Opinion
No. C 02-02287 CW
August 1, 2002
ORDER GRANTING PLAINTIFF'S MOTION TO REMAND TO STATE COURT
Plaintiff moves to remand this shareholder derivative action to State court (Docket #8). Defendants oppose the motion. The matter was heard on July 26, 2002. Having considered all of the papers filed by the parties and oral argument on the motion, the Court GRANTS Plaintiff's motion to remand the case to State court. Plaintiff shall not recover attorneys' fees and costs. Defendants' motion to dismiss is denied as moot (Docket #11).
BACKGROUND
Plaintiff is a holder of JDS Uniphase stock. On April 11, 2002, Plaintiff filed this shareholder derivative action in Santa Clara County Superior Court on behalf of JDS Uniphase. The complaint seeks relief under California law for alleged breaches of fiduciary duties, abuse of control, waste of corporate assets and unjust enrichment by the named defendant officers and directors of the corporation. The factual allegations underlying this shareholder derivative action are substantially similar to the factual allegations at issue in twenty-seven separate securities class actions currently pending before this Court and six other derivative actions filed on behalf of JDS Uniphase.
On May 10, 2002, Defendants filed a Notice of Removal pursuant to the Securities Litigation Uniform Standards Act of 1998, Pub.L. No. 105-353, 112 Stat. 3227 (1998) (SLUSA), asserting that this action is a "covered class action" under the SLUSA. See 15 U.S.C. § 77p. Plaintiff filed a timely motion to remand the action to State court.
LEGAL STANDARD
A defendant may remove a civil action filed in State court to federal district court so long as the district court could have exercised original jurisdiction over the matter. 28 U.S.C. § 1441(a). Title 28 U.S.C. § 1447 provides that if at any time before judgment it appears that the district court lacks subject matter jurisdiction over a case previously removed from State court, the case must be remanded. 28 U.S.C. § 1447(c). On a motion to remand, the scope of the removal statute must be strictly construed. See Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). "The `strong presumption' against removal jurisdiction means that the defendant always has the burden of establishing that removal is proper." Id. Courts should resolve doubts as to removability in favor of remanding the case to State court. See id.
Ordinarily, federal question jurisdiction is determined by examining the face of the plaintiff's properly pleaded complaint. Caterpillar, Inc. v. Williams, 482 U.S. 386, 392 (1987). When a plaintiff has suffered an injury that could give rise to both federal and State causes of action, the plaintiff "is free to ignore the federal cause of action and rest the claim solely on a state cause of action." Garibaldi v. Lucky Food Stores, Inc., 726 F.2d 1367, 1370 (9th Cir. 1984). A plaintiff may not, however, artfully plead a complaint to avoid federal jurisdiction by "omitting from the complaint federal law essential to his claim, or by casting in state law terms a claim that can be made only under federal law." Olguin v. Inspiration Consol. Copper Co., 740 F.2d 1468, 1472 (9th Cir. 1984). "Once an area of state law has been completely pre-empted, any claim purportedly based on that pre-empted state law is considered, from its inception, a federal claim, and therefore arises under federal law." Caterpillar, 482 U.S. at 392.
DISCUSSION
A. Plaintiff's Motion to Remand
Plaintiff seeks to remand this case to State court, asserting, among other things, that this action is an "exclusively derivative action" and is therefore not a "covered class action" under the SLUSA. 15 U.S.C. § 77p(f)(2)(B), 78bb(f)(5)(C) ("the term `covered class action' does not include an exclusively derivative action brought by one or more shareholders on behalf of a corporation"). Defendants argue that this case falls under the provisions of the SLUSA and was properly removed.
1. The Securities Litigation Uniform Standards Act
In 1995 Congress determined that meritless and abusive private securities lawsuits were harming the nation's securities markets. H.R. Conf. Rep. No. 104-369, at 31-32 (1995). It responded by passing the Private Securities Litigation Reform Act of 1995, Pub.L. 104-67, 109 Stat 737 (1995) (the Reform Act). The Reform Act set tougher procedural and substantive standards for private securities suits in federal courts. Among other things, the Reform Act established heightened pleading requirements, an automatic stay of discovery pending motions to dismiss and a safe harbor for certain forward-looking statements. 15 U.S.C. § 78u-4, 77z-1.
Three years later, Congress determined that class action attorneys were attempting to circumvent the Reform Act's requirements by filing frivolous securities lawsuits in State court and under State law, rendering virtually all of the Reform Act's protections inapplicable. Congress responded by enacting the SLUSA. Congress expressly found that "a number of securities class action lawsuits have shifted from Federal to State courts," and that "this shift has prevented [the Reform Act] from fully achieving its objectives." See SLUSA § 2(1)-(3). Congress concluded that "to prevent [these] State private securities class action lawsuits . . . from being used to frustrate the objectives of the [Reform Act], it is appropriate to enact national standards for securities class action lawsuits involving nationally traded securities, while . . . not changing the current treatment of individual lawsuits." Id. § 2(5).
