Commercial Litigation and Arbitration

Well-Pleaded Complaint Rule vs. Artful Pleading Doctrine: Is the Plaintiff Really the Master of Its Complaint?

From Romano v. Kazacos, 2010 U.S. App. LEXIS 13220 (2d Cir. June 29, 2010), in which the issue was whether the complaint was subject to the Securities Litigation Uniform Standards Act:

A. Master of the Complaint

Appellants initially contend that the District Court impermissibly looked beyond the face of the amended complaints, which make no reference to the federal securities laws, when it found that SLUSA applied. Appellants maintain that, under the "master of the complaint" rule, they are "free to avoid federal jurisdiction by pleading only state claims even where a federal claim is also available." Marcus v. AT&T Corp., 138 F.3d 46, 52 (2d Cir. 1998). Since jurisdiction "may not be sustained on a theory that the plaintiff has not advanced," Merrell Dow Pharms. Inc. v. Thompson, 478 U.S. 804, 809 n.6 (1986), appellants contend that they are entitled to avoid SLUSA by not asserting federal claims in state proceedings.

Appellants are incorrect. Whether federal courts have federal question jurisdiction over an action is typically governed by the "well-pleaded complaint" rule, pursuant to which federal question jurisdiction exists only if "plaintiff's statement of his own cause of action shows that it is based" on federal law. Vaden v. Discover Bank, 129 S. Ct. 1262, 1275 (2009); Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). Under the well-pleaded complaint rule, then, plaintiff is the master of his complaint and is free to avoid federal jurisdiction by "pleading only state claims even where a federal claim is also available." *** However, there exists a corollary to the well-pleaded complaint rule — the "artful pleading" rule — pursuant to which plaintiff cannot avoid removal by declining to plead "necessary federal questions." Rivet v. Regions Bank, 522 U.S. 470, 475 (1998). If the artful pleading rule applies, courts look beyond the face of an "artfully pled" complaint to determine whether plaintiff has "cloth[ed] a federal law claim in state garb" by pleading state law claims that actually arise under federal law. *** If such is the case, the reviewing court will "uphold removal even though no federal question appears on the face of the complaint." Rivet, 522 U.S. at 475.

The artful pleading rule applies when Congress has either (1) so completely preempted, or entirely substituted, a federal law cause of action for a state one that plaintiff cannot avoid removal by declining to plead "necessary federal questions," id., or (2) expressly provided for the removal of particular actions asserting state law claims in state court, see Beneficial Nat'l Bank v. Anderson, 539 U.S. 1, 6 (2003) (explaining the Price-Anderson Act, 42 U.S.C. § 2014(hh), presents an exception to the well-pleaded complaint rule because it "expressly provides for removal of [tort actions arising out of nuclear accidents] brought in state court even when they assert only state-law claims"). Application of the first prong is a bit tricky because SLUSA is a statute of preclusion, rather than preemption. But its effect is the same: where plaintiffs proceed as a class of fifty or more, state law securities claims are no longer available to them and federal law, which compels the dismissal of those claims, controls. Application of the second prong is straightforward. Since SLUSA expressly provides for the removal of covered class actions, it falls under the "removal" exception to the well-pleaded complaint rule. 15 U.S.C. § 78bb(f)(1). Consequently, we are free to look beyond the face of the amended complaints to determine whether they allege securities fraud in connection with the purchase or sale of covered securities. See Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294, 298 (3d Cir. 2005) ("No matter how an action is pleaded, if it is a covered class action involving a covered security, removal is proper.") (quotations and alterations omitted); see also Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 310 (6th Cir. 2009) ("Courts may look to--they must look to--the substance of a complaint's allegations in applying SLUSA. Otherwise, SLUSA enforcement would reduce to a formalistic search through the pages of the complaint for magic words . . . and nothing more.").

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