F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

N O R T H S T A R F I

N A N C I A L A D V I S O R S I N C ., on behalf of itself and all others similarly situated, Plaintiff-Appellant
,

v

.

S C H W A B I N V E S T M E N T S ; M A R

I A N N B Y E R W A L T E R , D O N

A L D F

. D O R W A R D , W I L L I A M A. H A S L E R , R O B E R T G. H O L M E S , G E R

A L D B

. S M I T H , D O

N A L D R. S T E P H E

N S , M I C H A E L W

. W I L S E Y , C H A R L E S R. S C H W A B , R A N D A L L W

. M E R

K , J O S E P H H. W E

N D E R and J O H

N F

. C O G A N , as Trustees of Schwab I nvestments; and Charles Schwab I nvestment Manag ement, I nc.,

Defendants-Appellees

. N o. 11-17187

D.C. No. 5:08-cv-4119- L H K

ORDER AND AMENDED OPI NI ON

A ppeal from the United States District Court for the Northern District of California L u cy H. Koh, District J udg e, Presiding

Arg ued and Submitted May 17, 2013—San F rancisco, California

F iled March 9, 2015 Amended April 28, 2015N O R T H S T A R F I

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B efore: Richard R. Clifton and Carlos T. B ea, Circuit J udg es, and Edward R. Korman, Senior District J udg e. *

Order; Opinion by

J udg e Korman; Dissent by

J udg e B ea

SUMMARY * *

M utual F unds

The panel reversed in part and vacated in part the district court’s dismissal of a shareholder c lass action o n behalf o f investors who alleg ed that the manag ers of the Schwab Total B ond Market F und, a mutual fund, failed to adher e t o the F und’s fundamental investment o bjectives of seeking to track

a particular index a

nd not over-concentrating its investments in any one industry

. The F und w as cr e ated by Schwab I nvestments (“Schwab Trust”), a “Massachusetts trust ,” a nd its investment adviser was Charles Schwab I n vestment Manag ement, I nc. (“Schwab Advisor”).

The named plainti f

f was N orthstar F inancial Advisors, I nc., a reg istered investment advisery and financial planning firm that manag e d accounts on behalf of investors and h ad

* T h e Ho n o rab le Ed w ard R. Ko rm an , Sen io r Dis t r i c t J u d g e f o r th e Un i ted States District Co u rt f or th e Eastern District of New Yo rk
, sittin g b y d esig n atio n

.

** T h is su m m ary co n stitu

t es n o p ar t o f t h e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.N O R T H S T A R F I

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over 200,000 shares of the F u nd under its manag ement. The panel held that Northstar had standing because it filed a supplemental pleading under F ederal Rule of Civil Procedure 15(d) after obtaining an assig nment of claim from an investor in the F und.

The panel r eversed the district court’s dismissal of breach of con t r a c t claims. I t held that the F und shareholders’ adoption o f t h e investment objectives added a structural restriction on the power conferred o n the F und trustees that could only be chang ed by a v o te o f the shareholders, and was subsequently reflected in the F und’s r eg istration statements and p rospectuses, and thus created a contract between the trustees and F und investors.

Vacating the dismissal of fiduciary duty claims, the panel held that the operative complaint stated a claim that the Schwab d efendants breached their fiduciary duties by failing to ensure that the F u nd was manag ed in accordance with the fundamental investment objectives a n d by chang ing the F und’s f undamental investment objectives without obtaining required shareholder authoriz ati o n

. The panel held that the
trustees owed a fiduciary duty to the shareholders, rather than the F und, and so Northstar was n o t required t o p roceed b y way of a derivative action.

The panel reversed the dismissal of a thir d

- p a r ty beneficiary breach of c ontract claim. I t h eld that Northstar adequatel y alleg ed that the investors were third-party beneficiaries of the I nvestment Advisory and Administration Ag reement between Schwab Trust and Schwab Advisor.N O R T H S T A R F I

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The panel d eclined to a ddress the e ffect of the Securities L i tig ation Uniform Standards Act o n the various common l a w causes of action. I

t remanded the case to the district court.

Dissenting
, J u dg e B e a wrote that Northstar lacked standing because, at t h e commencement of the action, it did
not own any fund shares, nor did it own any claims of others who had suffered losses the defendants had alleg edly caused.

