DocketNumber: Civil Action No. 18-10508-NMG
Citation Numbers: 327 F. Supp. 3d 345
Judges: Gorton
Filed Date: 8/16/2018
Status: Precedential
Modified Date: 7/25/2022
This is a dispute between the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth ("the Enforcement Section" or "plaintiff") and Scottrade, Inc., a Massachusetts registered broker-dealer ("Scottrade" or "defendant"). Plaintiff alleges that Scottrade violated its internal policy by hosting incentivized sales contests, thus violating state law. Scottrade responds that the Enforcement Section is merely attempting to enforce federal standards that were set forth in the now-vacated "Fiduciary Rule." After plaintiff filed an administrative complaint with the Securities Division, defendant removed the action to this Court. Pending before the Court is plaintiff's motion to remand.
I. Background
The Secretary of the Commonwealth of Massachusetts, William F. Galvin, is responsible for administrating the Massachusetts Securities Act, M.G.L. c. 110A, and "may employ such assistants and others employees as are required ... for the administration and enforcement" of the Act. M.G.L. c. 9, § 10A. Pursuant to that latter provision, the Secretary established the Securities Division of the Office of the Secretary of the Commonwealth to
administer and enforce [the Securities Act,] M.G.L. c. 110A and [the regulations promulgated thereunder],950 C.M.R. 10 .00 through 14.413.
950 C.M.R. § 14.406(A)(1).
In February, 2018, the Enforcement Section filed an administrative complaint against Scottrade with the Securities Division. "In anticipation of its obligations under the upcoming Fiduciary Rule," the Enforcement Division alleges, Scottrade added an Impartial Conduct Standards section to its Brokerage and Investment Advisor Compliance Manual that provides:
The firm does not use or rely upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended or reasonably expected to cause associates to make recommendations that are not in the best interest of Retirement *349Account clients or prospective Retirement Account clients.
Because Scottrade held sales contests between June and July 2017 ("the Q3 sales contest") and between August and September, 2017 ("the Q4 sales contest"), the Enforcement Division claims,
Scottrade violated its own internal policies regarding the Fiduciary Rule, thereby failing to act in good faith to comply with the Fiduciary Rule.
The Enforcement Section alleges that Scottrade's conduct 1) constitutes "unethical or dishonest conduct or practices" in the securities business, in violation of M.G.L. c. 110A, § 204(a)(2)(G), and 2) demonstrates that Scottrade "failed reasonably to supervise agents, investment adviser representatives or other employees", in violation of M.G.L. c. 110A § 204(a)(2)(J).
The "Fiduciary Rule" to which the complaint refers is a group of seven rules that expand the "investment advice fiduciary" definition in the Employee Retirement Income Security Act of 1974 ("ERISA"), codified as amended at
Various business groups have challenged the Rule, alleging that 1) it was inconsistent with the governing statute, 2) the DOL lacked authority to regulate the affected servicers and providers, 3) the DOL imposed legally unauthorized contract terms, 4) the Rule violated the First Amendment and 5) the Rule was arbitrary and capricious. See Chamber of Commerce of United States of Am. v. United States Dep't of Labor,
Scottrade simultaneously removed this administrative action to the United States District Court for the District of Massachusetts. It asserts that this Court has federal question jurisdiction because the matter "arises under and is governed by ERISA". Pending before the Court is plaintiff's motion to remand the case to the Enforcement Section of the Massachusetts Securities Division.
II. Status of Fifth Circuit vacatur
As a preliminary matter, the Court notes that Scottrade proceeds under the assumption that the decision of the Fifth Circuit vacating the Fiduciary Rule binds this Court. At oral argument, its counsel posited that
if a federal appellate court vacates an order, it isn't that it existed and no longer exists; it's as if it never existed at all.... I don't know that there's a contrary view, frankly.
That opinion is itself contrary to
the traditional conception that a judge does not so much strike down an unconstitutional law as refuse to apply it.
