Commercial Litigation and Arbitration

Federal Jurisdiction — The Current Status of Grable

From Stern v. Baldwin, 2010 U.S. Dist. LEXIS 27709 (D.N.J. Mar. 24, 2010):

This matter comes before the Court on Plaintiff Bernard Stern's motion for remand, pursuant to 28 U.S.C. § 1447(c). ***

On June 9, 2009, Plaintiff Bernard Stern, a shareholder of Quest Diagnostics, Inc. ("Quest"), filed a derivative suit against the directors and officers of Quest and its wholly-owned subsidiary Nichols Institute Diagnostics, Inc. ("NID") in the Superior Court of New Jersey. The Complaint asserts two claims under state law: breach of fiduciary duty and waste of corporate assets.

These claims are based on alleged and admitted misconduct by Quest and NID. The latter manufactured and marketed faulty medical test kits to various U.S. laboratories. The faulty results caused the submission of false claims for reimbursement to federal healthcare providers and the Veterans Administration. Then, in April 2004, the CEO of one of these laboratories ("the Relator") brought a qui tam action under the False Claims Act ("FCA"). In October 2004, the United States intervened, and in October 2008 the parties reached an agreement [in which a felony guilty plea and multimillion fines were paid].***

The instant suit alleges breach of fiduciary duty and waste of corporate assets on the basis of these terms. ***

In Grable [& Sons Metal Prod., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308, 313-14 (2005)], the Court sustained federal jurisdiction over a state-law quiet title claim, in which the central issue was the validity of Respondent Darue's record title. *** To satisfy Petitioner Grable's tax delinquency, the Internal Revenue Service ("IRS") seized the real property at issue and then sold it to Darue.... Under 26 U.S.C. § 6335, the IRS was required to give Grable notice of the seizure; however, Petitioner Grable later brought a quiet title action in state court, asserting that Darue's record title was invalid because the Internal Revenue Service had seized the parcel without giving the requisite notice under § 6335(a). Darue removed the action to federal court as presenting a federal question, stating that the title claim depended on the interpretation of the notice provision in the federal tax law. *** The Supreme Court agreed. The Court found that notice was an "essential element" of the claim, that the federal statute's meaning was "actually in dispute," and that it was "the only legal and factual issue contested." ***

A year later, the Supreme Court further limited Grable. Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677 (2006). In Empire, a health insurance carrier for federal employees brought suit in federal court, seeking reimbursement of benefits paid to an insured following the settlement of a state court tort action, in which the insured received damages from parties at fault. *** The Supreme Court found that federal jurisdiction was unavailing, since the claim was "triggered, not by the action of any federal department, agency, or service [as in Grable], but by a personal-injury action launched in state court." *** Whereas the dispute in Grable "centered on the action of a federal agency (IRS) and its compatibility with a federal statute," ***, the action brought in Empire was "poles apart," as it centered on the share of a state court tort settlement properly payable to the insurance provider. ***

The Supreme Court held in Empire that "fact-bound and situation-specific" state claims cannot be "squeezed into the slim category Grable exemplifies." Empire, 547 U.S. at 701. This, however, is precisely what Defendants seek to do. Grable involved a pure issue of federal law — the construction of a notice provision in the federal tax code — which was the sole issue in the case and would control the disposition of many other cases. The instant case raises no such "pure issue of federal law"; instead, this is a garden variety shareholder derivative suit, which will depend heavily on its facts. Here, the FCA is not an "essential element" of the claim, that the federal statute's meaning is not "actually in dispute," and it is not "the only legal and factual issue contested." Grable, 545 U.S. at 315. Thus, remand is appropriate.

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