Shearman & Sterling LLP | Securities Litigation Blog | Northern District Of California Denies Motion To Remand Putative Class Action Asserting Both Securities Act And State Law Claims<br >  
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  • Northern District Of California Denies Motion To Remand Putative Class Action Asserting Both Securities Act And State Law Claims

    On August 10, 2018, United States District Judge Phyllis J. Hamilton of the United States District Court for the Northern District of California denied a motion to remand to state court a putative securities class action against digital currency issuer Ripple Labs, Inc., one of its subsidiaries, and its Chief Executive Officer.  Coffey v. Ripple Labs Inc., No. 18-cv-03286-PJH (N.D. Cal. Aug. 10, 2018).  Plaintiff, a purchaser of XRP, Ripple’s digital currency, sued defendants in California state court, alleging violations of the Securities Act of 1933 (the “Securities Act”) and California’s blue sky statute.  Plaintiff alleges that defendants’ sale of XRP to investors in an initial coin offering (in which digital assets are sold to consumers in exchange for legal tender or other cryptocurrencies) constituted an unregistered sale of securities in violation of the Securities Act and the California Corporations Code.  Defendants removed the action to federal court pursuant to Section 1453 of the Class Action Fairness Act (“CAFA”), and plaintiff moved to remand the action to state court.  The Court denied plaintiff’s motion, holding that Section 1453 of CAFA provides an independent right to removal that is not precluded by the anti-removal provision in Section 22(a) of the Securities Act, at least in cases not involving a “covered security” as defined in the Securities Litigation Uniform Standards Act (“SLUSA”).

    The Court observed that the core issue in question—whether Securities Act claims bar a defendant from removing an action on the basis of state law claims that independently satisfy CAFA’s jurisdictional requirements—was an issue of first impression.  The parties and the Court agreed that, absent the assertion of Securities Act claims, defendants could properly remove the action under CAFA based on plaintiff’s assertion of state law claims because plaintiff sought $340 million in damages on behalf of a putative class of thousands of investors.  Under Section 1453 of CAFA, a defendant may remove an action if the amount in controversy exceeds $5 million, the putative class has more than 100 members, and the citizenship of any class member is diverse from the citizenship of any one defendant.  A few specific exceptions apply, including—importantly—that securities class actions “concerning a covered security” under SLUSA are not removable under CAFA.  That exception did not apply, however, because XRP is not a security traded on a national securities exchange (or a security issued by an investment company) and thus is not a “covered security.”

    Plaintiff argued that Section 22(a) of the Securities Act (15 U.S.C. § 77v(a)) nevertheless bars removal of any action that includes a Securities Act claim (subject to certain inapplicable exceptions).  The Court disagreed with plaintiff’s contention that the Supreme Court’s decision earlier this year in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), as well as the Supreme Court’s earlier decision in Kircher v. Putnam Funds Trust, 547 U.S. 633 (2006), and the Ninth Circuit’s decision in Luther v. Countrywide Home Loans Servicing LP, 533 F.3d 1031 (9th Cir. 2008), required the Court to remand the action to state court.  In Cyan, the Supreme Court held that state courts have concurrent jurisdiction over class actions alleging only Securities Act violations, and that SLUSA does not override the bar against removal of such actions set forth in Section 22 of the Securities Act.  In Kircher, the Supreme Court addressed only whether an order remanding a case removed under SLUSA is appealable (as opposed to a case removed under CAFA).  The Court thus held that Cyan, another decision purely addressing SLUSA, and Kircher “have nothing to do with CAFA.”  The Court then turned to Luther, in which the Ninth Circuit addressed both CAFA and Section 22(a) of the Securities Act.  Luther held that a state court class action alleging only violations of the Securities Act was not removable under CAFA, because Section 22(a) addressed “a narrow, precise, and specific subject,” i.e., “claims arising under the Securities Act” and was “not submerged by” the more generalized coverage in CAFA.  The Court found that this case is distinguishable from Luther because, here, plaintiff alleged claims under both California law and the Securities Act, and defendants had removed the action based on the California claims, which independently satisfied CAFA’s requirements—a situation that Luther does not address.  The Court also stated that part of Luther’s reasoning has been undermined by the Supreme Court’s decision in Dart Cherokee Basin Operating Co., LLV v. Owens, 135 S. Ct. 547 (2014), which addressed another decision that, like Luther, relied on the Ninth Circuit’s general rule that “removal statutes are strictly construed against removal” and that “any doubt is resolved against removability.”  In Dart Cherokee, the Supreme Court stated that “no antiremoval presumption attends cases invoking CAFA, which Congress enacted to facilitate adjudication of certain class actions in federal court.”  The Court noted that Luther’s rationale was inconsistent with Dart Cherokee.

    The Court then considered the general statutory operation of removal provisions, and pointed out that, under other removal regimes, such as 28 U.S.C. Section 1441’s provision for federal question or diversity jurisdiction, defendants may successfully remove actions without satisfying the requirements of other inapplicable removal provisions.  Emphasizing that a defendant may successfully remove an action from state to federal court by pointing to and complying with a statutory basis for removal rather than every statutory basis for removal, the Court turned to the plain language of CAFA’s removal provision, Section 1453(b).  The Court concluded that, read as a whole, CAFA’s plain language “creates original jurisdiction for and removability of all class actions that meet the minimal requirements and do not fall under one of the limited exceptions.”  The Court also compared and contrasted Section 1453 with Section 1441(a), the general removal statute, which includes a broader clause “excepting” removal if such exception is expressly provided by any statute, and concluded that Section 1453 says nothing about incorporating Section 1441(a)’s broader exception clause.

    While adding that it need not address CAFA’s purpose or legislative history because Section 1453’s plain language is unambiguous, the Court noted that those considerations support the same conclusion.  Citing Dart Cherokee’s indication that CAFA’s provisions should be read broadly with a strong preference that interstate class actions be heard in federal court if properly removed, the Court pointed out that granting plaintiff’s motion to remand would contradict the general independence of the removal provisions and CAFA’s purpose.

    In sum, the Court concluded that CAFA is a valid basis for removal in Securities Act class actions not involving a “covered security” where the plaintiff asserts both Securities Act and state law claims.  The decision, while potentially useful to defendants in some cases, is likely to be of limited impact given that securities class action plaintiffs rarely assert state law claims and most such cases involve covered securities as defined in SLUSA.  

    Because a Court of Appeals can accept an immediate appeal of a CAFA removal decision, it will soon be clear whether this decision will be appealed to the Ninth Circuit.
    CATEGORY: Jurisdiction