COUNSEL

Robert C

. F inkel (arg

ued), W olf Popper L L P, N ew York, New York; J oseph J

. T abacco, J r., C h r i s topher T. Heffeling er, and Anthony D. Phillips, B erman DeValerio, San F rancisco, California; Marc J

. Gross, Greenbaum Rowe Smith & D avis L L P, Roseland, New J ersey , for Plaintiff-Appellant.

Karin Krame r a n d Arthur M. Roberts, Quinn Emanuel U rquhart & Sullivan, L L P, San F rancisco, Californ i a ; R i c h a r d Schirtz er (arg

ued), Susan R. Estrich, and B. D y lan Proctor, Quinn Emanuel Urquhart & Sullivan, L L P, L os Ang eles, California, for Defendants-Appellees.N O R T H S T A R F I

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ORDER

J udg e Clifton and J udg e K orman voted to deny the petition for rehearing

. J udg e B ea voted to g rant the petition. The petition for rehearing is DENIED

.

The full court h as b ee n advised of the petition for rehearing en ban c and no judg e of the c ourt has requested a vote on whether to r ehear the matter e n banc. F ed. R. A pp. P. 35. The petition for rehearing en banc, filed March 2 3, 2015, is D ENIED

.

The o p i n i on filed March 9, 2015 is amended. The sentence beg inning immediately after the quote a t the top of
pag e 53 currently

reads as follows:

I ndeed, notwithstanding the requirement that

a percentag e of the members o f t h e mutual fund board be “independent” from the adviser, Cong r ess required that the shareholders of the F und annually approve the adviser c ontract. 15 U.S.C. § 80a-15.

The sentence is amended to read as follows:

I ndeed, notwithstanding the requirement that 40 percent of the members of the mutual fund board be “independent” f r om the adviser, 15 U.S.C. § 80a-10(a), Cong ress required that the sharehol d ers of the F und approve the initial contract for any adviser. 15 U

. S

. C. § 80a-15.N O R T H S T A R F I

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No further petitions for rehearing following this amendment
may be filed.

OP INION

KORMAN, District J udg e:

The I nvestm e n t Company Act (“I CA”) establishes a comprehensive federal reg ulato r y framework applicable to

m u t ual f u nds. See 15 U.S.C. § 80a-1 et seq

. M o r e specifically
, it provides that a mutual fund’s reg istration
statement must recite all investment policies th at can be chang ed only by shareholder vote. 15 U.S. C

. § 80a-8(b). Deviation from policies so desig nated violates § 13(a) of the I CA. 1 5 U .S .C. § 80a-13(a)(3). This appeal arises out of a class action on behalf of investors who alleg e that t he
manag ers o f the Schwab Total B ond Market F und ( “F und”) failed to a dhere to two of the F und’s fundamental investment objectives; namely
, that it seek to track a particular index a nd that it n ot over- c o n c e n trate its investments in any o ne industry

. These objectives, w hich could only be chang ed b y

a vote o f the shareholders, were adopted by a shareholder
vote and subsequently incorporated in the F und’s reg istration statement and prospectuses.

On a previous interlocutory appeal, we rejected the
arg ument that this conduct g ave rise to an i m p lied private rig ht to enforce § 13(a) of the I CA. Northstar Fin. Advisors, Inc. v

. Schwab Invs.
, 615 F .3d 1106 (9th Cir. 2010). On this appeal fr o m a n o rder g ranting a motion to dismiss a Third Amended Complaint
, t he principal issues a re whether the investors h ave stated valid causes of a c t i o n for breach o fN O R T H S T A R F I

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contract, breach o f f

i d uciary d

uty , and breach o f an ag reement to which the investors claim to be t hird-party beneficiaries.

BACK G ROUND

Schwab I nvestments (“Schwab Trust”) i s an investment
trust org aniz e d under Massachusetts law. Such a trust, which is often referred to g enerically as a “ M a s sachusetts trust,”

even when not cr e a t ed u nder Massachusetts law, is an unincorporated business org aniz ation c reated by an instrument o f trust b y w hich property is to be held a nd
manag ed b y trustees for the benefit of persons w ho are o r b e c ome the holders of the beneficial interests in the tru s t estate. See Hecht v. M

a l l ey , 265 U.S. 144, 146–47 (1924). 1 Thus, the Schwab Trust’s A gr e em ent and Declaration o f Trust s t a t es that “the T rustees hereby declare that they will hold a ll cash, securities and o ther a sse t s , which they may from time to time acquire in any manner as Trustees hereunder I

