On August 10, 2018, United States District Judge Phyllis J.
Hamilton of the United States District Court for the Northern
District of California denied a motion to remand to state court a
putative securities class action against digital currency issuer
Ripple Labs, Inc., one of its subsidiaries, and its Chief Executive
Officer. Coffey v. Ripple Labs Inc., No.
18-cv-03286-PJH (N.D. Cal. Aug. 10, 2018). Plaintiff, a
purchaser of XRP, Ripple's digital currency, sued defendants in
California state court, alleging violations of the Securities Act
of 1933 (the "Securities Act") and California's blue
sky statute. Plaintiff alleges that defendants' sale of
XRP to investors in an initial coin offering (in which digital
assets are sold to consumers in exchange for legal tender or other
cryptocurrencies) constituted an unregistered sale of securities in
violation of the Securities Act and the California Corporations
Code. Defendants removed the action to federal court pursuant
to Section 1453 of the Class Action Fairness Act
("CAFA"), and plaintiff moved to remand the action to
state court. The Court denied plaintiff's motion, holding
that Section 1453 of CAFA provides an independent right to removal
that is not precluded by the anti-removal provision in Section
22(a) of the Securities Act, at least in cases not involving a
"covered security" as defined in the Securities
Litigation Uniform Standards Act ("SLUSA").
The Court observed that the core issue in question—whether
Securities Act claims bar a defendant from removing an action on
the basis of state law claims that independently satisfy CAFA's
jurisdictional requirements—was an issue of first
impression. The parties and the Court agreed that, absent the
assertion of Securities Act claims, defendants could properly
remove the action under CAFA based on plaintiff's assertion of
state law claims because plaintiff sought $340 million in damages
on behalf of a putative class of thousands of investors.
Under Section 1453 of CAFA, a defendant may remove an action if the
amount in controversy exceeds $5 million, the putative class has
more than 100 members, and the citizenship of any class member is
diverse from the citizenship of any one defendant. A few
specific exceptions apply, including—importantly—that
securities class actions "concerning a covered security"
under SLUSA are not removable under CAFA. That exception did
not apply, however, because XRP is not a security traded on a
national securities exchange (or a security issued by an investment
company) and thus is not a "covered security."
Plaintiff argued that Section 22(a) of the Securities Act (15
U.S.C. § 77v(a)) nevertheless bars removal of any
action that includes a Securities Act claim (subject to certain
inapplicable exceptions). The Court disagreed with
plaintiff's contention that the Supreme Court's decision
earlier this year in Cyan, Inc. v. Beaver County Employees
Retirement Fund, 138 S. Ct. 1061 (2018), as well as the
Supreme Court's earlier decision in Kircher v. Putnam Funds
Trust, 547 U.S. 633 (2006), and the Ninth Circuit's
decision in Luther v. Countrywide Home Loans Servicing LP,
533 F.3d 1031 (9th Cir. 2008), required the Court to remand the
action to state court. In Cyan, the Supreme Court
held that state courts have concurrent jurisdiction over class
actions alleging only Securities Act violations, and that SLUSA
does not override the bar against removal of such actions set forth
in Section 22 of the Securities Act. In Kircher, the
Supreme Court addressed only whether an order remanding a case
removed under SLUSA is appealable (as opposed to a case removed
under CAFA). The Court thus held that Cyan, another
decision purely addressing SLUSA, and Kircher "have
nothing to do with CAFA." The Court then turned to
Luther, in which the Ninth Circuit addressed both CAFA and
Section 22(a) of the Securities Act. Luther held
that a state court class action alleging only violations of the
Securities Act was not removable under CAFA, because Section 22(a)
addressed "a narrow, precise, and specific subject,"
i.e., "claims arising under the Securities Act"
and was "not submerged by" the more generalized coverage
in CAFA. The Court found that this case is distinguishable
from Luther because, here, plaintiff alleged claims under
both California law and the Securities Act, and defendants had
removed the action based on the California claims, which
independently satisfied CAFA's requirements—a situation
that Luther does not address. The Court also stated
that part of Luther's reasoning has been undermined by
the Supreme Court's decision in Dart Cherokee Basin
Operating Co., LLV v. Owens, 135 S. Ct. 547 (2014), which
addressed another decision that, like Luther, relied on
the Ninth Circuit's general rule that "removal statutes
are strictly construed against removal" and that "any
doubt is resolved against removability." In Dart
Cherokee, the Supreme Court stated that "no antiremoval
presumption attends cases invoking CAFA, which Congress enacted to
facilitate adjudication of certain class actions in federal
court." The Court noted that Luther's
rationale was inconsistent with Dart Cherokee.
The Court then considered the general statutory operation of
removal provisions, and pointed out that, under other removal
regimes, such as 28 U.S.C. Section 1441's provision for federal
question or diversity jurisdiction, defendants may successfully
remove actions without satisfying the requirements of other
inapplicable removal provisions. Emphasizing that a defendant
may successfully remove an action from state to federal court by
pointing to and complying with a statutory basis for
removal rather than every statutory basis for removal, the
Court turned to the plain language of CAFA's removal provision,
Section 1453(b). The Court concluded that, read as a whole,
CAFA's plain language "creates original jurisdiction for
and removability of all class actions that meet the
minimal requirements and do not fall under one of the limited
exceptions." The Court also compared and contrasted
Section 1453 with Section 1441(a), the general removal statute,
which includes a broader clause "excepting" removal if
such exception is expressly provided by any statute, and concluded
that Section 1453 says nothing about incorporating Section
1441(a)'s broader exception clause.
While adding that it need not address CAFA's purpose or
legislative history because Section 1453's plain language is
unambiguous, the Court noted that those considerations support the
same conclusion. Citing Dart Cherokee's
indication that CAFA's provisions should be read broadly with a
strong preference that interstate class actions be heard in federal
court if properly removed, the Court pointed out that granting
plaintiff's motion to remand would contradict the general
independence of the removal provisions and CAFA's
purpose.
In sum, the Court concluded that CAFA is a valid basis for removal
in Securities Act class actions not involving a "covered
security" where the plaintiff asserts both Securities Act and
state law claims. The decision, while potentially useful to
defendants in some cases, is likely to be of limited impact given
that securities class action plaintiffs rarely assert state law
claims and most such cases involve covered securities as defined in
SLUSA.
Because a Court of Appeals can accept an immediate appeal of a CAFA
removal decision, it will soon be clear whether this decision will
be appealed to the Ninth Circuit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.