Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_08-cv-01820/USCOURTS-casd-3_08-cv-01820-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 28:1441 Petition for Removal- Breach of Contract

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 1 - 08cv1820-WQH-JMA

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

BARRY RUBIN, an individual on behalf of

himself and all others similarly situated and

derivatively on behalf of ARTES MEDICAL,

INC.,

Plaintiff,

CASE NO. 08cv1820-WQH-JMA

ORDER

vs.

CHRISTOPHER J. REINHARD; 

DOUGLAS ABEL; JOHN R.

CONSTANTINO; TODD C. DAVIS;

BEVERLY A. HUSS; LON E. OTREMBA;

ROBERT B. SHERMAN; MICHAEL K.

GREEN; DIANE S. GOOSTREE; 

PETER C. WULFF; DAREN J. BARONE;

and DOES 1-20,

Defendants,

-andARTES MEDICAL, INC.

Nominal Defendant.

HAYES, Judge:

The matters before the Court are the motion to dismiss (Doc. 11) filed by Defendants

and the motion to remand (Doc. 20) filed by Plaintiff. 

Case 3:08-cv-01820-WQH-JMA Document 30 Filed 03/25/09 Page 1 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 2 - 08cv1820-WQH-JMA

BACKGROUND

On September 4, 2008, Plaintiff Barry Rubin filed a shareholder derivative suit against

the present and former officers and directors of Artes Medical, Inc. (the Company) in the

Superior Court of California for the County of San Diego. (Notice of Removal ¶ 1.) 

On October 2, 2008, Plaintiff filed a first amended complaint in the state court adding

a class action claim against the Director Defendants for breach of fiduciary duty. (First

Amended Complaint ¶¶ 83-91, 95-101.) The members of the putative class are holders of the

Company’s common stock. (Id. ¶ 83.) Excluded from the class are the Defendants and “all

persons who acquired ARTES common shares pursuant to the private placement of common

stock and related warrants on September 26, 2008.” (Id.) The class claim alleges that the

Director Defendants breached their fiduciary duties to the shareholders in the class by issuing

the private placement of over 3 million shares of common stock and related warrants to “hand

picked friends of the Director Defendants” in order to dilute the shareholders’ voting rights at

the Annual Meeting scheduled to take place on October 31, 2008. (Id. ¶ 97.) The second,

third, and fourth causes of action are derivative claims on behalf of the Company for breach

of fiduciary duty to the Company (Id. ¶¶ 102-108), breach of the duty of loyalty to the

Company (Id. ¶¶ 109-118), and waste of corporate assets (Id. ¶¶ 119-122). The first amended

complaint seeks declaratory relief, injunctive relief, compensatory damages, and exemplary

damages. (Id. at 26-28.) 

Nominal Defendant Artes Medical, Inc. (the Company) is a publicly traded company

focused on developing, manufacturing and commercializing a new category of aesthetic

injectable products for the dermatology and plastic surgery markets. (Id. ¶ 2.) Plaintiff Barry

Rubin is an owner of the Company’s common stock. (Id. ¶ 52.) Defendants Christopher

Reinhard, Douglas Abel, John Constantino, Todd Davis, Beverly Huss, Lon Otremba, Robert

Sherman, Michael Green, Diane Goosetree, Peter Wulff, and Daren Barone are current and

former officers and directors of the Company (Director Defendants). (Id. ¶¶ 54-64.) 

Plaintiff alleges that on August 11, 2008, Michael Shack, a shareholder of the

Company, filed a proxy solicitation with the SEC soliciting proxies to replace to board

Case 3:08-cv-01820-WQH-JMA Document 30 Filed 03/25/09 Page 2 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 3 - 08cv1820-WQH-JMA

members whose terms had expired, remove three current board members and elect five new

board members to the Company’s Board of Directors. (Id. ¶ 21.) Plaintiff alleges that Shack’s

proxy solicitation stated that “the Company’s poor financial performance, lack of expressed

business plan, and questionable changes to key personnel are impairing the Company’s ability

to maximize value for all shareholders.’” (Id.) 

Plaintiff alleges that on August 29, 2008, the Director Defendants filed a proxy

solicitation on behalf of the Company with the SEC. (Id. ¶ 22.) Plaintiff alleges that the

Director Defendants notified the Company’s shareholders that they did not intend to have the

Shack proposals brought before the Company’s upcoming Annual Meeting on October 30,

2008 “because [the Director Defendants] thought the notice was not sufficient.” (Id.)

Plaintiff alleges that on September 26, 2008, the Company issued 3,233,045 shares of

its common stock and related warrants to private investors through a private placement

financing. (Id. ¶23.) 