*350Samuel Bray, Multiple Chancellors: Reforming the National Injunction,
As articulated in Marbury v. Madison,
As the following analysis may demonstrate, whether or not the Fifth Circuit has vacated the Fiduciary Rule on a nationwide and universal basis is not dispositive of this motion. The statement of that court that it vacates "the Fiduciary Rule in toto" appears immediately after it explains that the "comprehensive regulatory package is plainly not amendable to severance." See Chamber of Commerce,
III. Motion to remand
Plaintiff asserts that neither the complete preemption nor substantial federal question exception to the well-pleaded complaint rule applies and, as a result, federal question jurisdiction does not exist and removal was improper. Removal was also purportedly unwarranted because the administrative complaint was not initially brought in a state court which is a prerequisite for removal.
Defendant responds that federal question jurisdiction exists because ERISA completely preempts the plaintiff's claims and resolution of the state law claims necessarily involves consideration of a substantial issue of federal law. Scottrade contends, moreover, that the action was brought in the equivalent of a state court under the relevant controlling authority, thus satisfying the removal statute.
District courts "have original jurisdiction of all civil actions arising under" the laws of the United States.
A "cause of action arises under federal law only when the plaintiff's well-pleaded complaint" raises an issue of federal law. Metro. Life Ins. Co. v. Taylor,
There are two common exceptions to the well-pleaded complaint rule.
First, under the federal ingredient doctrine, a well-pled complaint arises under the laws of the United States if a state law cause of action "requires resolution of a substantial question of federal law" in dispute between the parties. Franchise Tax Bd. of State of Cal. v. Constr. Laborers Vacation Tr. for S. California,
Second, under the "artful pleading" or "complete preemption" doctrine, if a court concludes that a plaintiff has attempted to defeat removal by omitting necessary federal questions, "it may uphold removal even though no federal question appears on the face" of the complaint. Rivet v. Regions Bank of Louisiana,
Scottrade submits that the administrative complaint encompasses both exceptions and that the causes of action therefore "arise under" the laws of the United States.
A. Federal Ingredient
The Enforcement Section contends that federal ingredient jurisdiction does not exist because analysis of the federal Fiduciary Rule is unnecessary to determine whether Scottrade violated the Massachusetts Securities Act. Scottrade rejoins that this case is of "central concern" to ERISA, such that resolving the claims here would involve resolution of a substantial issue of federal law.
Federal ingredient jurisdiction is "controversial" and should be applied sparingly. Almond,
(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in a federal court without disrupting the federal-state balance of power.
Municipality of Mayaguez v. Corporacion Para el Desarrollo del Oeste, Inc.,
No federal issue is necessarily raised from the face of plaintiff's administrative complaint. That complaint alleges two claims under Massachusetts state law: 1) that Scottrade "engaged in [ ] unethical *352or dishonest conduct or practices" in violation of M.G.L. c. 110A, § 204(a)(2)(G) and 2) that Scottrade "failed reasonably to supervise agents, investment adviser representative or other employees" in violation of M.G.L. c. 110A, § 204(a)(2)(J).
A court could resolve both claims without any analysis of the DOL Fiduciary Rule. It is true that Scottrade adopted its Impartial Conduct policy in response to the Fiduciary Rule but this Court need not interpret the Fiduciary Rule nor rule on its validity to determine whether Scottrade violated that policy.
The Enforcement Section regularly brings actions under § 204 when companies fail to comply with their internal policies. See, e.g., InreMerrill Lynch, Pierce, Fenner & Smith Inc.,
The same is true where companies fail to supervise their employees reasonably. See InreSII Investments, Inc.,
B. Complete preemption
The Enforcement Section avers that complete preemption is improper because ERISA's preemption provisions do not apply to IRAs and because it, as a state agency, would not have standing to sue under that statute. Scottrade responds that ERISA's preemption provisions do apply to the retirement accounts at issue in this case and that a functional analysis of the administrative warrants preemption.
ERISA contains an exclusive civil enforcement provision at § 502(a),
integrated enforcement mechanism, ERISA § 502(a),29 U.S.C. § 1132 (a), is a distinctive feature of ERISA, and essential to accomplish Congress' purpose of creating a comprehensive statute for the regulation of employee benefit plans.
