UFCW LOCAL 1500 PENSION FUND, on behalf of itself and all others similarly situated, Plaintiff-Appellant, v. MARISSA MAYER; DAVID FILO; SUE JAMES; THOMAS J. MCINERNEY; CHARLES R. SCHWAB; H. LEE SCOTT, JR.; KENNETH A. GOLDMAN; RONALD S. BELL; HENRIQUE DE CASTRO; MAX R. LEVCHIN; JANE E. SHAW; MAYNARD WEBB, JR.; YAHOO! INC., Nominal Defendant, Defendants-Appellees.
No. 17-15435
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
July 12, 2018
D.C. No. 3:16-cv-00478-RS
Appeal from the United States District Court for the Northern District of California
Richard Seeborg, District Judge, Presiding
Argued and Submitted June 13, 2018 San Francisco, California
FOR PUBLICATION
OPINION
Before: Mary M. Schroeder, David M. Ebel,* and John B. Owens, Circuit Judges.
Opinion by Judge Owens
SUMMARY**
Investment Company Act
The panel affirmed the district court‘s dismissal of a lawsuit bringing derivative claims against Yahoo! Inc.‘s board of directors and certain corporate officers, as well as one direct claim against Yahoo!, under the Investment Company Act.
The plaintiff alleged that when Yahoo! invested in Alibaba.com, a Chinese retail website, Yahoo! violated the conditions of its exemption, granted by the Securities and Exchange Commission, from the registration requirements of the ICA. The panel held that the plaintiff failed to state a claim because the ICA does not establish a private right of action for challenging the continued validity of an ICA exemption.
COUNSEL
Richard L. Stone (argued), Blackner Stone & Associates PA, Palm Beach, Florida; Ira M. Press and Peter S. Linden, Kirby McInerney LLP, New York, New York;
OPINION
OWENS, Circuit Judge:
Plaintiff-Appellant UFCW Local 1500 Pension Fund (“UFCW“) appeals from the district court‘s dismissal of a lawsuit bringing derivative claims against Yahoo! Inc.‘s board of directors and certain corporate officers, as well as one direct claim against Yahoo!. We have jurisdiction under
I. BACKGROUND
A. Yahoo!, Alibaba, and the ICA
Back in 1995, Yahoo! helped pioneer what the Supreme Court calls “the Cyber Age.” Packingham v. North Carolina, 137 S. Ct. 1730, 1736 (2017). Using (for its time) cutting-edge technology, Yahoo! enabled people to visit websites previously inaccessible except to the most internet savvy. Its promise as an internet search company was so bright, in fact, that the 2000 movie Frequency featured Yahoo! as the stock for the next millennium.
Of course, Hollywood doesn‘t always get it right. Although Yahoo! has fared better than dot-com busts like eToys and Pets.com, Yahoo!‘s search engine technology turned out to be closer in value to the Ark of the Covenant at the end of Raiders of the Lost Ark than the Apple stock that Lieutenant Dan purchased in Forrest Gump. Today we “Google” things—we do not “Yahoo!” them (or “Alta Vista,” “Excite,” or “Dogpile” them for that matter). But during its marketplace decline this century, Yahoo! made a savvy $1 billion investment in Alibaba.com, a Chinese retail website.
Alibaba burgeoned into a behemoth. Alibaba was so successful that by 2012 Yahoo! was able to sell just over half of its Alibaba stock for $7.1 billion. And when Alibaba conducted its initial public offering in 2014, $9.4 billion more flowed into Yahoo!‘s coffers essentially overnight. By 2016, Yahoo!‘s remaining stake in Alibaba was worth some $27 billion. That figure dwarfed the value of Yahoo!‘s internet business.
Investments in Alibaba and other ventures (such as Yahoo! Japan) would normally subject Yahoo! to the requirements of the Investment Company Act of 1940 (“ICA“). The ICA permits the Securities and Exchange Commission (“the SEC” or “the Commission“) to regulate more rigorously the activities of enterprises that qualify as investment companies under section 3(a) of the statute. See Northstar Fin. Advisors, Inc. v. Schwab Invs., 615 F.3d 1106, 1109-12 (9th Cir. 2010) (detailing the ICA and describing it as “provid[ing] comprehensive regulation of investment companies and the mutual fund industry“); see also
among other things, “engag[ing] in any business in interstate commerce.”
