Supreme Court Holds "Arising Under" Standard Satisfies Jurisdictional Questions

U.S. Supreme Court Short Sale

In an 8-0 opinion delivered by Justice Kagan on May 16, the Supreme Court affirmed the Third Circuit’s ruling that the “jurisdictional test established by §27 [of the Exchange Act] is the same as [28 U.S.C.] §1331’s test for deciding if a case ‘arises under’ a federal law.” Merrill Lynch v. Manning, No. 14-1132 (U.S. May 16, 2016). In this case, the defendant, an investment bank, removed plaintiff’s case against the bank for its short sale practices to Federal District Court. The bank asserted that plaintiff’s claims, which referred explicitly to the SEC’s Regulation SHO in “describing the purposes of that rule and cataloguing past accusations against [the bank] for flouting its requirements,” were within federal jurisdiction on the following two grounds: (i) 28 U.S.C. §1331 grants district courts jurisdiction of “all civil actions arising under federal law”; and (ii) §27 of the Exchange Act “grants federal courts exclusive jurisdiction of ‘all suits in equity and actions at law brought to enforce liability or duty created by [the Exchange Act] or the rules or regulations thereunder.’” The plaintiff, in seeking remand of the case back to state court, argued that neither 28 U.S.C. §1331 nor §27 of the Exchange Act granted federal court the authority to adjudicate his claims which were brought under state law – specifically, the New Jersey Racketeer Influenced and Corrupt Organizations Act (RICO), New Jersey Criminal Code, and New Jersey Uniform Securities Law, as well as New Jersey common law of negligence, unjust enrichment, and interference with contractual relations. The Supreme Court’s opinion relies heavily on the natural reading of §27: “Like the Third Circuit, we read §27 as conferring exclusive federal jurisdiction of the same suits as ‘aris[e] under’ the Exchange Act pursuant to the general federal question statute.” The Court concluded that because the plaintiff’s claims were brought under state law and merely referenced Regulation SHO, the Federal District Court did not have jurisdiction and the case was remanded to state court.