Aetna Health Inc. v. Davila,
In Davila, the Supreme Court explained that a cause of action is completely preempted under ERISA
if an individual, at some point in time, could have brought his claim under ERISA § 502(a)(1)(B), and [ ] there is no other independent legal duty that is implicated by a defendant's actions ....
1. Application to IRAs
The Enforcement Section contends that its current action is not removable because ERISA's preemption provisions do not apply to IRAs. That contention is unavailing. Many IRAs are subject to Title 1 of ERISA because they fall within the definition of employee benefit plans and are subject to ERISA preemption. See, e.g., Cline v. Industrial Maintenance Engineering & Contracting Co.,
2. Complete preemption under Davila
The Enforcement Section's second, and more plausible, argument is that its claim cannot be preempted under § 502(a) because it is not entitled to sue under ERISA. Defendant rejoins that plaintiff relies on out-of-date and inapposite case law.
Relying on the rule of In re Pharm. Indus. Average Wholesale Price Litig.,
standing to sue under Section 502(a) ... [and] plaintiffs' claim falls within the scope of an ERISA provision that plaintiffs can enforce via § 502(a).
Defendant responds that Davila, decided after the District of Massachusetts opinion in Wholesale Price, established a test in which only the claims, not the litigant, are relevant.
This Court agrees with the Enforcement Section that Davila established a multi-part test in which the adjudicating forum considers both the type of entity bringing the claim and the substance of the claim itself. In Davila, the Supreme Court concluded that
if an individual, at some point in time, could have brought his claim under ERISA § 502(a)(1)(B), and where there is no other independent legal duty that is implicated by a defendant's actions, then the individual's cause of action is completely pre-empted by ERISA § 502(a)(1)(B).
Davila,
The Second Circuit Court of Appeals ("Second Circuit") has separated this test into multiple "prongs". Under the first prong, concerning whether an individual can bring a claim under § 502(a), that court requires the forum to consider
whether the plaintiff is the type of party that can bring a claim pursuant to § 502(a)(1)(B); and second, [ ] whether the actual claim that the plaintiff asserts can be construed as a colorable claim for benefits pursuant to § 502(a)(1)(B).
Montefiore Med. Ctr. v. Teamsters Local 272,
At first blush, it may appear that complete preemption depends entirely upon the claims asserted and not the party asserting them. The brief analysis in Negron-Fuentes v. UPS Supply Chain Sols.,
are in substance duplicated or supplanted by the ERISA cause of action (in which case removal based on complete preemption is proper) or instead whether all are directed at violation of a legal duty ... independent of ERISA or the plan terms, thus defeating removal.
It is not surprising, however, that Negron made no mention of the plaintiff's ERISA standing because the plaintiff there was the prototype of a party who can sue under ERISA. The defendant in that case argued that § 502(a) completely preempted the action because the claim sought "ERISA benefits from an ERISA plan on behalf of an ERISA plan participant." See
In the present case, by contrast, the Enforcement Section is not "an individual ... [who] could have brought his claim under" § 502(a). See Franchise Tax Bd. of State of Cal. v. Constr. Laborers Vacation Tr. for S. California,
Scottrade agrees that the Enforcement Section "does not have standing to sue under ERISA." Nonetheless, it contends, this Court still has subject matter jurisdiction. That contention, however, puts the cart before the horse. Given that no federal ingredient jurisdiction exists, this Court possesses subject matter jurisdiction only if one of plaintiff's claims is completely *355preempted. Because complete preemption under ERISA requires that "the plaintiff is the type of party that can bring a claim", see Montefiore,
In a last gasp, defendant suggests that the issue in this case is of such central importance to ERISA that this Court should re-characterize the complaint as a federal common law action. The Court declines that invitation. Courts are cautioned to be "careful not to allow federal common law to rewrite ERISA's carefully crafted statutory scheme." State St. Bank & Tr. Co. v. Denman Tire Corp.,
Because, the Enforcement Section is not the kind of party that can bring a claim pursuant to § 502(a), ERISA does not completely preempt either claim in the administrative complaint and neither claim "arises under" ERISA. This Court lacks subject matter jurisdiction and plaintiff's motion to remand will be allowed.