Any would-be investment company can try to avoid the ICA‘s registration requirements, however. Section 3(b)(2) empowers the SEC, “upon application,” to exempt such a company from the ICA‘s requirements, if the SEC “finds and by order declares” the company “to be primarily engaged in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities.”
After entering into a joint venture to create Yahoo! Japan, Yahoo! applied for an ICA exemption from the SEC. The SEC granted Yahoo! a “temporary exemption” in April 2000 and then issued a “permanent order” exempting Yahoo! from the ICA a few months later. Yahoo!‘s ICA exemption came with strings attached. Yahoo! could only make investments “for bona fide business purposes” and had to “refrain from investing or trading in [securities] for short-term speculative purposes.” Despite those conditions, Yahoo!‘s investment in Alibaba, and filings detailing Yahoo!‘s Alibaba holdings, the SEC has not revoked Yahoo!‘s ICA exemption.
B. This Litigation
UFCW sued in January 2016, alleging that Yahoo! had violated the conditions of its ICA exemption by investing in Alibaba and, as a result, that Yahoo! had “been operating as
an unregistered investment company” in violation of the ICA since at least 2013. Based on that allegation, UFCW brought derivative claims against an array of Yahoo! higher-ups, and one direct claim against Yahoo! itself. UFCW sought to (1) rescind the higher-ups’ employment contracts, (2) enjoin Yahoo! from further performing contracts signed in violation of the ICA and from selling any material assets, and (3) recover damages for unjust enrichment.
Despite acknowledging that exempted companies must comply with the conditions of their ICA exemptions, the district court concluded that the ICA provides “no role for the courts to find, in the first instance, that a company should be stripped of its exemption and therefore deemed an unregistered investment company.” For that reason, the district court held that UFCW‘s claims “all fail as a matter of law” and dismissed UFCW‘s suit.
II. DISCUSSION
UFCW conceded below and acknowledges on appeal that its claims all rely on the allegation that Yahoo! violated the conditions of its ICA exemption by investing in Alibaba. But because no provision of the ICA establishes a private right of action for challenging the continued validity of an ICA exemption, UFCW‘s claims fizzle faster than Flooz.com.1
A. Standard of Review
We review de novo a “decision involving interpretation of a federal statute,” In re Digimarc Corp., 549 F.3d at 1229, as we do a dismissal for failure to state a claim, Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1061 (9th Cir. 2008). In this posture, we must accept as true the operative complaint‘s allegations and construe them in favor of the nonmoving party, UFCW. See id. Our review “is limited to the complaint, materials incorporated into the complaint by reference, and matters of which [we] may take judicial notice.” Id.
B. The ICA Does Not Establish A Private Right of Action to Challenge the Continued Validity of an ICA Exemption
“Like substantive federal law itself, private rights of action to enforce
To create a private right, a statute must use rights-creating language. See id. at 288. Language that “focus[es] on the person regulated rather than the individuals protected” will not do. Id. at 289. Rather, the statute must place “an unmistakable focus” on the latter group. Ball v. Rodgers,
492 F.3d 1094, 1106 (9th Cir. 2007) (quoting Gonzaga Univ. v. Doe, 536 U.S. 273, 284 (2002)); accord AlohaCare v. Hawaii, Dep‘t of Human Servs., 572 F.3d 740, 746 (9th Cir. 2009). And to create a private remedy, a statute must (at the very least) avoid remedy-foreclosing language. See In re Digimarc, 549 F.3d at 1231. Language establishing an express “remedial scheme[]” may “foreclose a[n implied] private [right] of action to enforce even those statutes that admittedly create substantive private rights.” Sandoval, 532 U.S. at 290. That is because providing for “one method of enforcing” a private right “suggests that Congress intended to preclude others.” Id.; see also Middlesex Cty. Sewerage Auth. v. Nat‘l Sea Clammers Ass‘n, 453 U.S. 1, 14-15 (1981) (observing that “elaborate enforcement provisions” mean that “it cannot be assumed that Congress intended to authorize by implication additional judicial remedies“).
The ICA provisions related to SEC registration and ICA exemptions do not have rights-creating language. Section 7(a) of the ICA commands that “[n]o investment company” shall, among other things, “engage in any business in interstate commerce” unless it registers with the SEC.
