Nasd Dispute Resolution v. Judicial Council of Ca, C-02-3486-SC.

CourtUnited States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
Citation232 F.Supp.2d 1055
Docket NumberNo. C-02-3486-SC.,C-02-3486-SC.
PartiesNASD DISPUTE RESOLUTION, INC. and New York Stock Exchange, Inc., Plaintiffs, v. JUDICIAL COUNCIL OF CALIFORNIA; Ronald M. George, in his official capacity as Chair of the Judicial Council, et. al., Defendants.
Decision Date12 November 2002
232 F.Supp.2d 1055
NASD DISPUTE RESOLUTION, INC. and New York Stock Exchange, Inc., Plaintiffs,
JUDICIAL COUNCIL OF CALIFORNIA; Ronald M. George, in his official capacity as Chair of the Judicial Council, et. al., Defendants.
No. C-02-3486-SC.
United States District Court, N.D. California.
November 12, 2002.

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Ethan D. Dettmer, F. Joseph Warin, Mark A. Perry, Gibson, Dunn & Crutcher, LLP, San Francisco, CA, John J. Flood, NASD, Inc., Washington, DC, for NASD Dispute Resolution, Inc.

Douglas W. Henkin, Milbank, Tweed, et al., New York City, Linda Dakin-Grimm, Milbank, Tweed, et al., Los Angeles, CA, M. Benjamin Valerio, Los Angeles, CA, for New York Stock Exchange, Inc.

Joseph W. Cotchett, Cotchett, Pitre & Simon, Burlingame, CA, Mary Maloney Roberts, Michael Bergeisen, Judicial Council of Cal., Admin, Office of Courts, San Francisco, CA, for Judicial Council of California, Ronald M. George, Marvin R. Baxter, Richard D. Alrich, Norman L. Epstein, Richard D. Huffman, Gail Andrea Andler, Aviva K. Bobb, Robert A. Dukes, Leonard P. Edwards, William C. Harrison, Brad R. Hill, Donna J. Hitchens, Ronald M. Sabraw, Barbara Ann Zuniga, Martha Escutia, Ellen M. Corbett, John J. Collins, Pauline W. Gee, Rex A. Heeseman, Thomas J. Warwick, Jr., William C. Vickery

Giovanni P. Prezioso, Securities and Exchange Com'n, Washington, DC, for Securities and Exchange Com'n.

Amy J. Winn, Atty. General's Office, Sacramento, CA, for Atty. Gen. of State of Cal.

Paul R. Kiesel, Raymond P. Boucher, Kiesel, Boucher & Larson, Beverly Hills, CA, for State Senate of Cal. Legislature.


CONTI, District Judge.


In September 2001, the California legislature enacted SB 475, a bill imposing new regulations upon arbitration. The new law directed the California Judicial Council to draft ethical standards for arbitrators and provided that failure to abide by those standards could be grounds for vacating an arbitration award. By its terms, SB 475 is applicable to all arbitrations in California. NASD Dispute Resolution, Inc. and the New York Stock Exchange, Inc. ("Plaintiffs") have sued the Judicial Council, however, seeking a declaratory judgment that, as applied to them, the ethical standards set by the Judicial Council are preempted by federal law. The Judicial Council has moved for dismissal, arguing that this court lacks subject matter jurisdiction, that the case fails to present a justiciable controversy, that the suit is barred by the Eleventh Amendment, and that this court should abstain from deciding the case. For the following reasons, this Court finds that it has subject matter jurisdiction and that Plaintiffs have presented a justiciable claim, but concludes that the claim is barred by the Eleventh Amendment. Accordingly, Plaintiffs' claim must be dismissed, and this Court need not reach the issue of abstention.1

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The California Judicial Council, defendant in this case, is a state governmental body created in accordance with the California Constitution. Cal. Const. art. VI, § 6. Its members are drawn mostly from the California Judiciary, though a few are private attorneys. Id. Pursuant to the directives of the California Legislature, the Judicial Council is charged with creating rules and suggesting reforms to ensure the effective administration of justice in California.2

In 2001, the California Legislature passed and Governor Gray Davis signed SB 475, which required the Judicial Council to "adopt ethical standards for all neutral arbitrators effective July 1, 2002." Cal. Code Civ. Proc. § 1281.85. In accordance with this new law, the Judicial Council adopted ethics standards applicable to all arbitrators in California. Those standards include extensive requirements for disclosure by the arbitrator of information possibly relating to potential biases or conflicts of interest. An arbitrator may be disqualified on the basis of this information, and failure to comply with the ethics standards can be grounds for vacating an arbitration award. Cal.Code Civ. Proc. §§ 1281.91, 1286.2. SB 475 did not give the Judicial Council any authority to enforce the ethical standards, however, and no such authority exists elsewhere in California law.