N T RUST to manag e and dispose o f the same

. . . for the pro rata benefit o f the holde r s f ro m time to time o f Shares in this Trust.” Schwab I nvestments, Reg i s t r a t ion Statement (F orm N-1A), Ag r e e ment and Declaration o f Trust 1 (Ex

. 1 ) (Dec. 29, 1997) [ hereinafter “Ag r eem e nt a nd Declaration of Trust”]

. S u c h a “trust today is a preferred for m o f org aniz ation for mutual funds and asset

1 “ Un l ik e th e co rp o ratio n o f th e late 1 8 0 0s an d early 1 9 0 0 s, th e co m m on law b u sin ess t

ru st w as o n ly lig h tly reg u lated
, s o e n t r ep ren eu rs u s ed th e b u sin ess t ru st to escap e th e co m

p arativ ely m

u ch h eav ier reg u latio n o f th e

co rp o rate f

o rm

. Usin g th e b u sin ess tru st f o r th is p u rp o se w as so p ro n o u n ced in Massach u setts, w h ere co rp o rate o w

n ersh ip o f real estate

w a s p ro h ib ited
, th at th e t erm Ma ssa ch u setts tru st b ecam e sy n o n y m o u s

w ith b u sin ess tru st.” J esse Du k em in i er, Ro b ert H. S itk o f f & J am es L in d g ren , W

i lls, Tru sts, a n d Esta tes 5 5 5 –5 6 (8 th ed . 2 0 0 9 ).N O R T H S T A R F I

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securitiz a tion.” Dukeminier, Sitkoff & L indg r en, W ills, Trusts, and Estates 5 5 6.

One of the sig nificant features that disting uishes a Massachusetts trust from the ordinary or private trust “lies in the manner in w hich the trust relationship is created; investors in a business trust e n t e r into a voluntary
, consensual, a nd
contra c t u al relationship, whereas the beneficiaries of a traditional private trust take their interests by g ift fro m t he donor or settlor.” Herbert B

. Chermside, J r., Modern Status of the Massachusetts or Business Trust
, 88 A.L .R.3d 704, 720 ( 1978); see also Berry v. M cCourt
, 204 N.E.2d 235, 2 4 0 ( O h i o Ct. App. 1965) ( “B y an underly ing contract, or in the provisions o f a business trust instrument, or both, the parties
agree on the opera t i o n s o f the venture.”). Thus, the Ag reement and Declaration o f Trust at issue here states at the
very outset that it w as made “by the Trustees hereunder, a nd by the h olders of shares of beneficial interest to b e issued hereunder.” Ag r eement a nd Declaratio n of T r

ust 1. Moreover, it c ontinues that “[ e] very Shareholder by virtue o f having become a Shareholder shall be held to have ex pressly assented and ag reed to the terms hereof and to have become a party hereto.” Ag

reement and Declaration of Trust 4.

Because this case involves the relationship betwee n investors and a mutual fund, the trust which created the fund and the investment adviser which manag es the f und, it is helpful to have a clear unders t a n d ing of the relationships
among these parties. W e beg in with a useful, if oversimplified, description of a mutual fund:

T
, an investment professional, a p proaches A
, B
, C , and others like them and ag rees to pool certain of their assets in a common fund to beN O R T H S T A R F I

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m an a ged by T

. A
, B
, C
, and the other investors ea c h receive tradable shares in the fund in an amount p roportional to their investment. B y structuring their collective investment in this way , A
, B
, C
, a nd the others

are able to take advantag e of economies o f

s c a l e , o b t a i n p r o f

e s s i o n a l p o r t f

o l i o manag ement, a n d achieve a more diversified portfolio than e ach could have individually

. I n m a n ag ing the portfolio, T is subject to a fiduciary oblig ation to A
, B
, C
, and the othe r investors in the fund.

Dukeminier, Sitkoff & L indg ren, W ills, Trust s, and Estates 556.

