. 1992). See also Dura Pharms., Inc. v. Broudo, 544 U.S.
336, 341 (2005) (noting that a Section 10(b) “private damages
action . . . resembles, but is not identical to, common-law tort
actions for deceit and misrepresentation”); Huddleston, 459
U.S. at 388 (similar); Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723, 744-45 (1975) (similar).
[3] The Supreme Court has stated in general terms that an
attorney may be liable under Section 10(b). “Any person or
entity, including a lawyer, accountant, or bank, who employs
a manipulative device or makes a material misstatement (or
omission) on which a purchaser or seller of securities relies
may be liable as a primary violator under 10b-5, assuming all
of the requirements for primary liability under Rule 10b-5 are
met.” Central Bank of Denver v. First Interstate Bank of Den-
ver, 511 U.S. 164, 191 (1994) (first emphasis added). See also
United States v. O’Hagan, 521 U.S. 642, 664 (1997) (quoting
Central Bank of Denver). The precise question presented in
this case is whether an attorney can be liable under Section
10(b) for statements made to third parties—that is, to persons
or entities other than the attorney’s clients. A number of cir-
cuit courts have answered yes to that question.
In Rubin v. Schottenstein, Zox & Dunn, 143 F.3d 263 (6th
Cir. 1998) (en banc), attorney Barnhart represented Medical
Designs, Inc. (“MDI”) in connection with the sale of MDI
14968 THOMPSON v. PAUL
debt and stock. Barnhart assured Rubin, one of the prospec-
tive investors, that one of MDI’s lenders, Star Bank, would
increase the amount of funding for MDI. Barnhart also
assured Weiss, an attorney for Rubin, that Star Bank would
have no problem with the contemplated investment by Rubin.
However, in truth, MDI was already in default on a loan from
Star Bank, and the contemplated investment in MDI would
constitute further default. Barnhart knew this, but told Weiss
that everything between MDI and Star Bank was “fine,” and
discouraged him from contacting Star Bank.
[4] The Sixth Circuit, sitting en banc, held that Barnhart
could be held liable under Section 10(b), even though he had
been representing the seller, and even though his misrepresen-
tations had been made to a non-client prospective investor.
The court wrote:
One fundamental question posed by this case is
whether enterprising attorneys may gratuitously tout
their clients’ securities unconstrained by the general
duty imposed by the securities laws not to make
materially misleading statements in connection with
the sale of such securities.
...
There is nothing special about Barnhart’s status as
an attorney that negates his Rule 10b-5 duty to dis-
close, a duty that ordinarily would devolve under
Rule 10b-5 upon a third party under these circum-
stances. Although under Rule 10b-5(b) and its pre-
decessor, “only those individuals who had an
affirmative obligation to reveal what was allegedly
omitted can be held liable as primary participants in
the alleged deception[, a] duty to disclose naturally
devolves on those who have direct contacts with ‘the
other side.’ ” SEC v. Coffey, 493 F.2d 1304, 1315
(6th Cir. 1974). “Direct contacts may take many
THOMPSON v. PAUL 14969
forms. . . . ” Id. at 1315. n.24. . . . [T]he conversa-
tions between Barnhart and the plaintiffs clearly
were instances of “direct contacts” sufficient to give
rise to the duty to disclose.
...
In sum, while an attorney representing the seller in
a securities transaction may not always be under an
independent duty to volunteer information about the
financial condition of his client, he assumes the duty
to provide complete and nonmisleading information
with respect to subjects on which he undertakes to
speak. . . . When Barnhart consented to speak to
Rubin and Weiss concerning the status of MDI’s
relationship with Star Bank, and about Star Bank’s
likely reaction to a substantial loan from Rubin and
[another investor], he assumed a duty to speak fully
and truthfully on those subjects.
Id. at 266-68 (first set of brackets in original).
[5] In Trust Company of Louisiana v. N.N.P., Inc., 104 F.3d
1478 (5th Cir. 1997), an attorney representing a seller of debt
made representations of a material fact in a letter sent to a
prospective purchaser of the debt. The Fifth Circuit held that
the attorney was liable under Section 10(b) because he
“knowingly and with scienter made material misstatements in
connection with the purchase of a security.” Id. at 1491.
[6] In Kline v. First Western Government Securities, 24
F.3d 480 (3d Cir. 1994), a Chicago law firm prepared opinion
letters describing the tax consequences of securities that its
client was offering for sale. Purchasers of the securities
brought suit under Section 10(b) against the firm that had pre-
pared the letters. The Third Circuit noted that the firm pre-
pared the letters with knowledge that they would be presented
to potential purchasers of the securities. The court held that
14970 THOMPSON v. PAUL
the law firm could be held liable under Section 10(b) for
material misrepresentations and omission in the letters: “We
conclude . . . that attorneys may be liable for both misrepre-
sentations and omissions where the result of either is to render
an opinion letter materially inaccurate or incomplete.” Id. at
485-86.