On October 6, 2008, Plaintiff filed an ex parte application for a temporary restraining

order in the state court. (Notice of Removal Ex. 2.) The application for a temporary restraining

order sought to enjoin any shares issued in connection with the Company’s September 26,

2008 private placement from voting at the Company’s annual shareholder meeting scheduled

for October 31, 2008. (Id. at 1.)

On October 6, 2008, before the state court issued a ruling on Plaintiff’s application for

a temporary restraining order, Defendants removed the first amended complaint to the United

States District Court for the Southern District of California pursuant to the removal provision

of the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 77p(c).

(Notice of Removal ¶¶ 7-20.) 

On October 7, 2008, Plaintiff filed an application for issuance of a preliminary

injunction in federal court. (Doc. 2.) The application sought an order from this Court

enjoining the newly issued shares from voting at the upcoming shareholders meeting.

Defendants filed an opposition to the application for a preliminary injunction and Plaintiff filed

his reply. (Docs. 7, 9.) 

Case 3:08-cv-01820-WQH-JMA Document 30 Filed 03/25/09 Page 3 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 4 - 08cv1820-WQH-JMA

On October 29, 2008, the parties appeared for oral argument on the preliminary

injunction before the Court. On the same day, the Court issued a written opinion denying

Plaintiff’s application for a preliminary injunction. (Doc. 19.)

On October 24, 2008, Defendants filed a motion to dismiss the first amended complaint

on the grounds that the first amended complaint failed to adequately allege (1) facts showing

that he has standing to proceed derivatively on behalf of the Company and (2) facts sufficient

to state a claim upon which relief may be granted. (Doc. 11.) Plaintiff filed an opposition to

the motion to dismiss and Defendants filed their reply. (Docs. 21, 22.)

On November 5, 2008, Plaintiff filed a motion to remand on the ground that removal

to this Court under the Securities Litigation Uniform Standards Act, 15 U.S.C. 77p(c), was

improper. (Doc. 20.) Plaintiff requested an order requiring Defendants to pay the attorneys’

fees and costs incurred as a result of removal. (Id. at 5.) Defendants filed an opposition to the

motion to remand and Plaintiff filed his reply. (Docs. 24, 25.)

On December 1, 2008, Artes Medical, Inc. filed a voluntary petition for bankruptcy

pursuant to Chapter 7 of the United States Bankruptcy Code. (Doc. 28.) All further

proceedings against Artes Medical as the nominal defendant were stayed pursuant to the

automatic stay provision of 11 U.S.C. 362(a). The automatic stay does not apply to the officers

and directors of Artes Medical named as co-defendants in this case. 

CONTENTIONS OF THE PARTIES

Plaintiff asserts that the removal and preclusion provisions of the Securities Litigation

Uniform Standards Act (SLUSA) “do not apply to this suit and removal was improper.” (Pl.’s

Mot. Remand at 1.) Plaintiff contends that his class claim does not fall within the definition

of a “covered class action” under SLUSA because Plaintiff does not seek monetary damages

on behalf of the class. Plaintiff asserts that his class claim seeks only injunctive and

declaratory relief to remedy the alleged dilution of the class members’ shareholder voting

rights. Plaintiff requests an award of costs and attorneys’ fees incurred as a result of removal

pursuant to 28 U.S.C. § 1447(c). (Id. at 5.) Plaintiff asserts that an award of attorneys’ fees

under § 1447(c) is warranted because “Defendants removed this case for an improper purpose:

Case 3:08-cv-01820-WQH-JMA Document 30 Filed 03/25/09 Page 4 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 5 - 08cv1820-WQH-JMA

namely, to delay things long enough to prevent any court from hearing Rubin’s request for

preliminary injunctive relief until after the annual shareholders’ meeting.” (Id. at 6.) 

Defendants contend that the first amended complaint was properly removed to this

Court because it is a covered class action as defined by SLUSA. (Doc. 24 at 2.) Defendants

assert that the first amended complaint seeks compensatory damages and punitive damages as

well as injunctive and declaratory relief. Defendants assert that the prayer for relief in the first

amended complaint does not distinguish between the relief sought on behalf of the class and

the relief sought derivatively on behalf of the Company. (Id. at 6.) Defendants assert that

Plaintiff is attempting to “artfully plead around SLUSA” by asserting that he does not seek

damages on behalf of the putative class members. (Id. at 7.) Defendants oppose Plaintiff’s

request for attorney’s fees under § 1447(c) on grounds that the Defendants had a good faith

basis for removal based upon their interpretation of the first amended complaint, SLUSA, and

the decisional law interpreting that statute. (Id. at 11.) 

