Suppose Congress enacts a statute providing that the federal courts will have exclusive jurisdiction of all lawsuits brought to enforce any liability or duty under a federal act or the rules adopted under that act. If a state later enacts a statute that copies one of the rules adopted under the federal act, can lawsuits seeking to enforce the state law doppelgänger be brought in that state’s courts? If the answer is yes, isn’t this a rather obvious end-run around Congress’ clear intent to have all suits of that type brought in the federal courts? I haven’t researched the question and would be very interested to hear from anyone who has considered it.
This isn’t idle speculation. As mentioned in earlier posts, the California legislature recently adopted amendments to Corporations Code Section 25401 to conform it to federal rule 10b-5 under the Securities Exchange Act of 1934. See Die Verwandlung: How The Legislature Likely Raised The Bar On Securities Fraud Actions. Before the recent amendment (SB 538 (Hill)), Section 25401 had been based on Section 12(a)(2) of the Securities Act of 1933. Section 27(a) of the Exchange Act vests exclusive jurisdiction over violations of that act in the federal courts, but Section 12(a) permits suits and actions in “any court of competent jurisdiction”.
I noticed that others have echoed my observations about the possibility that California has raised the pleading bar for Section 25401 suits. Michael Mugmon, Chris Johnstone, Jessica Freiheit Kurzban, Matthew D. Benedetto at WilmerHale recently wrote:
Now that the California legislature has remodeled § 25401 based on Rule 10b-5, it stands to reason that courts may interpret the new version in a way consistent with how the federal courts have interpreted Rule 10b-5. Unlike for Section 12(a)(2) claims, plaintiffs bringing a claim under Rule 10b-5 must allege scienter, reliance, and causation. Accordingly, if the California courts import federal courts’ Rule 10b-5 jurisprudence in their interpretation of the revamped § 25401, they may end up creating a new pleading hurdle for theoretically aggrieved investors (and their counsel)—and a ground for demurrer if plaintiffs do not plead what they must.