Dennis Ex Rel. PICO Holdings, Inc. v. Hart

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

RONALD DENNIS, derivatively on No. 12-55241

behalf of Pico Holdings, Inc.,

Plaintiff-Appellant, D.C. No.

3:11-cv-02271-

v. WQH-WVG

JOHN R. HART ; RONALD LANGLEY ;

RONALD G. DEUSTER ; RICHARD D.

RUPPERT ; JULIE H. SULLIVAN ;

KRISTINA M. LESLIE; CARLOS C.

CAMPBELL; KENNETH J. SLEPICKA ;

PICO HOLDINGS, INC., Nominal

Defendant,

Defendants-Appellees.

GEORGE ASSAD , Derivatively on No. 12-55266

Behalf of Pico Holdings, Inc.,

Plaintiff-Appellant, D.C. No.

3:11-cv-02269-

v. WQH-BGS

JOHN R. HART ; RONALD LANGLEY ;

ROBERT G. DEUSTER ; RICHARD D.

RUPPERT ; JULIE H. SULLIVAN ;

KRISTINA M. LESLIE; CARLOS C.

2 DENNIS V . HART

CAMPBELL; KENNETH J. SLEPICKA ,

Defendants-Appellees,

PICO HOLDINGS, INC.,

Nominal Party.

RONALD DENNIS, derivatively on No. 12-55282

behalf of Pico Holdings, Inc.,

Plaintiff-Appellee, D.C. No.

3:11-cv-02271-

v. WQH-WVG

JOHN R. HART ; RONALD LANGLEY ;

RONALD G. DEUSTER ; RICHARD D.

RUPPERT ; JULIE H. SULLIVAN ;

KRISTINA M. LESLIE; CARLOS C.

CAMPBELL; KENNETH J. SLEPICKA ;

PICO HOLDINGS, INC., Nominal

Defendant,

Defendants-Appellants.

GEORGE ASSAD , Derivatively on No. 12-55291

Behalf of Pico Holdings, Inc.,

Plaintiff-Appellee, D.C. No.

3:11-cv-02269-

v. WQH-BGS

JOHN R. HART ; RONALD LANGLEY ;

ROBERT G. DEUSTER ; RICHARD D. OPINION

DENNIS V . HART 3

RUPPERT ; JULIE H. SULLIVAN ;

KRISTINA M. LESLIE; CARLOS C.

CAMPBELL; KENNETH J. SLEPICKA ,

Defendants-Appellants,

PICO HOLDINGS, INC.,

Nominal Party.

Appeal from the United States District Court

for the Southern District of California

William Q. Hayes, District Judge, Presiding

Argued and Submitted

June 4, 2013—Pasadena, California

Filed July 31, 2013

Before: Sidney R. Thomas, Barry G. Silverman,

and Raymond C. Fisher, Circuit Judges.

Opinion by Judge Fisher

4 DENNIS V . HART

SUMMARY*

Securities

The panel vacated the district court’s orders in

shareholder derivative suits alleging that a corporation’s

executive compensation policies violated state law.

The suits followed shareholders’ advisory “say-on-pay”

vote on executive compensation pursuant to the Dodd-Frank

Wall Street Reform and Consumer Protection Act. The panel

held that removal of the suits from state court was improper

because the plaintiffs asserted state-law causes of action, and,

under the well-pleaded complaint rule, their allegations

regarding the say-on-pay vote were insufficient to establish

federal-question jurisdiction. The panel rejected defendants’

arguments that federal jurisdiction existed under § 27 of the

Securities Exchange Act of 1934, the “significant federal

issue” rule, or the complete preemption doctrine.

The panel vacated the decisions of the district court with

instructions to remand the cases to state court. The panel

dismissed the cross-appeals for lack of jurisdiction.

*

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

DENNIS V . HART 5

COUNSEL

Kathleen A. Herkenhoff (argued), The Weiser Law Firm,

P.C., San Diego, California; Robert B. Weiser, Brett D.

Stecker, Jeffrey J. Ciarlanto, and Joseph M. Profy, The

Weiser Law Firm, P.C., Berwyn, Pennsylvania, for Plaintiff-

Appellant-Cross-Appellee George Assad.

Louis N. Boyarsky (argued), Lionel Z. Glancy, and Michael

Goldberg, Glancy Binkow Goldberg LLP, Los Angeles,

California, for Plaintiff-Appellant-Cross-Appellee Ronald

Dennis.

