Santelices v. Apttus Corp.
| Decision Date | 02 October 2020 |
| Docket Number | Case No. 19-cv-07414-HSG |
| Parties | JEFFREY SANTELICES, Plaintiff, v. APTTUS CORPORATION, et al., Defendants. |
| Court | U.S. District Court — Northern District of California |
Pending before the Court is Plaintiff Jeffrey Santelices' motion to remand, as well as several administrative motions to seal. See Dkt. Nos. 20, 24, 29, 35. The Court finds this matter appropriate for disposition without oral argument and the matter is deemed submitted. See Civil L.R. 7-1(b). For the reasons detailed below, the Court GRANTS the motion to remand. The Court further GRANTS the administrative motions to seal.
Plaintiff originally filed this action in San Mateo Superior Court on February 8, 2019, against his former employer, Defendant Apttus Corporation. See Dkt. No. 1-1, Ex. 1 at 7.1 Plaintiff alleged that Apttus failed to pay him his severance benefits as well as the value of certain stock options. See id. Plaintiff brought causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of the California Labor Code for failing to pay wages and waiting time penalties. See id. On October 10, 2019, Plaintiff filed a First Amended Complaint ("FAC"), adding Defendants Project Everest Parent, LLC and Project Everest Holdings, LLC, and as relevant to this motion, an additional cause of action. See id. at 71.
Plaintiff alleges that as part of his compensation as a Vice President for Apttus Corporation, Apttus offered him stock options and restricted stock units (collectively, "stock options"), which entitled him to receive common stock in the company. See id. at ¶ 3. Plaintiff further alleges that under the terms of the related stock plan and stock option agreements, "no modification of a[] [stock] Option shall . . . impair the Optionee's rights or increase the Optionee's obligations." Id. at ¶¶ 3, 21-23. In August 2018, however, Apttus's board of directors sold Apttus at less than its fair market value. See id. at ¶¶ 4, 42. And as part of this transaction, Defendants agreed to convert Plaintiff's stock options to less valuable stock options in the buyer's company. Id. at ¶¶ 4-6. These converted stock options entitled Plaintiff to receive what he claims are inferior "Class C Units." See id. at ¶¶ 6-8, 44-47. Unlike common stock, these Class C Units "do not receive any distributions until the liquidation preferences associated with Class A Units and Class B Units are paid in full." See id. at ¶¶ 8, 47, 51. Plaintiff alleges that these Class C Units are thus "potentially worthless." Id. Plaintiff further alleges that Defendants did not inform him that his outstanding stock options would be impaired. See id. at ¶¶ 9, 44, 49, 51.
On the basis of these facts, Plaintiff brought a new cause of action for violation of the California Corporate Securities Act of 1968, Cal. Corp. Code § 25110. See id. at ¶¶ 94-110. Under § 25110, "[i]t is unlawful for any person to offer or sell in this state any security in an issuer transaction . . . unless such sale has been qualified," or is exempt or otherwise not subject to qualification. See Cal. Corp. Code § 25110. According to Plaintiff, the stock options are "securities" under the California Act, and Defendants issued unqualified securities to Plaintiff in violation of § 25110. See FAC at ¶¶ 10, 94-110. Plaintiff further notes that Defendants could not "avail [themselves] of any exemption to qualification" because they had not complied with Rule 701 of the Securities Act of 1933, 17 C.F. R. § 230.701, as required under California law. See id. at ¶¶ 106-107 (citing Cal. Corp. Code § 25102(o)).
Defendants removed this action on November 8, 2019, alleging that it arises under federal law under 28 U.S.C. § 1331 based on this new cause of action under the California Corporate Securities Act. See Dkt. No. 1. Plaintiff moves to remand the action. See Dkt. No. 24.
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A suit may be removed from state court to federal court only if the federal court would have had subject matter jurisdiction over the case. See 28 U.S.C. § 1441(a); see Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987) (). "If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded." 28 U.S.C. § 1447(c). The party seeking removal bears the burden of establishing federal jurisdiction. See Provincial Gov't of Marinduque v. Placer Dome, Inc., 582 F.3d 1083, 1087 (9th Cir. 2009). "The removal statute is strictly construed, and any doubt about the right of removal requires resolution in favor of remand." Moore-Thomas v. Alaska Airlines, Inc., 553 F.3d 1241, 1244 (9th Cir. 2009).
