Sparta Surgical Corp. v. National Ass'n of Securities Dealers, Inc.

• Citation: 159 F.3d 1209
• Decision Date: 06 November 1998
• Docket Number: No. 97-15394,97-15394
• Parties: Fed. Sec. L. Rep. P 90,318, 98 Cal. Daily Op. Serv. 8274, 98 Daily Journal D.A.R. 11,493 SPARTA SURGICAL CORPORATION, Plaintiff-Appellant, v. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.; NASDAQ Stock Market, Inc., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1209

159 F.3d 1209

Fed. Sec. L. Rep. P 90,318, 98 Cal. Daily Op. Serv. 8274,

98 Daily Journal D.A.R. 11,493

SPARTA SURGICAL CORPORATION, Plaintiff-Appellant, v. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.; NASDAQ

Stock Market, Inc., Defendants-Appellees.

No. 97-15394.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 10, 1998.

Decided Nov. 6, 1998.

Timothy G. Atkinson, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, Denver, CO, and Ardell Johnson, Korda, Johnson & Wall, San Jose, CA, for plaintiff-appellant.

Douglas R. Cox, Daniel W. Nelson, Gibson, Dunn & Crutcher, Washington, D.C., for defendants-appellees.

Appeal from the United States District Court for the Northern District of California; Marilyn H. Patel, Chief Judge, Presiding. D.C. No. CV-95-03926-MHP.

Before: HUG, Chief Judge, FERNANDEZ and THOMAS, Circuit Judges.

THOMAS, Circuit Judge:

In this appeal we consider what civil remedies are available against a national securities exchange for temporarily de-listing and suspending trading in a stock on the opening day of a public offering. We agree with the district court that defendants are entitled to regulatory immunity, and affirm dismissal of the action.

I

The National Association of Securities Dealers ("NASD") is a non-profit, self-regulatory organization registered pursuant to the Maloney Act amendments to the Securities Exchange Act of 1934 ("Exchange Act"). 15 U.S.C. § 78a et seq.; see also National Assoc. of Sec. Dealers, Inc., 5 SEC 627 (1939). NASD is the only securities association registered with the Securities and Exchange Commission ("SEC") under 15 U.S.C. § 78o-3, and is the primary regulatory body for the broker-dealer industry. It supervises the conduct of its members under the general aegis of the SEC. The Nasdaq Stock Market, Inc. ("NASDAQ") is a wholly owned NASD subsidiary which processes quotations for most over-the-counter equity trading. NASDAQ is the only exchange which NASD both owns and regulates.

Sparta Surgical Corporation ("Sparta") is a medical products manufacturer and distributor whose stock has been listed and traded on the NASDAQ SmallCap market since 1991. The NASDAQ SmallCap market is a distinct tier of the NASDAQ Stock Market comprised of securities of smaller, "emerging growth" companies. See NASD Manual (CCH) at 157; NASD Rule 4200(20). Each tier has its own set of financial requirements that a company must meet for NASDAQ to list its securities.

To effectuate its desire to make a secondary public offering, Sparta filed two listing applications with NASDAQ on February 15, 1995. On March 21, 1995, the SEC declared Sparta's offering effective, prompting Sparta and its underwriter to commence selling shares. Later that morning, NASDAQ de-listed Sparta's stock and suspended trading on the offering without explanation. The suspension was lifted the following day, and trading on the offering resumed.

Although the suspension was temporary, Sparta contends that in the world of public offerings and labile investor confidence, the regulatory action and trading hiatus rendered the offering unmarketable. Accordingly, Sparta filed suit in California superior court alleging a variety of state common-law claims, including breach of express and implied contract, breach of the covenant of good faith and fair dealing, gross negligence, intentional misrepresentation, negligent misrepresentation, and interference with economic relations. Defendants removed the action to federal district court. After denying Sparta's remand motion, the district court subsequently dismissed the suit for failure to state a claim upon which relief could be granted.

II

Contrary to Sparta's assertions, the district court had subject matter jurisdiction and properly denied the motion to remand, a decision which we review de novo. Easton v. Crossland Mortgage Corp., 114 F.3d 979, 982 (9th Cir.1997).

If a district court lacks subject matter jurisdiction over a removed action, it has the duty to remand it, for "removal is permissible only where original jurisdiction exists at the time of removal or at the time of the entry of final judgment...." Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26, 118 S.Ct. 956, 966, 140 L.Ed.2d 62 (1998). Under 28 U.S.C. § 1441(a), an action must "be fit for federal adjudication when the removal petition is filed." Id. at 965. The existence of federal question jurisdiction is ordinarily determined from the face of the complaint. Ultramar America Ltd. v. Dwelle, 900 F.2d 1412, 1414 (9th Cir.1990).

