Court Finds No Substantial Federal Issue Engendered By Claim Of California Option Plan Exemption

Allen Matkins
Contact

Allen Matkins

The United States federal courts are courts of limited jurisdiction.  Therefore, it is not always possible to make a "federal case" out of claim, even when issues of federal law may be involved. 

In Santelices v. Apttus Corp., 2020 U.S. Dist. LEXIS 183322, the plaintiff  was displeased with the handling of his stock options in connection a sale of his former employer.   Consequently, he filed a complaint in California Superior Court alleging, among other things, that the defendants had violated Section 25110 of the California Corporations Code.  The defendants removed the action to the U.S. District Court on the basis of federal question jurisdiction pursuant to  28 U.S.C. § 1331.   

At first blush, this seems a bit mysterious because the plaintiff's claim involved a violation of California, not federal, law.  The defendants, however, argued that the court had federal question jurisdiction because to find Defendants liable under Section 25110, the Court will necessarily have to interpret and apply federal law.  Why?  The defendants apparently intended to argue that the option transactions were exempt pursuant to Section 25102(o) of the Corporations Code and that Section 25102(o) is conditioned upon the exemption in Rule 701 under the federal Securities Act of 1933.  

Judge Haywood S. Gilliam, Jr. declined to keep the case.  He ruled that under Grable & Sons Metal Prod., Inc. v. Darue Eng'g & Mfg.,545 U.S. 308, 312 (2005), a federal court may exercise jurisdiction over a state law claim only if (i) the action necessarily raises a federal issue that is disputed and substantial; and (ii)  the court may entertain the case without disturbing the congressionally approved balance of federal and state judicial responsibilities.  In this case, Judge Gilliam found that whether the defendants complied with Rule 701 did not appear to involve "the validity, construction or effect of federal law" that is required to be considered "substantial" under Grable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Allen Matkins | Attorney Advertising

Written by:

Allen Matkins
Contact
more
less

Allen Matkins on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.