Plaintiff argues that Defendants improperly removed this action on the basis of federal question jurisdiction. Federal district courts have original jurisdiction over all civil actions "arising under the Constitution, laws, or treaties of the United States." See 28 U.S.C. § 1331. Such jurisdiction "exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). Thus, a case may arise "aris[e] under" federal law for the purpose of 28 U.S.C. § 1331 "when federal law creates the cause of action asserted." Gunn v. Minton, 568 U.S. 251, 257 (2013). However, a case raising a federal defense does not "arise under" federal law "even if the defense is anticipated in the complaint, and even if both parties admit that the defense is the only question truly at issue in the case." See Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 14 (1983); see also Vaden v. Discover Bank, 556 U.S. 49, 60 (2009) .
Here, it is undisputed that Plaintiff's FAC contains exclusively state law causes of action. See generally FAC. Although the FAC references Rule 701 in arguing that Defendants are not exempt from the qualification requirements under the California Corporate Securities Act, SeeFAC at ¶¶ 106-107, merely referencing a federal statute in anticipation of Defendants' possible defenses is insufficient to confer federal jurisdiction.
The Supreme Court has nevertheless recognized that in "certain cases federal-question jurisdiction will lie over state-law claims that implicate significant federal issues." See Grable & Sons Metal Prod., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308, 312 (2005). Under Grable, a federal court may exercise jurisdiction over a state law claim only if (1) the action necessarily raises a federal issue that is (2) disputed and (3) substantial, and if (4) the Court may entertain the case without disturbing the congressionally approved balance of federal and state judicial responsibilities. Id. at 314. Defendants urge that this case presents such a "significant federal issue." See Dkt. No. 27 at 3-5.
Defendants argue that the Court has federal question jurisdiction because to find Defendants liable under § 25110, the Court will necessarily have to interpret and apply federal law. See Dkt. No. 27 at 4. As noted in Section I above, § 25110 prohibits the sale of unqualified securities. See Cal. Corp. Code § 25110. However, the California Corporate Securities Act contains certain exemptions to qualification under § 25110. Specifically, under § 25102(o), "[t]he following transactions are exempted":
An offer or sale of any security . . . issued pursuant to an option plan or agreement, where the security at the time of issuance or grant is exempt from registration under the Securities Act of 1933, as amended, pursuant to Rule 701 . . ., the provisions of which are hereby incorporated by reference into this section, provided that (1) the terms of any purchase plan or agreement shall comply with Sections 260.140.42, 260.140.45, and 260.140.46 of Title 10 of the California Code of Regulations, (2) the terms of any option plan or agreement shall comply with Sections 260.140.41, 260.140.45, and 260.140.46 of Title 10 of the California Code of Regulations, and (3) the issuer files a notice of transaction in accordance with rules adopted by the commissioner no later than 30 days after the initial issuance of any security under that plan, accompanied by a filing fee as prescribed by subdivision (y) of Section 25608.
Cal. Corp. Code § 25102(o) (emphasis added). The Court acknowledges that if Defendants raise § 25102(o) as a defense to Plaintiff's state law cause of action, it may have to determine, among several other conditions, whether Defendants are exempt from registration under the provisions ofRule 701. However, it is not enough that the case has the potential to implicate a federal issue. For the Court to exercise federal jurisdiction, the federal issue must be "substantial." See Grable, 545 U.S. at 314. Defendants make no effort to explain why determining whether they are exempt from registration under Rule 701 would be substantial. See Dkt. No. 27 at 4-5. Simply calling the issue substantial does not make it so.
Rule 701 allows privately-held companies to compensate their employees with securities without incurring the obligations of public registration and reporting under federal securities laws. See 17 C.F.R. § 230.701. The Rule requires, inter alia, that any company issuing more than $10 million in stock options over a 12-month period provide detailed financial statements and other disclosures to the option recipients. See id. Although perhaps a fact-intensive exercise, determining whether Defendants complied with Rule 701 does not appear to involve "the validity, construction or effect of federal law" that is required to be...
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