Section 3(b)(2) of the ICA is “yet a step further removed” from having rights-creating language, for that provision “focuses neither on the individuals protected nor even on the [parties] being regulated, but on the agenc[y] that will do the regulating“—the SEC. Sandoval, 532 U.S.
at 289. Again, section 3(b)(2) provides that “[w]henever the Commission, upon its own motion or upon application, finds that the circumstances which gave rise to [an ICA exemption] no longer exist, the Commission shall by order revoke such order.”
UFCW counters that, sections 7 and 3(b)(2) notwithstanding, section 47(b) of the ICA establishes a private right of action for challenging the continued validity of an ICA exemption. Section 47(b) does no such thing.2 As just explained, Congress contemplated that companies would contravene the conditions of ICA exemptions and concluded that the SEC, not the courts, should decide in the first instance what to do when that happens. Congress has thus “deliberately targeted” the “specific problem[]” alleged here with a “specific solution[].” RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012) (quoting Varity Corp. v. Howe, 516 U.S. 489, 519 (1996) (Thomas, J., dissenting)). That solution does not include lawsuits challenging the continued validity of ICA exemptions. So even if section 47(b) could be read as implying a private right of action, section 3(b)(2) would still bar lawsuits like UFCW‘s under the “well established canon
of statutory interpretation” that “the specific governs the general.” Id. (quoting Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384 (1992)).
More fundamentally, though, section 47(b) does not establish a private right of action.3 Section 47(b) provides that a “contract that is made, or whose performance involves, a violation of [the ICA], or of any rule, regulation, or order thereunder, is unenforceable by either party” to the contract unless “a court” makes certain findings.
UFCW would nevertheless have us read section 47(b) as implying a private right of action for any party to any contract allegedly formed in violation of any ICA provision, rule, regulation, or order to sue for rescission of that contract. That we cannot do. In Northstar we held that the structure
of the ICA forecloses reading the statute as implying a private [right] of action “to enforce the individual provisions of the Act.” 615 F.3d at 1116; see also Bellikoff v. Eaton Vance Corp., 481 F.3d 110, 116-17 (2d Cir. 2007); Olmsted v. Pruco Life Ins. Co. of N.J., 283 F.3d 429, 433 (2d Cir. 2002). And although we did not specifically address section 47(b) in Northstar, our reading of the ICA there demands that we reject UFCW‘s reading of the ICA here.
Our reasoning made good sense in Northstar, and it makes even better sense here. Consider the circumstances of this case. UFCW sued while Yahoo! was negotiating a multi-billion-dollar sale of its internet business, and UFCW sought (among other things) an injunction preventing any such sale. UFCW thus asserts the ability to halt a deal the
SEC has not blocked for alleged violations of an ICA exemption the SEC has not addressed, even though the SEC has been made fully aware of the facts underlying those alleged violations.
And that is not even the most awesome power UFCW purports to possess. So far as we can tell, nothing in UFCW‘s reading of section 47(b) would stop UFCW from seeking to rescind not just a handful of employment contracts, but also every other contract Yahoo! has entered into for the better part of a decade. If Congress really intended to expose companies receiving an ICA exemption to lawsuits of this unparalleled magnitude, it would have expressed that intention clearly, not covertly. Congress, after all, tends not to “hide elephants in mouseholes.” Whitman v. Am. Trucking Ass‘ns, Inc., 531 U.S. 457, 468 (2001).
Furthermore, at least when it comes to ICA exemptions, UFCW‘s position threatens to force courts and the SEC into a tellingly odd game of chicken. For example, if a court concluded in the first instance that a company had violated its ICA exemption, and if circumstances had not changed since the court‘s decision, could the SEC re-exempt the company as it saw fit? Or would the SEC, the body the ICA expressly charges with considering changed circumstances in the first instance, be bound by the court‘s decision until circumstances changed again? Either the court‘s diligent efforts get wasted, or the SEC‘s express prerogatives get thwarted. Pick your poison. Or better yet, barring a clear congressional command to the contrary, decline the “invitation to have one last drink.” Sandoval, 532 U.S. at 287. We choose temperance.
Because UFCW‘s claims all hinge on the power to challenge the continued validity of Yahoo!‘s ICA
exemption, and because the ICA accords UFCW no such power, we affirm.
AFFIRMED.