[7] Finally, in Ackerman v. Schwartz, 947 F.2d 841 (7th
Cir. 1991), Schwartz, an attorney representing sellers of
fraudulent tax shelters, wrote an opinion letter stating that
purchasers of the shelters were entitled to federal tax credits
and deductions. The Seventh Circuit held that because Sch-
wartz knew that his letter would be used to sell the shelters,
he could be held liable under Section 10(b) for material mis-
statements contained in the letter. “Although the lack of duty
to investors means that Schwartz had no obligation to blow
the whistle, . . . Schwartz cannot evade responsibility to the
extent he permitted the promoters to release his letter.” Id. at
848.
[8] The rule that emerges from Rubin, Trust Company of
Louisiana, Kline, and Ackerman is clear. An attorney who
undertakes to make representations to prospective purchasers
of securities is under an obligation, imposed by Section 10(b),
to tell the truth about those securities. That he or she may
have an attorney-client relationship with the seller of the
securities is irrelevant under Section 10(b). We therefore con-
clude, in accordance with the rule articulated in our sister cir-
cuits, that the L&R defendants are not protected from liability
under Rule 10(b) by the fact that they were representing
YP.Net and CEO Tullo at the time they made their alleged
misrepresentation of fact to Thompson.
[9] We hold that Thompson has alleged sufficient facts in
her complaint to survive a Rule 12(b)(6) motion to dismiss
her Section 10(b) claim against the L&R defendants. Thomp-
son alleged sufficient facts in her complaint to establish eco-
nomic loss and loss causation as well. See Stoneridge, 128
THOMPSON v. PAUL 14971
S. Ct. at 768. Because the district court concluded, incor-
rectly, that Thompson’s Section 10(b) claim had to be dis-
missed based on Arizona law, the court did not reach the
question of whether the complaint satisfies the heightened
pleading requirements of the PSLRA. See 15 U.S.C. § 78u-
4(b)(1)-(2). In the interest of judicial efficiency, we decide
that question now rather than remand to the district court.
Without burdening the reader with a detailed recounting of
the complaint beyond that provided, supra, we simply say that
Thompson’s complaint, pleading a violation of Section 10(b),
satisfies the heightened standard of the PSLRA. See Tellabs,
127 S. Ct. at 2509-11.
2. Alternate Ground
The L&R defendants urge an alternate ground for affirming
the district court’s dismissal of Thompson’s Section 10(b)
claim. Even assuming that Thompson’s complaint states a
claim for a violation of Section 10(b), they contend in their
brief to us that “Thompson’s appeal does not challenge the
district court’s conclusion that Thompson knew of the crimi-
nal investigation at the time of defendant George Paul’s [one
of the L&R attorney’s] alleged statement [at the April 22 set-
tlement meeting] that there was no such investigation.” The
L&R defendants characterize the district court’s “conclusion”
as a finding, and contend that “Thompson’s failure to appeal
from [that] finding[ ] means that the district court’s dismissal
of [that] claim[ ] must be affirmed.” They write, “[t]he district
court properly concluded, expressly relying on Atari [Corp. v.
Ernst & Whinney, 981 F.2d 1025 (9th Cir. 1992)], that
Thompson could not have justifiably relied on a statement
that she clearly knew was false.”
[10] The premise of the L&R defendants’ argument is that
the district court made a factual finding that on April 22,
2004, Thompson knew that the L&R attorneys’ representation
that Tullo was not being criminally investigated was false.
Because Thompson knew the representation of the L&R attor-
14972 THOMPSON v. PAUL
neys was false, the argument goes, she could not reasonably
have relied on them. This argument is frivolous.
First, the L&R defendants have misread the district court’s
order. For the convenience of the reader, we reproduce the
relevant paragraph, already quoted above. That paragraph is
as follows:
A section 10(b) action requires justifiable reliance
on alleged misrepresentations. Atari Corp. v. Ernst
& Whinney, 981 F.2d 1025 (9th Cir. 1992). The
securities laws create liability for misrepresentation
only in the event of a “substantial likelihood that the
misrepresentation significantly altered the total mix
of information that the investor possesse[d].” Id. at
1030. “If the investor already possesses information
sufficient to call the representations into question, he
cannot claim later that he relied on or was deceived
by the lie.” Id. As noted above, Ms. Thompson
[“]had no right to rely on statements made by the
attorneys opposing [her].” Linder, 943 P.2d at 765.