When removed, Sparta sought relief based in part upon NASD's purported violation of its own rules, specifically alleging that:

The foregoing actions of NASD were in direct violation of its own rules and procedures, including, but not limited to rules regarding the inclusion of stocks for listing as set forth in Schedule D of NASD Bylaws, rules regarding the suspension of trading in a stock as set forth in Schedule D, and internal guidelines requiring NASD and its staff to review proposed listings and timely and accurately respond to applicants.

Because Sparta's complaint sought relief based upon violation of exchange rules, subject matter jurisdiction was specifically vested in the federal district court under the Exchange Act, which provides in relevant part:

The district courts of the United States and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder.

15 U.S.C. § 78aa.

This section unequivocally "confers exclusive jurisdiction upon the federal courts for suits brought to enforce the Act or rules and regulations promulgated thereunder." Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 370, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996); see also Securities Investor Protection Corp. v. Vigman, 764 F.2d 1309, 1313 (9th Cir.1985).

NASD's association rules govern its decision to list, not to list, or to de-list an offering. Schedule D, p 1805, § 3. Those rules were issued pursuant to the Exchange Act's directive that self-regulatory organizations adopt rules and by-laws in conformance with the Exchange Act. See 15 U.S.C. § 78o-3(b). With some exceptions not germane to our inquiry, the SEC must approve the rules issued by self-regulatory organizations. See 15 U.S.C. § 78s(b). In addition, the SEC "may abrogate, add to, and delete from" rules of a self-regulatory organization as it "deems necessary or appropriate" to insure the fair administration of the organization or to conform the organization's rules to Exchange Act requirements. See 15 U.S.C. § 78s(c). The Exchange Act requires self-regulatory organizations to comply not only with the Exchange Act, but also with the association's own rules. See 15 U.S.C. § 78s(g)(1).

Because federal courts are vested by 15 U.S.C. § 78aa with the exclusive jurisdiction over actions brought "to enforce any liability or duty" created by exchange rules, the district court properly determined that subject matter jurisdiction existed at the time of removal over Sparta's claims arising from breach of association rules. See Hawkins v. National Assoc. of Sec. Dealers Inc., 149 F.3d 330, 332 (5th Cir.1998).

Even if Sparta had not specifically relied upon association rules in its claim for relief, federal question jurisdiction existed. In addition to examining the literal language selected by the plaintiff, the district court must analyze whether federal jurisdiction would exist under a properly pleaded complaint. Easton, 114 F.3d at 982. A plaintiff may not avoid federal jurisdiction by omitting from the complaint federal law essential to his or her claim or by casting in state law terms a claim that can be made only under federal law. Id.; see also Rains v. Criterion Sys., Inc., 80 F.3d 339, 344 (9th Cir.1996).

Here, although Sparta's theories are posited as state law claims, they are founded on the defendants' conduct in suspending trading and de-listing the offering, the propriety of which must be exclusively determined by federal law. The viability of any cause of action founded upon NASD's conduct in de-listing a stock or suspending trading depends on whether the association's rules were violated. As the district court correctly observed, "[a]ny claim stemming from NASD's decision to de-list an offering is necessarily based on an assumed violation of the rules governing such procedures...." If NASD's actions conformed to the rules, there can be no viable cause of action; if its actions violated the rules, any claim falls under the imperative of 15 U.S.C. § 78aa which grants the federal courts "exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder...." Thus, even though Spara's remaining claims were "carefully articulated in terms of state law," the district court had subject matter jurisdiction. See Hawkins, 149 F.3d at 332.

Sparta contests this conclusion, citing Merrell Dow Pharmaceuticals v. Thompson, 478 U.S. 804, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986), for the proposition that federal question jurisdiction cannot lie absent a private right of action to enforce the federal right. See also Utley v. Varian Assoc., 811 F.2d 1279, 1283 (9th Cir.1987). Because there is no private right of action for breach of a self-regulatory organization's rules, see Jablon v. Dean Witter & Co., 614 F.2d 677, 681 (9th Cir.1980), Sparta reasons that application of Merrell Dow and Utley should extinguish federal jurisdiction.

Sparta's argument would have merit if jurisdiction in this case had been solely predicated on 28 U.S.C. § 1331, which was at issue in Merrell Dow and Utley. However, jurisdiction lies here not under 28 U.S.C. § 1331, but under 15...