Robert W. Brownlie (argued) and Gerard A. Trippitelli, DLA

Piper LLP (US), San Diego, California, for Defendants-

Appellees-Cross-Appellants John R. Hart, Ronald Langley,

Robert G. Deuster, Richard D. Ruppert, Julie H. Sullivan,

Kristina M. Leslie, Carlos C. Campbell and Kenneth J.

Slepicka and nominal party PICO Holdings, Inc.

OPINION

FISHER, Circuit Judge:

The Dodd-Frank Wall Street Reform and Consumer

Protection Act requires corporations to hold periodic advisory

votes on executive compensation. Nominal defendant PICO

Holdings, Inc. held such a vote, and a majority of

shareholders expressed dissatisfaction with PICO’s executive

compensation policies. Soon thereafter, the plaintiffs in these

consolidated cases filed shareholder derivative suits in

California state court, alleging that PICO’s compensation

policies violated state law. The defendants removed the cases

6 DENNIS V . HART

to federal court and argued that Dodd-Frank bars the suits.

The district court dismissed portions of each case and

remanded the remaining portions for lack of jurisdiction. As

we explain below, removal of these cases was improper and

the district court lacked jurisdiction to do anything other than

remand them to state court. Accordingly we vacate the

decisions of the district court with instructions to remand the

cases to state court. We dismiss the defendants’ cross-

appeals for lack of jurisdiction.

BACKGROUND

The Dodd-Frank Wall Street Reform and Consumer

Protection Act (Dodd-Frank) provides that, at least every

three years, public companies must conduct a shareholder

vote “to approve the compensation of executives.” 15 U.S.C.

§ 78n-1(a)(1). However, these “say-on-pay” votes “shall not

be binding on the issuer or the board of directors of an issuer,

and may not be construed . . . (1) as overruling a decision by

such issuer or board of directors; (2) to create or imply any

change to the fiduciary duties for such issuer or board of

directors; [or] (3) to create or imply any additional fiduciary

duties for such issuer or board of directors.” Id. § 78n-1(c).

Nominal defendant PICO Holdings, Inc. is a California

holding company. In 2010, it reported negative net income

and free cash flow.1 Disappointing financial results

notwithstanding, PICO’s board of directors (the Board)

increased executive compensation in 2010. Shareholders, it

appears, were not happy with this. In a May 2011 advisory

vote mandated by Dodd-Frank, 61 percent of shareholders

1

These facts are drawn from the complaints.

DENNIS V . HART 7

voted against the 2010 compensation package. The Board

took no action in response to the vote.

After the vote, the plaintiffs in these cases filed

shareholder derivative actions in California state court against

PICO and the members of the Board. Plaintiff Ronald Dennis

asserted claims for breach of fiduciary duty, gross

mismanagement, contribution and indemnification, abuse of

control, waste, and unjust enrichment. In the “prayer for

relief” section of his complaint, he also requested a

declaration “that the adverse May 13, 2011 advisory

shareholder vote on the PICO Board’s executive

compensation rebutted the business judgment surrounding the

PICO Board’s decisions to increase executive compensation

in 2010.” Plaintiff George Assad asserted claims for breach

of fiduciary duty in association with the Board’s issuance of

false and misleading statements, the Board’s compensation

practices, and the Board’s failure to respond to the say-on-pay

vote. Assad also asserted an unjust enrichment claim.

The defendants removed both cases to federal court. The

defendants moved to dismiss both cases, and both plaintiffs

moved to remand. In Dennis, the district court dismissed the

request for declaratory judgment for failure to state a claim.

It then held that the remaining claims did not state a federal

claim or involve a substantial issue of federal law, declined

to exercise supplemental jurisdiction and remanded the case

to state court. In Assad, the district court dismissed the count

alleging the Board breached its fiduciary duty by failing to

respond to the adverse say-on-pay vote. It then held that the

remaining claims did not state a federal claim or involve a

substantial issue of federal law, declined to exercise

supplemental jurisdiction and remanded the case to state

court.

8 DENNIS V . HART

In each case, the plaintiff appealed the dismissal of parts

of his case, and the defendants cross-appealed the district

court’s decision remanding the remainder of the case to state

court rather than dismissing it on the merits.

STANDARD OF REVIEW

Orders denying remand and granting Federal Rule of

Civil Procedure 12(b)(6) motions to dismiss are both

reviewed de novo. See Proctor v. Vishay Intertechnology

Inc., 584 F.3d 1208, 1218 (9th Cir. 2009).

