Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning

PETITIONER: Merrill Lynch, Pierce, Fenner & Smith, Inc., et al.
RESPONDENT: Greg Manning, et al.
LOCATION: United States District Court for the District of New Jersey

DOCKET NO.: 14-1132
DECIDED BY: Roberts Court (2016- )
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 578 US (2016)
GRANTED: Jun 30, 2015
ARGUED: Dec 01, 2015
DECIDED: May 16, 2016

Peter K. Stris - for the respondents
Jonathan D. Hacker - for the petitioners

Facts of the case

The plaintiffs are shareholders in Escala Group, Inc. (Escala), and the defendants are a group of financial institutions that engage in equity trading. The plaintiffs sued the defendants in state court and alleged that the defendants participated in the short selling of Escala stock, which increased the pool of tradeable shares by electronically manufacturing counterfeit shares, thereby causing the plaintiffs’ shares to decline in value and dilute their voting rights. The plaintiffs’ claims were based on state law, but the Amended Complaint repeatedly mentioned a 2004 regulation that was adopted by the Securities and Exchange Commission (SEC) pursuant to the authority granted to it by the Securities Exchange Act of 1934, and no parties dispute the fact that the claims included violations of federal law. The defendants sought to remove the case from state court to federal court based on the question of whether the federal court has jurisdiction over the state law issues. The plaintiffs sought to bring the case back to state court, and the magistrate judge recommended that the district court grant the plaintiffs’ motion. The district court disagreed, and the issue went to the U.S. Court of Appeals for the Third Circuit. The appellate court held that the case should properly be heard in state court.


Does the Securities Exchange Act of 1934 provide for federal jurisdiction over state law claims seeking to establish liability based on violations of the federal Act?

Media for Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning

Audio Transcription for Oral Argument - December 01, 2015 in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning

Audio Transcription for Opinion Announcement - May 16, 2016 in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning

John G. Roberts, Jr.:

Today's orders of the court have been duly entered and certified and filed with the clerk.

Justice Kagan has our opinion this morning in case 14-1132 Merrill Lynch versus Manning.

Elena Kagan:

In this case, a stockholder alleges that various financial institutions unlawfully manipulated the stock price of a company, causing its value to plummet.

But we don't address the merits of that lawsuit rather we address a jurisdictional question meaning a question about which court the suit belongs in, a federal court or a state court.

The shareholder here originally brought the suit in state court but the financial companies said it belonged in federal court instead.

They base that claim on §27 of the Federal Securities Exchange Act.

That section provides for exclusive federal jurisdiction meaning only in federal courts of suits “that are brought to enforce any liability or duty created by the Exchange Act or by its regulations.”

Now the question we address is what that provision means?

And this isn't going to be very helpful to most of you that is to the non-lawyers here but what we conclude is that the jurisdictional test that §27 establishes is the same as the test we use in applying another very important and very commonly invoked jurisdictional statute.

To be more specific we say it's the same as the arising under standard that we use in applying the federal question statute.

If that doesn't make most of you think that you made the right decision by not going to law school, I am not sure what will.

The effect of the decision is usually this.

If a suit brings only claims created by State Law then the suit can be resolved in state court but if instead the suit brings claims created by the Federal Exchange Act then it should be brought in federal court.

But that's not always so I said usually and the reason why is this.

Every once in a while a claim that's created by State Law necessarily turns on a significant and disputed question of Federal Law.

It really rises and falls on that federal issue and when that's so the suit has to be decided in federal court too.

Our opinion explains why that's the right test.

We say it's most consistent with the language of §27.

We say it's most consistent with our precedents involving similar jurisdictional statutes and we say that it serves the goals that we usually think important in interpreting jurisdictional laws.

That is, it respects the balance between federal and state courts refusing to put too many state law claims into federal court and it promotes administrative simplicity by allowing judges and lawyers to apply a very familiar standard.

Under this test, the lawsuit here must go back to state court.

Although the suit has some relation to federal issues the claims that it brings are all created by state law and none of them necessarily rises and falls on a disputed and significant federal issue.

Because the Court of Appeals for the Third Circuit reached the same conclusion, we affirm the judgment below.

Justice Thomas has filed an opinion concurring in the judgment in which Justice Sotomayor joins.