Federal Jurisdiction — Grable & ‛Arising Under“

The Supreme Court held in Grable & Sons Metal Prods., Inc. v. Darue Engr’g & Mfg., 545 U.S. 1 (2005), that federal question jurisdiction may exist over a state law claim that entails an important, embedded federal issue. Since that decision, the lower courts have been grappling with its ramifications. Two district court opinions from last week are illustrative.

Fagin v. Gilmartin, 2007 U.S. Dist. LEXIS 7256 (D.N.J. Feb. 1, 2007), was a shareholder derivative action against Merck and its former subsidiary, Medco, alleging unjust enrichment and fiduciary duty claims. The defendants argued that, even though the plaintiffs alleged only state law causes of action, the claims turned on a substantial federal issue — namely, the conduct that allegedly constituted a breach of fiduciary duty and unjust enrichment involved acts violating federal securities laws. Judge Stanley Chesler rejected this argument, holding that merely because ‛one component of the alleged wrongdoing was, in essence, making false filings with the SEC, do[es] not transform the state claims into claims seeking redress for federal violations and do[es] not raise a substantial and disputed question of federal law.“ However, Judge Chesler noted that two prior District of New Jersey decisions from mid-January came to conflicting conclusions on similar facts. Compare Stechler v. Sidley Austin Brown & Wood, LLP, No. 05-3485, 2006 WL 90916 (D.N.J. Jan. 13, 2006) (no federal jurisdiction in action for fraudulent inducement of plaintiff to enter tax shelter despite relevance of issues of federal tax law) with Wietschner v. Gilmartin, No. 02-4879, 2003 U.S. Dist. LEXIS 18997 (D.N.J. Jan. 13, 2003) (finding federal jurisdiction for state law claims based on allegations that the defendant directors failed to monitor the company's financial disclosures as required by federal law.

Like Judge Chesler in Fagin, Judge Sarah Vance rejected the defendants’ assertion of federal jurisdiction over Katrina-related insurance claims in Accardo v. Lafayette Ins. Co., 2007 U.S. Dist. LEXIS 6859 (E.D. La. Jan. 30, 2007). The defendants argued that the plaintiffs’ lawsuits required the Court to construe a federal statute, the National Flood Insurance Act of 1968, 42 U.S.C. §§ 4001-4129, because plaintiffs also sought adjudication of any claims arising from their federal flood policies. However, as the plaintiffs’ claims against the defendants were based on their contractual rights under their individual homeowners’ policies and did not urge any particular reading of federal law in support of their claims, the Judge Vance rejected the applicability of Grable. She observed that ‛[t]he Supreme Court has since stated that only a ‘slim category’ of cases will satisfy the Grable paradigm“ (citing and quoting Empire Healthchoice Assur., Inc. v. McVeigh, 126 S. Ct. 2121, 2137 (2006)).

The primary focus of Judge Vance’s opinion in Accardo is an interesting analysis of the fraudulent joinder doctrine, concluding that fraudulent joinder can — and here did — exist where a diverse defendant was joined with a nondiverse defendant as to whom there is no joint, several or alternative liability, and where the claim against the diverse defendant had no real connection to the claim against the nondiverse defendant. The Court held that the aggregation of multiple plaintiff homeowners in one suit against multiple defendant homeowner insurers raised no common issues of fact ‛other than generic evidence of the speed of the hurricanes' winds and plaintiffs' residence in St. Bernard Parish.“ Once the suits were viewed individually, only one satisfied the amount in controversy requirement. And supplemental jurisdiction was lacking under Exxon Mobil Corp. v. Allapattah Servs., 545 U.S. 546 (2005) because there was no common nucleus of operative fact giving rise to the several claims.

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