DISCUSSION

Unless Congress has expressly provided otherwise, a

defendant may remove to federal court “any civil action

brought in a State court of which the district courts of the

United States have original jurisdiction.” 28 U.S.C.

§ 1441(a). “If a case is improperly removed, the federal court

must remand the action because it has no subject-matter

jurisdiction to decide the case.” ARCO Envtl. Remediation,

L.L.C. v. Dep’t of Health & Envtl. Quality of Mont., 213 F.3d

1108, 1113 (9th Cir. 2000). “As a general rule, ‘the presence

or absence of federal-question jurisdiction is governed by the

well-pleaded complaint rule, which provides that federal

jurisdiction exists only when a federal question is presented

on the face of the plaintiff’s properly pleaded complaint.’”

Id. (quoting Caterpillar, Inc. v. Williams, 482 U.S. 386, 392

(1987)) (alterations omitted).

The defendants argue that the well-pleaded complaint rule

confers federal jurisdiction because the say-on-pay vote

precipitated plaintiffs’ suits and the complaints are suffused

with references to the vote. This is insufficient to support

DENNIS V . HART 9

federal jurisdiction under the well-pleaded complaint rule.

See id. (holding that “the fact that ARCO’s complaint ma[de]

repeated references to” federal law was insufficient to confer

jurisdiction). Federal-question jurisdiction does not attach

here, because the plaintiffs’ complaints allege state – not

federal – causes of actions. “As the master of the complaint,

a plaintiff may defeat removal by choosing not to plead

independent federal claims.” Id. at 1114. The defendants

argue that federal jurisdiction nevertheless exists under (1)

Section 27 of the Securities Exchange Act of 1934 (Exchange

Act), (2) the “significant federal issue” rule and (3) the

complete preemption doctrine. We consider each argument

in turn.

A. Section 27 of the Exchange Act Does not Confer

Jurisdiction

The defendants argue that the Exchange Act confers

federal jurisdiction. Section 27 of the Exchange Act vests

federal courts with exclusive jurisdiction over actions

“brought to enforce any liability or duty created by [the

Exchange Act] or the rules and regulations thereunder.”

15 U.S.C. § 78aa(a). Section 27 is inapplicable because the

plaintiffs’ suits do not seek to enforce any liability or duty

created by the Exchange Act or the rules and regulations

thereunder. Nothing in either complaint alleges any implicit

or explicit violation of the say-on-pay provision or any other

provision of the Exchange Act. On the contrary, the parties

agree that PICO did what the Act requires: it held a vote. The

suits allege violations of state law and seek to enforce

liabilities created by state law.

The defendants’ reliance on Sparta Surgical Corp. v.

National Association of Securities Dealers, Inc., 159 F.3d

10 DENNIS V . HART

1209 (9th Cir. 1998), is misplaced. There, we held that

Section 27 conferred federal jurisdiction over a suit alleging

that the National Association of Securities Dealers (NASD)

had violated its own rules about whether to de-list an

offering. See id. at 1211–12. We explained that NASD rules

are created under federal law and “[t]he Exchange Act

requires [NASD] to comply . . . with [its] own rules.” Id. at

1212. Sparta therefore held that “subject matter jurisdiction

was specifically vested in the federal district court under

[Section 27]” because “Sparta’s complaint sought relief based

upon violation of exchange rules.” Id. at 1211. Here, by

contrast, the plaintiffs admit that PICO complied with the

Exchange Act and allege only violations of state laws.

Accordingly, we reject defendants’ contention that Section 27

confers jurisdiction.

B. No Significant Federal Issue Confers Jurisdiction

We next turn to the defendants’ contention that a

significant federal issue warrants the exercise of federal

jurisdiction. Whether or not a complaint pleads a federal

cause of action, “federal-question jurisdiction will lie over

state-law claims that implicate significant federal issues.”

Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg.,

545 U.S. 308, 312 (2005). The defendants argue that

Congress, in enacting Dodd-Frank, went to great lengths to

ensure that say-on-pay votes were merely advisory and to bar

any adverse consequences from a negative vote. This

congressional desire to preclude liability, they say, is a

significant federal issue conferring federal jurisdiction. We

disagree.

The defendants characterize the plaintiffs as

impermissibly seeking to impose liability based on the

DENNIS V . HART 11

adverse say-on-pay vote. The plaintiffs dispute this

characterization, but it is irrelevant to the jurisdictional issue.

If the defendants are correct – both that the plaintiffs are

seeking to impose liability based on the vote and that such

liability has been barred by Congress – then the defendants

might have a very strong federal defense.2 A federal defense,

however, is “inadequate to confer federal jurisdiction.”

Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804, 808

(1986). This is true even when the defense is that federal law

preempts the state law claim. See Marin Gen. Hosp. v.

Modesto & Empire Traction Co., 581 F.3d 941, 945 (9th Cir.

2009) (“The general rule is that a defense of federal

preemption of a state-law claim . . . is an insufficient basis for

original federal question jurisdiction . . . .”).

Aside from their potential defense, the defendants have

identified no significant federal issue that would confer

jurisdiction. Therefore, this theory of federal jurisdiction also

fails.

C. The Doctrine of Complete Preemption Does not Apply

We turn next to defendants’ argument that the doctrine of

complete preemption confers federal jurisdiction. Complete

preemption is “really a jurisdictional rather than a preemption

doctrine, as it confers exclusive federal jurisdiction in certain

instances where Congress intended the scope of a federal law

2

Of course, because we do not have jurisdiction, we express no view as

to the merits of any preemption defense that the defendants may raise in

state court. See Marin Gen. Hosp. v. M odesto & Empire Traction Co.,

581 F.3d 941, 951 (9th Cir. 2009) (“Defendants may assert in state court

their defense of conflict pre-emption under [federal law], as well as any

other defenses they might have.”).

12 DENNIS V . HART

to be so broad as to entirely replace any state-law claim.”

Marin Gen. Hosp., 581 F.3d at 945 (quoting Franciscan

Skemp Healthcare, Inc. v. Cent. States Joint Bd. Health &

Welfare Trust Fund, 538 F.3d 594, 596 (7th Cir. 2008))

(alterations omitted). Complete preemption is a limited

doctrine that applies only where a federal statutory scheme is

so comprehensive that it entirely supplants state law causes

of action. Examples include Section 502 of the Employee

Retirement Income Security Act of 1974 (ERISA), Section

301 of the Labor Management Relations Act (LMRA) and the

usury provisions of the National Bank Act. See Beneficial

Nat’l Bank v. Anderson, 539 U.S. 1, 7–8, 11 (2003); Ansley

v. Ameriquest Mortg. Co., 340 F.3d 858, 862 (9th Cir. 2003).

Nothing in the Exchange Act generally or Section 78n-1

specifically suggests that Congress intended to totally

displace state law. On the contrary, we have recognized that

the Exchange Act does not so fully displace state law as to

invoke complete preemption. See Lippitt v. Raymond James

Fin. Servs., Inc., 340 F.3d 1033, 1042 (9th Cir. 2003) (“We

conclude that the Exchange Act does not create exclusive

jurisdiction for any and all actions that happen to target false

advertising and deceptive sales practices in the sale of

callable CDs.”); see also Matsushita Electric Indus. Co. v.

Epstein, 516 U.S. 367, 383 (1996) (“Congress plainly

contemplated the possibility of dual litigation in state and

federal courts relating to securities transactions.”).

Two other considerations confirm that complete

preemption does not apply here. First, the complete

preemption doctrine applies only to “claim[s] which come[]

within the scope of [a federal] cause of action.” Beneficial

Nat’l Bank, 539 U.S. at 8. Here the parties agree that there is

no federal cause of action for plaintiffs’ claims, which places

this case outside the realm of complete preemption. See

DENNIS V . HART 13

Marin Gen. Hosp., 581 F.3d at 947–49 (holding that complete

preemption did not apply to state law contract and tort claims

because they were not cognizable as federal claims). Second,

§ 78n-1 – unlike ERISA, the LMRA and National Bank Act

– created neither a federal cause of action nor a complex

federal regulatory scheme. On the contrary, it created no new

fiduciary duties and explicitly preserved existing state laws.

See 15 U.S.C. § 78n-1(c) (“The shareholder vote . . . may not

be construed . . . to create or imply any change to the

fiduciary duties of [an] issuer or board of directors . . . [or] to

create or imply any additional fiduciary duties for such issuer

or board of directors . . . .”). This is the exact opposite of the

type of comprehensive federal regime that would justify

complete preemption.

None of defendants’ arguments in favor of federal

jurisdiction are persuasive. Accordingly, removal to federal

court was improper and the district court lacked jurisdiction

to do anything other than remand these cases to state court.

We therefore vacate the district court’s orders with

instructions to remand to state court. We likewise dismiss

defendants’ cross-appeals for lack of jurisdiction.

The plaintiffs are awarded their costs of appeal.

VACATED AND REMANDED.