Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_07-cv-03332/USCOURTS-cand-4_07-cv-03332-4/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1441 Petition for Removal

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

AUGUST T. PACE,

Plaintiff, No. C 07-3742 PJH

v. ORDER GRANTING MOTIONS

TO REMAND

D. JAMES BIDZOS, et al.,

Defendants. _______________________________

THOMAS MYKITYSHYN,

No. C 07-3332 PJH

Plaintiff,

RELATED CASES

v.

D. JAMES BIDZOS, et al.,

_______________________________/

The motions of plaintiffs August T. Pace and Thomas Mykityshyn for an order

remanding the above-entitled actions to the Superior Court of California, County of Santa

Clara, came on for hearing before this court on October 3, 2007. Plaintiffs appeared by

their counsel Patrice L. Bishop, and defendants appeared by their counsel Christopher

McGrath, Edward Han, and Grant P. Fondo. Having read the parties’ papers and carefully

considered their arguments and the relevant legal authority, and good cause appearing, the

court hereby GRANTS the motions as follows, for the reasons stated at the hearing.

The plaintiff in each of these substantially identical proposed class actions alleges a

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United States District Court

For the Northern District of California

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 “The grant of an employee stock option on a covered security is . . . a ‘sale’ of that

covered security” for purposes of SLUSA preemption.” Falkowski v. Imation Corp., 309 F.3d

1123, 1129-30 (9th Cir. 2002).

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claim of breach of the duty of disclosure, in connection with the alleged backdating of stock

option grants at defendant VeriSign, Inc. (“VeriSign”); and a claim for rescission, seeking an

order rescinding various amendments made to VeriSign’s option plans. The cases were

originally filed in Santa Clara Superior Court. 

Defendants removed the cases, asserting that because plaintiffs allege

misrepresentations of material facts by defendants in connection with the purchase or sale

of covered securities, or because they allege that defendants used or employed a

manipulative or deceptive device or contrivance in connection with the purchase or sale of

securities, the allegations in the complaint fall within the preemption and removal provisions

of the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb (“SLUSA”). 

Under SLUSA, no “covered class action” based on state law and alleging “a

misrepresentation or omission of a material fact in connection with the purchase or sale of

a covered security”1

 may be “maintained in any State or Federal Court by any private

party.” 15 U.S.C. § 78bb(f)(1)(A). 

Plaintiffs seek an order remanding the cases. They argue that the cases are not

preempted under SLUSA because an exemption applies. Certain types of class actions

are exempted under SLUSA if they are based on the statutory or common law of the

issuer’s state of incorporation. See 15 U.S.C. § 78bb(f)(3). This exemption is known as

the “Delaware carve-out.” See City of Ann Arbor Employees’ Retirement Sys. v. Gecht,

2007 WL 760568, at *2 (N.D. Cal., March 9, 2007). 

The exemption has two prongs – class actions that involve “(I) the purchase or sale

of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity

securities of the issuer;” and class actions that involve “(II) any recommendation, position,

or other communication with respect to the sale of securities of an issuer . . . that is made

by or on behalf of the issuer . . . to holders of equity securities of the issuer . . . [and]

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concerns decisions of such equity holders with respect to voting their securities . . . .” 15

U.S.C. § 78bb(f)(3)(A)(ii)(I), (II). Plaintiffs argue that both prongs apply here. Defendants

contend that neither prong applies.

The court finds that plaintiffs’ motions must be GRANTED. A defendant may

remove a civil action filed in state court if the action could have originally been filed in

federal court. 28 U.S.C. § 1441. The removal statutes are construed restrictively, so as to

limit removal jurisdiction. Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-09

(1941); Hofler v. Aetna US Healthcare, 296 F.3d 764, 767 (9th Cir. 2002). 

The district court must remand the case if it appears before final judgment that the

court lacks subject matter jurisdiction. 28 U.S.C. § 1447(c). The burden of establishing

federal jurisdiction for purposes of removal is on the party seeking removal. Valdez v.

Allstate Ins. Co., 372 F.3d 1115, 1117 (9th Cir. 2004). There is a strong presumption

against removal jurisdiction. Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). 

Doubts as to removability are resolved in favor of remanding the case to state court. 

Matheson v. Progressive Specialty Ins. Co., 319 F.3d 1089, 1090 (9th Cir. 2003). 

As an initial matter, the court finds no support in the statute for defendants’ claim

that the Delaware carve-out applies only to cases brought in the state courts of the state of

incorporation. Moreover, the two district court cases cited by defendants – In re

WorldCom, Inc. Sec. Litig., 2003 WL 716243, at *3 n.31 (S.D.N.Y., March 3, 2003); and

Drulias v. ADE Corp., 2006 WL 1766502, at *1 (D.Mass., June 26, 2006) – are not

persuasive, as those courts’ comments are, at most, dicta. 

While it is less clear that prong (I) of the carve-out applies here, the court finds that

prong (II) does apply. Plaintiffs allege claims under state law, and the proxy statements

urging shareholders to vote on an increase in the number of shares available for option

grants constitute “communication[s]” made “on behalf of” VeriSign to “holders” of VeriSign’s

equity securities, and “concern[ ] decisions of such equity holders with respect to voting

their securities.” 15 U.S.C. § 78bb(f)(3)(A)(ii)(II). 

The reasoning in two recent district court cases also supports a finding that the

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 Although the court in Gecht ultimately denied the motion to remand, it was because

the case had also been removed based on diversity jurisdiction, which the court determined

was present, and not because the SLUSA removal was found to have been proper.

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present cases were improperly removed under SLUSA. In Indiana Elec. Workers Pension

Trust Fund v. Millard, 2007 WL 2141697 (S.D.N.Y., July 25, 2007), the plaintiffs filed suit in

a New York state court, alleging that the defendants had breached their duty of disclosure

by making misrepresentations and failing to disclose material facts in proxy statements,

concerning a scheme to improperly backdate stock options, thereby persuading

shareholders to vote to authorize an increase in the number of shares available in the

company’s stock option plan. The defendants removed the case, alleging SLUSA

preemption. 

The court held that prong (II) of the Delaware carve-out precluded removal. The

court concluded that “[b]ecause the plaintiff's allegations relate to communications

concerning a shareholder vote to expand [the company’s] stock option plan, the ‘voting

their securities’ element of prong (II) is satisfied.” Id., 2007 WL 2141697, *8. 

In Gecht, the plaintiffs filed suit in a California state court, alleging that the

defendants had failed to disclose in the company’s proxy statement their practice of

backdating stock option grants. The defendants removed the case, alleging SLUSA

preemption. The plaintiffs moved for an order remanding the case, arguing that removal

was precluded based on prong (II) of the Delaware carve-out. 

The defendants argued that a proxy statement seeking authorization for the

issuance of more stock options was not sufficiently related to a “sale of securities” to

constitute a “communication . . . with respect to the sale of securities.” The court, however,

following a thorough analysis of the meaning of “with respect to,” concluded that the phrase

did not differ in any meaningful way from the phrase “in connection with” that appears in

SLUSA’s core provisions, and held that the allegations fell within prong “(II)” of the carveout. Id., 2007 WL 760568, *4-7.2

 

Because the court finds that the motions must be GRANTED, in accordance with the

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foregoing, the cases are hereby REMANDED to the Santa Clara Superior Court.

IT IS SO ORDERED.

Dated: October 3, 2007 ______________________________

PHYLLIS J. HAMILTON

United States District Judge

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