C. State court
Plaintiff submits that removal also was unauthorized because the Enforcement Section's administrative complaint was not initially brought in a state court. Defendant retorts that, under the First Circuit's functional approach to the removal statute, the Securities Division is sufficiently similar to a state court to justify removal in this case.
The removal statute provides that, as a general matter,
any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant ....
28 U.S.C. 1441(a).
Notwithstanding the text of that statute, this circuit has explained that a state administrative "board may ... be a court for removal purposes." Volkswagen de Puerto Rico, Inc. v. Puerto Rico Labor Relations Bd.,
a number of relevant factors, including the Board's procedures and enforcement powers, the locus of traditional jurisdiction over breaches of contract, and the respective state and federal interests in the subject matter and in the provision of a forum.
The First Circuit has not yet applied the Volkswagen factors in a subsequent case and more recent caselaw in other circuits has rejected the functional approach. See Porter Tr. v. Rural Water Sewer & Solid Waste Mgmt. Dist. No. 1,
*356Oregon Bureau of Labor & Indus. ex rel. Richardson v. U.S. W. Commc'ns, Inc.,
1. Agency Functions and Powers
Under the first prong of the Volkswagen test the court evaluates whether the state agency exercises powers and utilizes procedures that are sufficiently judicial in nature to constitute a "state court" for removal purposes.
There is no doubt that the Securities Division conducts adjudicatory proceedings. Respondents receive fair notice of the proceeding and the charges against them. M.G.L. c. 30A, § 11(1). A record of the proceedings is kept.
Courts applying the functional test have, however, found non-adjudicatory powers to be even more significant than judicatory powers. Whelchel v. Regus Mgmt. Grp., LLC,
[a]cts that collectively comprise the pursuit of an enforcement action fit snugly within the realm of traditional prosecutorial functions.
Of equal importance to the first prong, the Securities Division does not conduct *357proceedings between third parties. Cf. Ins. Com'r of Puerto Rico v. Doral Ins. Agency, Inc., No. CIV 05-2230CCC,
Although the Securities Division possesses many court-like powers, on balance, it does not function as a court for removal purposes in this case.
The other Volkswagen factors do not revive Scottrade's theory.
2. Traditional jurisdiction over the subject matter
Scottrade insists that the administrative complaint is an ERISA action in "state law clothing" and that the federal courts are the proper forum for ERISA claims.
As this Court has already observed, the claims in this action can be resolved without reference to federal law. The Enforcement Section commences adjudicatory proceedings in the Securities Division by filing "a Notice of Adjudicatory Proceeding and an Administrative Complaint." 950 C.M.R. § 10.06(a). Whereas the Volkswagen court discerned that courts have been the traditional forum for breaches of contract, see Volkswagen,
Thus, the second Volkswagen factor favors remand.
3. Federal and state interests
Defendant, reiterating that plaintiff is simply attempting to "enforce compliance with the standards of the federal fiduciary rule," submits that the federal interest in regulating employee benefit plans is great.
Removal may be appropriate where ERISA expressly preempts a state law claim. See, e.g., Nationwide Mut. Ins. v. N.H. Dept. of Labor, No. 07-CV-241-PB,
Accordingly, the third Volkswagen prong also favors plaintiff.
4. Analogous case law
District Courts within the First Circuit faced with the removal question involving agencies similar to the Securities Division have recognized that removal is inappropriate. Thus, the Massachusetts Commission Against Discrimination was deemed not court-like because its non-adjudicatory powers were more significant than its adjudicatory powers and because the agency was not considered judicial under state law. See Whelchel,
The Massachusetts Securities Division is not a court for the purposes of the removal statute. That conclusion, standing alone, compels this Court to allow plaintiff's motion to remand.
ORDER
For the foregoing reasons, plaintiff's motion for remand (Docket No. 10) is ALLOWED .
So ordered.