APPLICABLE LAW

Congress adopted the Private Securities Litigation Reform Act of 1995 (Reform Act),

109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1 and 78u-4), in order to “deter or at least quickly

dispose of abusive class actions by requiring plaintiffs bringing private securities fraud actions

in federal court to surmount a number of procedural hurdles.” Merrill Lynch, Pierce, Fenner

& Smith Inc. v. Dabit, 547 U.S. 71, 81-82 (2006). Rather “than face the obstacles set in their

path by the Reform Act, plaintiffs and their representatives began bringing class actions under

state law, often in state court.” Id. at 82. In 1998, Congress enacted SLUSA “to prevent

plaintiffs from seeking to evade the protections that Federal law provides against abusive

litigation by filing suit in State, rather than in Federal court.” H.R. Rep. No. 105-640, at 8-9

(1998). “The legislation is designed to protect the interests of shareholders and employees of

public companies that are the target of meritless ‘strike’ suits, the purpose of which is to

extract a sizeable settlement from companies that are economically forced to settle, regardless

of the lack of merits of the suit, simply to avoid the potentially bankrupting expense of

litigating.” Id. at 9. 

Case 3:08-cv-01820-WQH-JMA Document 30 Filed 03/25/09 Page 5 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

 The removal provision states that “[a]ny covered class action brought in any State court

involving a covered security, as set forth in subsection (b), shall be removable to the Federal district

court for the district in which the action is pending, and shall be subject to subsection (b)." 15 U.S.C.

77p(c). 

2

 “The preclusion provision is often called a preemption provision; the Act, however, does not

itself displace state law with federal law but makes some state-law claims nonactionable through the

class action device in federal as well as state court.” Kircher v. Putnam Funds Trust, 547 U.S. 633,

637 n. 1 (2006). 

- 6 - 08cv1820-WQH-JMA

Subject matter jurisdiction over cases removed to federal court under SLUSA “is

restricted to precluded actions defined by subsection (b).” Kircher v. Putnam Funds Trust, 547

U.S. 633, 643 (2006) (citing 15 U.S.C. §§ 77p(b), 77p(c)). “If the action is not precluded [as

defined by §77p(b)], the federal court has no jurisdiction to touch the case on the merits, and

the proper course is to remand to the state court that can deal with it.” Kircher, 547 U.S. at

644. 

SLUSA provides for the removal1

 and preclusion2 of any “covered class action based

upon the statutory or common law of any State . . . [brought] by any private party alleging –

(1) an untrue statement or omission of a material fact in connection with the purchase or sale

of a covered security; or (2) that the defendant used or employed any manipulative or

deceptive device or contrivance in connection with the purchase or sale of a covered security.”

15 U.S.C. §§ 77p(b), 77p(c). SLUSA defines a “covered class action” as one in which either

(1) damages are sought on behalf of more than 50 persons or prospective class members or (2)

one or more named parties seek to recover damages on a representative basis. 15 U.S.C. §

77p(f)(2)(A)(i). “The term covered class action does not include an exclusively derivative

action brought by one or more shareholders on behalf of a corporation.” 15 U.S.C. §

77p(d)(2)(f)(2)(B). 

DISCUSSION

In this case, Plaintiff alleges four causes of action in the first amended complaint. The

first cause of action is on behalf of putative class of the Company’s public shareholders against

the Director Defendants for breach of fiduciary duty. The second, third, and fourth causes of

action are derivative claims on behalf of the Company for breach of fiduciary duty, breach of

the duty of loyalty, and waste of corporate assets. Plaintiff seeks declaratory relief, injunctive

Case 3:08-cv-01820-WQH-JMA Document 30 Filed 03/25/09 Page 6 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 7 - 08cv1820-WQH-JMA

relief, compensatory damages, and exemplary damages. Defendants removed the case under

SLUSA based upon the class claim alleged in the first amended complaint; Plaintiff’s

derivative claims are not subject to removal and preclusion under SLUSA. 15 U.S.C. §

77p(2)(f)(2)(B). 

The issue now before the Court is whether Plaintiff’s class claim is precluded as defined

by §77p(b). If Plaintiff’s class claim is not precluded, then the Court must remand this case

to the state court. Kircher, 547 U.S. at 644. In order to be precluded, the class claim must be

(1) a covered class action; (2) based on state law; (3) alleging an untrue statement or omission

of a material fact; (4) in connection with the purchase or sale of a covered security. 15 U.S.C.

