Seismic Reservoir 2020, Inc. v. Paulsson, 785 F.3d 330 (9th Cir. 2015) [click for opinion]

Björn Paulsson (“Paulsson”) appealed from the dismissal of his counterclaim seeking damages under § 242 of the Alberta Business Corporations Act for breach of fiduciary duties owed by directors of an Alberta company. The district court had dismissed Paulsson’s claim under Fed. R. Civ. P. 12(b)(1), concluding it did not have subject matter jurisdiction to issue a remedy because the Alberta Act vested exclusive jurisdiction in the Court of the Queen’s Bench of Alberta.

In 2009, Seismic Reservoir 2020, Inc. (“Seismic”), a California company with its principal place of business in California, brought suit against Paulsson alleging violations of the Lanham Act and breach of fiduciary duty. Paulsson raised counterclaims against two Canadian directors of Seismic arising from his status as a shareholder and director of Seismic’s parent company, a Canadian corporation. Paulsson originally alleged three causes of action: (1) fraud and conspiracy to defraud; (2) breach of fiduciary duty; and (3) unfair business practices in violation of California Business and Professions Code § 17200, et seq., but dismissed his counterclaims for fraud and unfair business practices with prejudice in January 2012.  At that time he also specified that his remaining counterclaim, for breach of fiduciary duty, alleged a breach of fiduciary duties “owed by directors to shareholders as codified in Alberta law.” 

Section 242 of the Alberta Business Corporations Act allows a complainant to “apply to the Court for an order . . . to rectify the matters complained of” if the alleged activities are “oppressive or unfairly prejudicial” or if the corporation or its directors “unfairly disregard[ed] the interests of any security holder, creditor, director or officer.” The Act defines “Court” as “the Court of Queen’s Bench of Alberta.” The Act also grants that Court broad equitable powers to regulate corporate matters.

The district court requested additional briefing regarding its jurisdiction to issue a shareholder oppression remedy under the act and appointed an independent expert on Alberta corporate law, Peter Linder. Linder concluded that Canadian law determined that only an Alberta court has jurisdiction to grant a remedy for oppression brought in respect of an Alberta corporation. Relying on this report, the district court concluded that it could not issue a remedy for shareholder oppression under § 242 of the Alberta Business Corporations Act. The district court therefore dismissed the case for lack of subject matter jurisdiction.

On appeal, the Ninth Circuit noted that subject matter jurisdiction defines the court’s authority to hear a given type of case. The counterclaim by Paulsson, a citizen of California, against Canadian citizens seeking damages in excess of $75,000, fits squarely within the language of the diversity statute and, therefore, the district court had subject matter jurisdiction.  As the court explained, the exclusive jurisdiction provision of the Canadian statute cannot divest the district court of its jurisdiction to entertain Paulsson’s counterclaim.  Thus, the district court was wrong in dismissing the case for lack of jurisdiction.

The Ninth Circuit went on to explain that dismissal was nonetheless the proper result.  Although foreign law cannot limit the jurisdiction of a U.S. Article III court to entertain controversies, when that foreign law creates a right, it can also determine the remedy.  Thus, the counterclaim asserted by Paulsson is one upon which no relief could be granted by the district court. Rule 12(b)(6) provides the vehicle for dismissal of a claim for “failure to state a claim upon which relief can be granted.”  Thus, the case was ordered to be dismissed under Rule 12(b)(6). 

Eileen Flynn of the Chicago office contributed to this summary.