Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning
136 S. Ct. 1562
| SCOTUS | 2016Background
- Manning and other former Escala shareholders sued Merrill Lynch in New Jersey state court, alleging Merrill Lynch drove down Escala’s stock price through naked short selling and asserting only state-law claims (RICO, state securities law, torts, contract-based claims).
- The complaint referenced SEC Regulation SHO and alleged conduct consistent with violations of federal securities rules, but plaintiffs did not bring federal securities claims.
- Merrill Lynch removed the case to federal district court asserting federal-question jurisdiction under 28 U.S.C. §1331 and exclusive jurisdiction under §27 of the Securities Exchange Act (15 U.S.C. §78aa(a)).
- The District Court denied remand; the Third Circuit reversed, holding §1331 did not apply and that §27 is coextensive with §1331 (i.e., only covers suits that satisfy the federal "arising under" test).
- The Supreme Court affirmed: §27’s grant of exclusive federal jurisdiction is governed by the same "arising under" standard used for §1331; because Manning’s state-law claims did not satisfy that test, remand to state court was required.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §27 (15 U.S.C. §78aa(a)) gives federal courts exclusive jurisdiction over state-law claims that reference or implicate Exchange Act duties | Manning: §27 does not apply because he pleaded only state-law claims (the cause of action derives from state law) | Merrill Lynch: §27 applies whenever a suit asserts (expressly or implicitly) a breach of an Exchange Act duty—so any complaint mentioning an Exchange Act duty is "brought to enforce" it | Held: §27’s jurisdictional test is coextensive with the §1331 "arising under" test; it covers suits brought under the Exchange Act and rare state-law claims that necessarily raise a substantial federal issue (Grable test). Manning’s suit does not meet that standard and must be remanded. |
| Proper scope of "brought to enforce" language in §27 | (implicit in Manning) Only suits asserting Exchange Act causes of action fall within §27 | (Merrill Lynch) Broad reading: any suit commenced to give effect to or enforcing an Exchange Act duty, even if the plaintiff pleads only state law | Held: "Brought to enforce" means suits commenced to give effect to an Exchange Act requirement; that aligns with the established "arising under" doctrine (not as broad as Merrill Lynch urged, not as narrow as Manning urged). |
| Whether references to federal law in a state-law complaint automatically trigger §27 exclusive jurisdiction | Manning: Mere references are insufficient; need a federal cause of action or unavoidable federal question | Merrill Lynch: References (even implicit) suffice to make the suit one "brought to enforce" Exchange Act duties | Held: References alone are insufficient; only if the state-law claim necessarily depends on resolution of a substantial, disputed federal issue will federal jurisdiction under §27 attach. |
| Role of precedent and statutory interpretation in reading §27 | Manning: §27 should be read narrowly to preserve state-court authority except when the Exchange Act creates the cause of action | Merrill Lynch: Text supports broad federal jurisdiction; consistency across statutes requires broad reading | Held: Precedent (Pan American, Matsushita, Grable) and textual analysis support treating §27 as matching the §1331 "arising under" standard to respect state courts and preserve administrable rules. |
Key Cases Cited
- Grable & Sons Metal Prods. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005) (announcing the test for when a state-law claim "necessarily raise[s]" a federal issue sufficient for federal-question jurisdiction)
- Pan American Petroleum Corp. v. Superior Court of Del. for New Castle Cty., 366 U.S. 656 (1961) (holding that "brought to enforce" language is coterminous with the "arising under" inquiry)
- Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367 (1996) (construing §27 and treating certain state-law suits that merely reference federal securities law as outside exclusive federal jurisdiction)
- Gunn v. Minton, 568 U.S. 251 (2013) (discussing the "special and small category" of state-law claims that may arise under federal law)
- Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804 (1986) (addressing limits on federal jurisdiction when federal law is only an ingredient of a state claim)
- Romero v. Int’l Terminal Operating Co., 358 U.S. 354 (1959) (counseling reluctance to expand federal jurisdiction by broad readings of jurisdictional statutes)