The SLUSA resolves these problems by foreclosing the option of filing class actions in State court or under State law. See H.R. Conf. Rep. No. 105-803, at 13-15 (1998). The general preemption provision of the SLUSA broadly precludes class actions under State law where they allege facts actionable under the federal securities laws:
(b) CLASS ACTION LIMITATIONS. — No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging —
(1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security . . .15 U.S.C. § 77p(b). The next paragraph of the SLUSA authorizes the removal of such class actions from State court to federal district court: "(c) REMOVAL OF COVERED CLASS ACTIONS. — Any covered class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b)." 15 U.S.C. § 77p(c). Taken together, these provisions authorize the removal and subsequent dismissal of any (1) "covered class action," (2) based on State law, (3) that alleges an "untrue statement or omission of material fact in connection with the purchase or sale" (4) of a "covered security."
2. "Covered Class Action"
The broad preclusive effect of the SLUSA only applies to "covered class actions." A "covered class action," however, "does not include an exclusively derivative action brought by one or more shareholders on behalf of the corporation." Id. § 77p(f)(2)(B). The parties dispute whether this is an "exclusively derivative action" that may be adjudicated in State court.
Defendants do not dispute that this action is a shareholder derivative action. They contend, however, that it is not "exclusively" derivative so as to fall outside the preemptive reach of the SLUSA. Defendants emphasize that Congress did not exempt all derivative actions from the SLUSA. See H.R. Conf. Rep. No. 105-803 at 14 (1998) ("the legislation provides for an exception from the definition of `class action' forcertain shareholder derivative actions") (emphasis added). The disposition of this motion, therefore, depends on the definition of the term "exclusively" as used in the SLUSA.
Defendants contend that "exclusively" should be read to support the underlying policy of the SLUSA. "The purpose of this title is to prevent plaintiffs from seeking to evade the protections the federal law provides against abusive litigation by filing suit in State, rather than Federal court." H.R. Conf. Rep. No. 105-803 at 13. Defendants note that the allegations underlying this derivative action mirror those that underlie numerous federal class actions against JDS Uniphase to which the SLUSA applies. Defendants appear to be advocating that the Court define "exclusively" in a functional manner. If the complaint could have alleged claims that would be subject to the SLUSA, the SLUSA should apply even if the plaintiff only brought derivative claims under State law.
The language of the statute, however, does not support Defendants' narrow construction of what constitutes an "exclusively derivative" action. Rather, the common understanding of an "exclusively derivative" action is an action that asserts only derivative claims. This action satisfies that definition. "The test to distinguish between derivative claims and direct/class action claims is well-defined. In a derivative suit, a shareholder (or limited partner) sues on behalf of the corporation (or partnership) for harm done to the corporation (or partnership). By contrast, a Plaintiff bringing an individual, direct action must be injured directly or independently of the corporation (or partnership)." Mallia v. PaineWebber, Inc., 889 F. Supp. 277, 282 (S.D. Tex., 1995) (internal citations omitted).
The present action seeks recovery, on behalf of JDS Uniphase, against JDS Uniphase's board members and certain officers for their breaches of fiduciary duties and other violations of California law. The federal securities class actions, on the other hand, seek recovery on behalf of a class of those purchasers of JDS Uniphase securities who were defrauded by the company. The claims made in the two actions, the relief sought, and several of the defendants are separate and distinct. Because Plaintiff's well-plead complaint alleges only derivative claims, this action is "exclusively derivative" within the meaning of 15 U.S.C. § 77p(f)(2)(B). As such, it is not preempted by the SLUSA and removal was improper.
Defendants contend that the well-plead complaint rule is inapplicable here because the SLUSA completely preempts State law claims. This is not so. The SLUSA preempts State law claims of "covered class actions." The well-plead complaint rule applies to determine if the claims at issue are "covered class actions" as de in the statute.
Because this action is exclusively derivative and, therefore, exempted from the preemptive reach of the SLUSA, the Court does not address whether this action would otherwise satisfy the definition of a "covered class action."
Particularly, the Court does not address whether a derivative suit is brought on a "representative basis" within the meaning of the SLUSA or whether this action alleges fraud "in connection with the purchase or sale" of a covered security.
B. Defendants' Motion to Dismiss
Because Plaintiff's motion to remand is granted, the Court will not consider Defendants' motion to dismiss, which is denied as moot.
C. Plaintiff's Request for Attorneys' Fees
Plaintiff requests that the Court award attorneys' fees and costs. On granting a motion to remand, the Court may order the defendant to pay the plaintiff its "just costs and any actual expenses, including attorney fees, incurred as a result of the removal." 28 U.S.C. § 1447(c). The district court is given "wide discretion" by § 1447(c) to determine whether to award fees. Moore v. Permanente Medical Group, Inc., 981 F.2d 443, 447 (9th Cir. 1992); see also Gotro v. R B Realty Group, 69 F.3d 1485 (9th Cir. 1995). A finding of improper purpose is not necessary to support an award of attorneys' fees. See Moore, 981 F.2d at 447.
Defendants had a reasonable basis in law to seek removal of this case, because the SLUSA is a fairly recent law, and the preemption and removal issues raised here have not been resolved in this circuit. Therefore, Plaintiff's request for attorneys' fees and costs is denied.
CONCLUSION
For the foregoing reasons, Plaintiff's motion to remand is GRANTED, but Plaintiff's request for attorneys' fees and costs is DENIED (Docket #8). Defendants' motion to dismiss is denied as moot (Docket #11). The Clerk of Court shall remand the case to the Santa Clara County Superior Court and close the district court case file.
IT IS SO ORDERED.