Plaintiffs are national securities exchanges. Each provides arbitration services to its members. Those arbitrations are conducted in accordance with detailed guidelines prepared by the arbitration services but approved, in accordance with federal law, by the United States Securities and Exchange Commission (SEC). Shearson/American Express v. McMahon, 482 U.S. 220, 234, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). Defendants now argue that their obligations under the California standards differ from and conflict with their obligations under their own rules. They also argue that ensuring that their members' arbitrations comply with the California rules would force them to incur substantial recordkeeping expenses and might cost them the services of many of their arbitrators. They have sued the California Judicial Council and, in their official capacity, its members, seeking a declaratory judgment from this court that federal law preempts the California standards.

Defendants argue that the California standards are not preempted. In addition, they assert that this court lacks subject matter jurisdiction over the claims, that the claims raise no justiciable controversy, that the claims are barred by the Eleventh Amendment, and that this court should abstain from hearing the case.


A. Subject Matter Jurisdiction

Federal courts have limited jurisdiction, and Plaintiffs must establish that their claims fall within that limited jurisdiction. Kokkonen v. Guardian Life Insurance Co. of America, 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994). In responding to a motion to dismiss, however, a plaintiff need not offer detailed proof; "general factual allegations of injury resulting from the defendant's conduct may suffice." Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). Plaintiffs assert that this court has diversity and federal question

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jurisdiction, and either must show that a federal question arises out of Plaintiffs' complaint or must establish the existence of complete diversity of citizenship between all defendants and all plaintiffs. 28 U.S.C. § 1331; 28 U.S.C. § 1332.

B. Justiciability

Article III of the U.S. Constitution limits federal courts to resolving cases or controversies. In accordance with Article III, the federal courts may hear only present disputes between parties with concrete, adverse interests. Flast v. Cohen, 392 U.S. 83, 96-97, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968). The federal courts may not issue advisory opinions, hear unripe or moot cases, or decide cases brought by plaintiffs without standing. Id.; Abbott Laboratories v. Gardner, 387 U.S. 136, 148-49, 87 S.Ct. 1507, 18 L.Ed.2d 681 (1967).

In order to have standing, a plaintiff must have suffered "injury-in-fact." Defenders of Wildlife, 504 U.S. at 560, 112 S.Ct. 2130. Such injury must be "concrete and particularized," and "actual or imminent," not "conjectural or hypothetical." Id. (citations omitted). The injury must be "fairly traceable" to the defendants' conduct and must be redressable through the relief sought from the court. Id. at 560-61, 112 S.Ct. 2130.

A case is not ripe until the dispute has metamorphosed from a hypothetical controversy into a present, concrete, conflict. Abbott Laboratories, 387 U.S. at 148, 87 S.Ct. 1507. Ripeness doctrine prevents premature judicial involvement in disputes that might otherwise disappear or become clarified through further factual development. Id. A party need not wait for actual injury to occur, but ripeness requires at least an "immediate dilemma" in which the issues at stake are thoroughly defined, more factual development will provide little more clarity, and delaying adjudication is likely to lead to injury. Id.

C. Eleventh Amendment

The Eleventh Amendment establishes a general bar against suing a state in federal court. Edelman v. Jordan, 415 U.S. 651, 662-63, 94 S.Ct. 1347, 39 L.Ed.2d 662 (1974). Eleventh Amendment immunity extends beyond the state itself and also prohibits naming state agencies and departments as defendants. Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, 100, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984); Shaw v. State of Cal. Dept. of Alcoholic Beverage Control, 788 F.2d 600, 603-04 (9th Cir.1986).

The Eleventh Amendment does not, however, prohibit suing state agents in their official capacity where the plaintiff seeks to prevent those agents from violating federal law. Ex parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed. 714 (1908); Agua Caliente Band of Cahuilla Indians v. Hardin, 223 F.3d 1041, 1045 (9th Cir. 2000). Ex parte Young set forth the "fiction" that since the state lacks the power to grant its agents authority to act in violation of federal law, any official who acts in violation of federal law, even if he does so in accordance with state law, ceases to be a state agent, steps outside the Eleventh Amendment's immunity, and may be sued in federal court. Ex parte Young, 209 U.S. at 159-60, 28 S.Ct. 441; Agua Caliente Band of Cahuilla Indians, 223 F.3d at 1045.

The fiction has limits. The relief sought must be prospective and cannot implicate the state treasury. Edelman, 415 U.S. at 663, 94 S.Ct. 1347; Agua Caliente Band of Cahuilla Indians, 223 F.3d at 1045. The defendant sued must be a state officer with some connection to the enforcement of the challenged law. Ex parte Young, 209 U.S. at 156-57, 28 S.Ct. 441; Los Angeles

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County Bar Ass'n v. Eu, 979 F.2d 697, 704 (9th Cir.1992). Finally, allowing the suit to proceed must be consistent with the federalism principles underlying 11th Amendment Jurisprudence;...

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