Dennis v. Hart

A suit is improperly removed from state court where a plaintiff asserts a state-law cause of action and when a plaintiff’s allegations, under the well-pleaded complaint rule, are insufficient to support federal jurisdiction.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires corporations to hold advisory votes at least every three years to approve executive compensation. The PICO Holdings, Inc. (“PICO”) Board of Directors (“the Board”) increased executive compensation; a majority of shareholders voted against PICO’s compensation plan. The Board took no action, so various shareholders filed shareholder derivative actions in state court against PICO and the Board (collectively, “Defendants”). Ronald Dennis and George Assad (collectively, “Plaintiffs”) filed claims including breach of fiduciary duty and unjust enrichment. Both cases were removed to federal court. Defendants moved for dismissal; Plaintiffs moved to remand. The district court dismissed parts of each case before remanding for lack of jurisdiction. Plaintiffs appealed the dismissals; Defendants cross-appealed the remands. On appeal, Defendants argued that, under the well-pleaded complaint rule, federal jurisdiction was available because the advisory vote spawned the Plaintiffs’ suits, and the complaints referenced the vote. The Ninth Circuit was unconvinced. Defendants then argued federal jurisdiction was proper via: (1) Section 27 of the Securities Exchange Act of 1934 (“the Exchange Act”); (2) the “significant federal issue” rule; and (3) the complete preemption doctrine. First, the panel reasoned that Section 27 did not apply since the Plaintiffs’ suits did not look to enforce any liability or duty created by the Exchange Act. Second, with the “significant federal issue” rule, Defendants may have a strong federal defense, but a federal defense cannot confer federal jurisdiction. Third, the panel disagreed that the complete preemption doctrine applied because it was unconvinced that Congress intended to completely displace state law with the Exchange Act. The panel held that the suits were improperly removed from state court where Plaintiffs asserted state-law causes of action. Further, Plaintiffs’ allegations, under the well-pleaded complaint rule, were insufficient to support federal jurisdiction. VACATED AND REMANDED.