On May 16, 2016, the United States Supreme Court held that a federal district court does not have jurisdiction to hear a case even if the Complaint invokes violations of the Securities Exchange Act of 1934, unless the Complaint either explicitly brings a claim under the Act, or brings a claim that requires a showing of a violation of the Act to determine ultimate liability. Merrill Lynch, Pierce Fenner & Smith, et al., v. Manning, et al., 2016 WL 2842450 (May 16, 2016). In Merrill Lynch, the Plaintiff sued in New Jersey state court, alleging violations of, among other common law torts, the New Jersey Racketeer Influenced and Corrupt Organizations Act (“RICO”) and the New Jersey Uniform Securities Law. No claims were brought under any federal rules or statutes, although the Complaint explicitly referenced Regulation SHO (which prohibits short sellers from intentionally failing to deliver securities) with a suggestion that Merrill Lynch had violated that regulation, along with infringing New Jersey law.

Merrill Lynch removed the case to Federal District Court, asserting federal jurisdiction under both the federal question statute and § 27 of the Exchange Act, which grants federal courts exclusive jurisdiction of all suits “brought to enforce any liability or duty created by [the Exchange Act] or the rules and regulations thereunder.” 15 U.S.C. § 78aa(a). The District Court denied the Plaintiff’s motion to remand the case back to state court. The Court of Appeals for the Third Circuit reversed, ordering a remand to state court, and found that the claims were brought under state law and did not “necessarily raise[]” a federal issue. The Court of Appeals further found that § 27 of the Exchange Act only covers those cases that would satisfy the “arising under” test of the federal question statute.

The Supreme Court affirmed, choosing to view the jurisdictional reach of § 27 more narrowly than urged by Merrill Lynch. The Court declined to expand the jurisdiction of federal courts to a case in which, for example, the plaintiff asserted a claim for breach of contract and alleges “for atmospheric reasons” that the defendant’s conduct also violated the Exchange Act. The Court, however, refused to go so far as urged by the Plaintiff, which was that federal question jurisdiction only applies if a claim is brought directly under the statute – and instead found a middle ground where federal question may also be invoked in a case where “a suit raising a state-law claim rises or falls on the plaintiff’s ability to prove the violation of a federal duty.” The Court considered a hypothetical state statute that makes illegal “any violation of the Exchange Act involving naked short selling.” Under that scenario, federal jurisdiction is proper as a plaintiff seeking relief under this statute must prove a violation of the federal statute and therefore his suit is being “brought to enforce” a duty created by (in this hypothetical) the Exchange Act.

While not representing a sea change in federal question jurisprudence, under the Supreme Court’s framework, a prospective plaintiff can plead his/her way into federal court without a direct claim or cause of action alleging a violation of a federal statute. The inverse of course is also true – if the plaintiff wishes to remain in state court, he/she must be careful not to allege conduct that could be construed as asserting a violation of a federal statute as a central component to the claim; even if the claim itself is based on state law.