Thompson, 402 F. Supp. 2d at 1115. In this paragraph, the dis-
trict court notes correctly that a Section 10(b) plaintiff must
show “justifiable reliance” on alleged misrepresentations. The
court then quotes statements from Atari to the effect that an
investor who “already possesses information sufficient to call
the representations into question” cannot succeed in a claim
under Section 10(b). However, the court after quoting Atari,
makes no factual finding that Thompson possessed informa-
tion that Tullo was being investigated criminally. Instead, the
district court relies upon the Arizona Supreme Court’s deci-
sion in Linder by concluding that, as a matter of law, Thomp-
son “had no right to rely on statements by the attorneys
opposing her.”
Second, even if it were possible (which we think it is not)
to read the district court’s order as the L&R defendants sug-
THOMPSON v. PAUL 14973
gest, the district court could not have made such a factual
finding. The district court was ruling on a Rule 12(b)(6)
motion to dismiss for failure to state a claim. All properly
pleaded allegations in Thompson’s complaint had to be taken
as true. Thompson specifically alleged in her complaint that
she “did not know of the falsity of the communications and
representations” by the L&R attorneys. Compl. ¶ 51. “[A]s a
result, [she] relied upon the communications and representa-
tions of the [L&R attorneys] and thought they had been truth-
ful.” Id.The question is not whether Thompson knew that Tullo had
been criminally investigated at some time in the past. The
question, rather, is whether he was being investigated, or still
being investigated, on April 22, 2004. It may turn out, on
summary judgment or at trial, that the L&R defendants will
be able to show that on April 22 Thompson knew that Tullo
was being, or still being, criminally investigated. But the dis-
trict court had no way of knowing this in the context of a Rule
12(b)(6) motion, and its order does not purport to make any
factual finding to that effect. We therefore conclude that the
L&R defendants’ alternate argument fails.
B. Certification to the Arizona Supreme Court
After the district court had entered its order dismissing all
of Thompson’s claims, but before entry of final judgment,
Thompson moved for reconsideration of its dismissals, asking
the district court to certify the following question to the Ari-
zona Supreme Court: “Whether a lawyer is prohibited from
making a material misrepresentation to the opposing party
during settlement negotiations, and whether the opposing
party has the right to rely on that representation.” Thompson
hoped that the answer of the Arizona Supreme Court would
lead the district court to reverse its dismissal of her Section
10(b) claim and its dismissal of her state-law misrepresenta-
tion claims.
14974 THOMPSON v. PAUL
The district court denied Thompson’s motion on the ground
that she had unduly delayed asking for certification. Because
the L&R defendants’ liability under Section 10(b) is governed
by federal rather than state law, Thompson’s appeal of the
district court’s refusal to certify is moot with respect to that
claim. However, it is not moot with respect to her state-law
misrepresentation claims.
[11] There is a presumption against certifying a question to
a state supreme court after the federal district court has issued
a decision. A party should not be allowed “a second chance
at victory” through certification by the appeals court after an
adverse district court ruling. In re Complaint of McLinn, 744
F.2d 677, 681 (9th Cir. 1984). See also Enfield v. A.B. Chance
Co., 228 F.3d 1245, 1255 (10th Cir. 2000) (“Although the
issues raised by the City are novel and somewhat difficult, the
City did not seek certification until after it received an adverse
ruling from the district court. That fact alone persuades us that
certification is inappropriate.”); Perkins v. Clark Equip. Co.,
Melrose Div., 823 F.2d 207, 209-10 (8th Cir. 1987) (noting
that request for certification was not made “until after the
motion for summary judgment had been decided against
them,” and stating that this “practice . . . should be discour-
aged. Otherwise, the initial federal court decision will be
nothing but a gamble with certification sought only after an
adverse ruling.”).
[12] Certification of open questions of state law to the state
supreme court can “in the long run save time, energy, and
resources and helps build a cooperative judicial federalism,”
but “[i]ts use in a given case rests in the sound discretion of
the federal court.” Lehman Bros. v. Schein, 416 U.S. 386, 391
(1974). See also Coughlin v. Tailhook Ass’n, 112 F.3d 1052,
1063 (9th Cir. 1997). We hold that the district court did not
abuse its discretion in denying Thompson’s motion for recon-
sideration asking the district court to certify the question of
state law to the Arizona Supreme Court. We therefore affirm
the district court’s decision on this issue.
THOMPSON v. PAUL 14975
Conclusion
We reverse the district court’s dismissal under Rule
12(b)(6) of Thompson’s claim under Section 10(b). We hold
that Thompson’s complaint states a claim upon which relief
can be granted under Section 10(b). We affirm the district
court’s denial of Thompson’s motion to reconsider and to cer-
tify a question of state law to the Arizona Supreme Court. No
issue affecting defendant Capitol Detective Agency was
appealed. Costs on appeal are to be divided equally between
Thompson and the L&R defendants.
REVERSED and REMANDED in part. AFFIRMED in
part.