§ 77p(b). Plaintiff concedes that his class claim is based upon state law and that covered

securities have been purchased or sold. Plaintiff contends, however, that his class claim does

not meet the definition of a “covered class action,” as defined by SLUSA because his class

action claim seeks only equitable injunctive relief and not damages. Defendants assert that

Plaintiff has made an unambiguous request for damages and Plaintiff’s class claim is a covered

class action. Defendants contend that Plaintiff is attempting to artfully plead around SLUSA

in order to evade the heightened pleading standards of the Private Securities Litigation Reform

Act, which SLUSA was designed to prevent. 

In this case, there appears to be no dispute that the original complaint filed in state court

was exclusively a derivative action brought by Plaintiff as a shareholder on behalf of the

Company. The original complaint included claims for breach of fiduciary duty to the

Company, breach of the duty of loyalty to the Company, and waste of corporate assets and

sought monetary damages and injunctive relief. One month after the original complaint was

filed, the Director Defendants allegedly caused the Company to issue over three million shares

of common stock to private investors. Plaintiff promptly amended his complaint to add a state

law class action claim for breach of fiduciary duty. This new class claim alleged that the

Director Defendants breached their fiduciary duty to the class by “issuing more than three

million shares of new common stock at below market price to hand picked friends of the

Director Defendants . . . to significantly dilute the voting power [of] Plaintiff and the other

Case 3:08-cv-01820-WQH-JMA Document 30 Filed 03/25/09 Page 7 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 8 - 08cv1820-WQH-JMA

members of the class.” (First Amended Complaint ¶ 97.) 

Plaintiff’s contention that the class claim seeks only injunctive relief is supported by

the fact that Plaintiff filed a state court application for a temporary restraining order and a

federal court application for a preliminary injunction, both of which sought to enjoin the newly

issued shares from voting at the meeting. The first paragraph in the first amended complaint’s

prayer for relief seeks “a declaration that, as to the first cause of action, this action is properly

maintainable as a class action.” (First Amended Complaint ¶ 1.) The second paragraph in the

first amended complaint’s prayer for relief seeks “a temporary restraining order, preliminary

and permanent injunction, enjoining Defendants from allowing the share issued on September

26, 2008, to vote at the Annual Meeting scheduled for October 30, 2008.” (Id. ¶ 2.) The

reference to damages in the first amended complaint are found in paragraphs seven and eight

of the prayer for relief, which seek “a determination and award to ARTES for the damages

sustained by it” and “a determination and award to ARTES for exemplary damages . . .” (Id.

¶¶ 8, 9.) Plaintiff’s request for award compensatory and exemplary damages to ARTES in the

first amended complaint relate only to the derivative claims brought by Plaintiff on behalf of

the company. No where in the first amended complaint does Plaintiff seek an award of

damages on behalf of the class. See Shen v. Bohan, 2002 U.S. Dist. LEXIS 22485 (C.D. Cal.

2002) (remanding shareholder class action and derivative complaint where Plaintiff did not

seek damages on behalf of the class). Even if Plaintiff is attempting to “artfully plead” around

the application of SLUSA, he is not prohibited from doing so. See U.S. Mortgage, Inc. v.

Saxon, 494 F.3d 833, 843 (holding that a plaintiff may file an amended complaint in an attempt

to avoid SLUSA dismissal). The Court concludes that Plaintiff’s class claim does not fall

within the definition of a covered class action and is not precluded under SLUSA. This Court

“has no jurisdiction to touch this case on the merits, and the proper course is to remand.”

Kircher, 547 U.S. at 644.

An order remanding a removed case to state court may require payment of just costs and

any actual expenses, including attorney fees, incurred as a result of the removal. 28 U.S.C. §

1447(c). The standard for awarding fees under 28 U.S.C. § 1447(c) turns on the

Case 3:08-cv-01820-WQH-JMA Document 30 Filed 03/25/09 Page 8 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 9 - 08cv1820-WQH-JMA

reasonableness of the removal. Martin v. Franklin Capital Corp., 546 U.S. 132, 141 (2005).

“Absent unusual circumstances, courts may award attorney’s fees under § 1447(c) only where

the removing party lacked an objectively reasonable basis for seeking removal. Conversely,

when an objectively reasonable basis exists, fees should be denied.” Id. In this case, the Court

does not conclude that Defendants lacked an objectively reasonable basis for seeking removal.

CONCLUSION

IT IS HEREBY ORDERED that the motion to remand (Doc. 20) filed by Plaintiff is

GRANTED. It is further ordered that the motion to dismiss (Doc. 11) filed by Defendants is

DENIED as moot. The Plaintiff’s request for attorney’s fees and costs pursuant to 28 U.S.C.

1447(c) (Doc. 20) is DENIED. 

DATED: March 25, 2009

WILLIAM Q. HAYES

United States District Judge

Case 3:08-cv-01820-WQH-JMA Document 30 Filed 03/25/09 Page 9 of 9