88 F.4th 58
1st Cir.2023Background
- Two Massachusetts solar developers (Tyngsboro Sports II and 201 Oak Pembroke) entered interconnection service agreements (ISAs) with National Grid that required a "tax gross up" to cover utility tax liability on interconnection payments.
- National Grid treated interconnection payments as taxable income; the companies disagreed, citing 26 U.S.C. § 118 and ambiguity in IRS Notice 2016-36 about transmission vs. distribution interconnections.
- National Grid obtained an Ernst & Young opinion concluding payments to distribution systems were taxable; the solar companies paid the charge and later sued.
- Plaintiffs filed a putative class action in federal court asserting: (I) declaratory relief under the DJA and (II–IV) state-law claims for breach of the covenant of good faith, unjust enrichment/restitution, and violation of a Massachusetts "just and reasonable" charges statute.
- The district court dismissed for lack of subject-matter jurisdiction; on appeal the First Circuit affirmed, holding no federal-question jurisdiction: the DJA claim could not convert a federal defense into a federal claim, Counts II and IV did not necessarily raise a federal issue, and Count III raised a federal issue that was not substantial under Grable.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the DJA claim creates federal-question jurisdiction | DJA declaratory relief over the tax issue brings the case within federal-question jurisdiction | DJA does not create federal cause of action; the tax issue would be a federal defense to a state contract claim | No — DJA cannot be used to convert an anticipated federal defense into a federally cognizable claim; no federal-question jurisdiction for the DJA claim |
| Whether Counts II (good-faith) and IV (just & reasonable charges) necessarily raise a federal issue | These claims require resolving whether payments were taxable under federal law | Both claims can be decided under state law (reasonableness, bad faith) without resolving federal tax status | No — Counts II and IV do not necessarily raise a federal question |
| Whether Count III (restitution/unjust enrichment) necessarily raises a federal issue | Recovery for overpayment requires proving the tax was not actually owed to the IRS (federal question) | Incorporated bad-faith allegations could avoid necessity; alternatively, dispute is fact-bound | Yes — Count III necessarily raises the federal tax issue because proving overpayment requires showing tax was not owed |
| Whether the embedded federal issue in Count III is substantial under Grable | Resolution will affect many generators and clarify federal tax law | The issue is fact-specific, affects a limited set of contracts, and poses little risk to federal interests or the IRS | No — the federal issue is not substantial to the federal system as a whole; no federal jurisdiction over Count III |
Key Cases Cited
- Franchise Tax Bd. of Cal. v. Constr. Laborers Vacation Tr. for S. Cal., 463 U.S. 1 (well-pleaded complaint rule; DJA cannot create federal jurisdiction)
- Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667 (DJA limits and artful-pleading doctrine)
- Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308 (embedded federal-question jurisdiction test)
- Gunn v. Minton, 568 U.S. 251 (substantiality requirement for embedded federal issues)
- Empire Healthchoice Assur., Inc. v. McVeigh, 547 U.S. 677 (fact-bound federal issues are not substantial)
- Great Clips, Inc. v. Hair Cuttery of Greater Bos., 591 F.3d 32 (treating declaratory-judgment DJA analysis via hypothetical coercive action)
- Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574 (appellate court's duty to satisfy subject-matter jurisdiction)
- Colonial Penn Grp., Inc. v. Colonial Deposit Co., 834 F.2d 229 (DJA does not expand federal jurisdiction)