(Article from Securities Law Alert, March 2015)
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Pursuant to 28 U.S.C.A. § 1331, federal courts “have original jurisdiction of all civil actions arising under the . . . laws . . . of the United States” (emphasis added). On March 16, 2015, the Southern District of New York held that Section 1331’s “arising under” requirement was not met in a shareholder derivative suit concerning Avon Products’ alleged failure to comply with the Foreign Corrupt Practices Act (“FCPA”). Pritika v. Moore, 2015 WL 1190157 (S.D.N.Y. 2015) (Gardephe, J.). The court found that “exercising subject matter jurisdiction over [p]laintiff’s state law claims would be tantamount to recognizing a private right of action under the FCPA.”
Southern District of New York Explains that Section 1331 Confers Jurisdiction Over State Law Claims Only In “Exceptional” Cases
The Southern District of New York observed that “[f]ederal courts may exercise jurisdiction over state [law-based] claims” pursuant to Section 1331 “where it appears that some substantial, disputed question of federal law is a necessary element of one of the well-pleaded state [law] claims.” In determining whether jurisdiction under Section 1331 is proper, courts must consider whether the state law claim “(1) necessarily raise[s] a stated federal issue” that is “(2) actually disputed and (3) substantial, which (4) a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities” (quoting Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005)). The court underscored that state law-based claims that warrant Section 1331 jurisdiction are “extremely rare exceptions to the general rule that a suit arises under the law that creates the cause of action.”
Southern District of New York Determines That Plaintiff’s Derivative Suit Does Not Satisfy Grable’s Substantiality Requirement Because It Does Not Implicate the FCPA’s Validity or Its Requirements
The court found that plaintiff’s state law-based derivative action, brought on behalf of nominal defendant Avon, did not satisfy Grable’s substantiality requirement. While the court recognized that “Avon’s compliance with the FCPA [would] be one of the critical issues in this litigation,” the court determined that the “case [did] not implicate the validity of the FCPA or the requirements that the Act imposes.” Rather, the case “involve[d], at best, the application of a federal legal standard to private litigants’ state law claims.”
The court rejected plaintiff’s contention that it should exercise Section 1331 jurisdiction over plaintiff’s claims because “a court may be required to interpret certain provisions of the [FCPA]” “in determining whether [d]efendants’ conduct [violated] FCPA standards.” The court explained that the same argument could be made “for every case that involves state law claims invoking a federal standard.” The court also found meritless plaintiff’s assertion that Section 1331 jurisdiction was warranted because “the FCPA is not commonly the subject of litigation.” The court explained that in Merrell Dow Pharmaceuticals, Inc. v. Thompson, 478 U.S. 804 (1986), the Supreme Court “explicitly rejected the argument that the novelty of [an] issue” can justify the exercise of Section 1331 jurisdiction.
Southern District of New York Finds That Exercising Section 1331 Jurisdiction Over Plaintiff’s Claims Would Disturb a “Congressionally Approved Balance of Federal and State Judicial Responsibilities” with Respect to FCPA Enforcement
The court further determined that it “could not exercise subject matter jurisdiction here ‘without disturbing [the] congressionally approved balance of federal and state judicial responsibilities” with respect to FCPA enforcement (quoting Grable, 545 U.S. 308). The court explained that “Congress intended that federal court litigation under the FCPA would proceed by way of SEC and DOJ enforcement actions, . . . and not via private suit.”
The court found that “exercising subject matter jurisdiction over [p]laintiff’s state law claims would be tantamount to recognizing a private right of action under the FCPA.” Taking “[s]uch an approach would ‘open the floodgates’ to federal court litigation of private disputes raising issues under the FCPA, an outcome directly contrary to Congress’s apparent intent.” The court therefore dismissed plaintiff’s derivative suit for lack of subject matter jurisdiction.