Commercial Litigation and Arbitration

Derivative Action Predicated on Failure to Prevent Corporate Liability under False Claims Act Is Removable under Grable Even If False Claims Act Liability Is Separately Being Adjudicated in another Federal Action

From Prince v. Berg, 2011 U.S. Dist. LEXIS 1071 (N.D. Cal. Jan. 3, 2011):

This shareholders derivative action was filed in San Mateo Superior Court and was removed here by defendants, based on their contention that the claims arise under federal law. The complaint alleges that nominal defendant Oracle Corporation engaged in a scheme over a number of years to overcharge for products purchased by the federal government. The individual defendants are all directors, and in some cases officers, of Oracle who allegedly authorized, participated in, and/or failed to prevent the alleged overbilling. Plaintiff Philip Prince moves to remand the action to state court, contending that the claims for relief sound in state law only. Prince acknowledges, however, that his state law claims for breach of fiduciary duty and abuse of control depend on whether or not there were underlying violations of the False Claims Act, 31 U.S.C §§ 3729-3733. Prince argues that because Oracle's potential liability under the False Claims Act is presently being litigated in a qui tam action pending against it in another district, the issues of federal law need not be adjudicated in this action. As the existence of False Claim Act violations are nonetheless an element of the wrongdoing that Prince hopes to prove here, and present a substantial, disputed federal issue, the removal based on federal question jurisdiction was proper, and the motion to remand will be denied. ***

Prince makes two basic arguments that his state law claims do not give rise to federal jurisdiction here. First, Prince argues that because the alleged underlying False Claims Act violations are being litigated in the Eastern District of Virginia, and presumably will be resolved there one way or the other, this action "may not" require any determination at all of whether federal law was contravened. Prince asserts that if Oracle is found liable in Frascella [the other qui tam action], defendants here will be collaterally estopped from relitigating the False Claim Act issues, and that if Oracle is exonerated in Frascella, no damages will be recoverable in this action. It is not immediately clear, however, that applying collateral estoppel would be entirely straightforward, given that the individual defendants here are not parties in Frascella and that therefore issues of privity would arise. *** Similarly, despite Prince's implication that he may abandon this action should Frascella resolve in Oracle's favor, his complaint appears to seek to hold defendants liable for embroiling Oracle in this controversy, even if the government ultimately fails to prove its case in the qui tam action. Furthermore, regardless of whether collateral estoppel ultimately is available to Prince as one possible avenue for establishing underlying False Claim Act violations, the existence or non-existence of such violations remains a disputed and substantial issue in this case. By Prince's own argument, his state court claims depend on his ability to prove, whether by application of collateral estoppel or otherwise, the alleged underlying federal claims.

Prince's second argument is independent of the fact that the qui tam action against Oracle is proceeding in the Eastern District of Virginia. Relying on Merrell Dow Pharms., Inc. v. Thompson, 478 U.S. 804 (1986), and similar cases, Prince contends that even to the extent that the alleged False Claims Act violations represent an element that he must prove here to prevail on his state law claims, that does not automatically confer federal jurisdiction. In Merrell Dow, the Supreme Court reasoned that where Congress has declined to provide a private right of action for violations of a federal statute, but state law allows claims based at least in part on a failure to comply with the federal standards, it would undermine Congressional intent for a federal court to exercise "federal-question jurisdiction and provide remedies for violations of that federal statute solely because the violation of the federal statute is said to be a 'rebuttable presumption' or a 'proximate cause' under state law, rather than a federal action under federal law." 478 U.S. at 812.

Merrell Dow plainly supports the proposition that a plaintiff's need to establish a federal law violation as an element of a state law claim does not, in and of itself, necessarily give rise to a basis for federal jurisdiction. *** The touchstone remains, however, whether there is a necessary, disputed, and substantial federal issue, "which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities." Grable, supra, iiiiki 545 U.S. at 312. In that regard, this action is more like Grable than it is like Merrell Dow or other cases that have declined to find federal jurisdiction. This is not a case where Congress has declined to provide a private right of action for a violation of federal standards, and state law has in effect merely incorporated those standards into a private claim. Moreover, because the heart of the claims in this action go to the propriety of Oracle's billing practices with respect to the federal government, issues that are of paramount federal concern and therefore the subject of extensive federal regulation and legislation, the questions of federal law are necessarily substantial, and are appropriately resolved in a federal forum. Accordingly, the motion to remand will be denied.

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