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Court Finds No Substantial Federal Issue Engendered By Claim Of California Option Plan Exemption

The United States federal courts are courts of limited jurisdiction.  Therefore, it is not always possible to make a "federal case" out of claim, even when issues of federal law may be involved. 

In Santelices v. Apttus Corp., 2020 U.S. Dist. LEXIS 183322, the plaintiff  was displeased with the handling of his stock options in connection a sale of his former employer.   Consequently, he filed a complaint in California Superior Court alleging, among other things, that the defendants had violated Section 25110 of the California Corporations Code.  The defendants removed the action to the U.S. District Court on the basis of federal question jurisdiction pursuant to  28 U.S.C. § 1331.   

At first blush, this seems a bit mysterious because the plaintiff's claim involved a violation of California, not federal, law.  The defendants, however, argued that the court had federal question jurisdiction because to find Defendants liable under Section 25110, the Court will necessarily have to interpret and apply federal law.  Why?  The defendants apparently intended to argue that the option transactions were exempt pursuant to Section 25102(o) of the Corporations Code and that Section 25102(o) is conditioned upon the exemption in Rule 701 under the federal Securities Act of 1933.  

Judge Haywood S. Gilliam, Jr. declined to keep the case.  He ruled that under Grable & Sons Metal Prod., Inc. v. Darue Eng'g & Mfg.,545 U.S. 308, 312 (2005), a federal court may exercise jurisdiction over a state law claim only if (i) the action necessarily raises a federal issue that is disputed and substantial; and (ii)  the court may entertain the case without disturbing the congressionally approved balance of federal and state judicial responsibilities.  In this case, Judge Gilliam found that whether the defendants complied with Rule 701 did not appear to involve "the validity, construction or effect of federal law" that is required to be considered "substantial" under Grable.

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 344
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

949-851-5428
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