This simple description does not adequately disc u ss perhaps the most important p arty to this arra n gement, namely
, the investment adviser, whose “main rol e is to supervise and manag e the fund’s assets , i n c luding handling the fund’s portfolio transactions.” C l i fford E. Kirsch, A n In t r oduction to Mutual Funds
, in Mutual Fund Regulation § 1:2.2 (Clifford E. Kirsch ed., 2d ed. 2005). The investment adviser is not a mere employ ee, co n t r actor, or consultant. I nstead, i t is “ more often than not also the creator, sponsor, and promoter of the mutual fund.” Charles E. Rounds, J r

. & Charles E. Rounds, I I I
, Loring and Rounds: A Trus t e e’s Handbook 955–56 (2012 ed.); see also Kamen v. Kemper Fin. Servs., Inc.
, 5 00 U.S. 90, 93 (1991) (Mutual f unds “ty pically

are org an i z ed and underwritten by the same firm that serves

as the company ’s ‘inves t m e nt adviser.’”); Daily Income Fund, Inc. v

. Fox
, 464 U.S. 523, 536 (1984) (Mutual funds

are “ty pically created and manag ed by a pre-ex isting e x ternalN O R T H S T A R F I

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org aniz ation k

nown as an investment adviser.” (citing B u rks v. Lasker
, 441 U.S. 471, 481 (1979))).

Thus, while “[ i] n theory
, the [ trust] is able to choose any

a d v iser it deems appropriate to invest the fund’s portfol i o , based on the adviser’s investing sty le, track record and fees,” in p r a c t ice, the investment adviser picked to manag e the portfo l i o is most often self-selected and u n likely to be removed. J o hn Shipman, So W ho Owns Y

our M utual Fund?
, W al l S t

. J
., May 5, 2003, at R1, available at h t t p : / / o n l i n e

. w s j

. c o m / n e w s / a r t i c l e s / S B 1 0 5 2 0 7 9 6 9 8 7 3 1 4 2 9 0 0

. B ecause “a ty

pical fund is org aniz ed b y its investment adviser which p r ovides it with almost all manag ement services . . . ,

a mutual f

u n d c annot, as a practical matter sever its relationship w ith the a d v iser.” Burks
, 441 U.S. at 481 (quoting S. Rep. No. 91-184, at 5 (1969), reprinted i n 1 9 70 U.S.C.C.A.N. 4897, 4901).

Consistent with this description of the structu r e of a mutual fund and its relationship with its investment adviser, the Schwab Trust selected Charles Schwab I nvestme nt Manag ement, I nc. (“Schwab Ad v isor”) as its investment adviser. I ndeed, Charles R. S chwab is a lleg ed to have been

c h a i rm a n and trustee of the Schwab T rust and a member o f
t h e b o a r d of the Schwab Advisor. Third Am. Compl. ¶ 38. The latter is a subsidiary of the Charles Schwab Corporation, of whic h Mr. Schwab has served a s “CEO at various times, including from 2 004 throug h O c t o ber 2008.” Third Am. Compl. ¶ 3 6

. M oreover, the complaint alleg es that all “[ d] efendants a

nd their affiliates hel d themselves o ut as o ne Schwab entity [ .] ” Third Am. Compl. ¶ 167.

The mutual fund at issue here, one of several operated b y the Sch w a b T rust, is the Schwab T o tal B ond Market F und.N O R T H S T A R F I

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Reflecting the terms of a prox y statement proposed by the Schwab T r u st in 1997, and subsequently adopted by the shareholders b y majority vote, the prospectuses that the F und issued during the relevant period stated that the F und w a s “de sig ned to offer hig h current income by tracking the performance of the L ehman B r others [ U.S.] Ag g reg ate B ond I ndex [ (“L ehman I ndex ”)] ” a n d was “intended for investors seeking to fill the fix ed i n c o m e component of their asset allocation plan.” Specifically
, the L ehman I ndex i n cluded “investm e n t

- gr a d e go v e rn m en t , c o r p o r ate, mortg a g e-,

co m mercial mortg ag e

- and a sset-backed bonds that [were] denominated in U.S. dollars and ha[ d] maturities long e r than

one y e ar.” Northstar Fin. Advisors, Inc. v. Schwab Invs.
, 609 F

. Supp. 2 d 938, 945 ( N.D. Cal. 2009). 2 Nevertheless, the F und is not itself an index fund and, a c c o r d i n g to the F und’s p rospectus, it w as “ n ot required to invest any percent a g e o f its a ssets in the securities represented in the [ L ehman] I ndex

. ” Decl. o f Kevin Calia in Support of Motion
to Dismiss Second A mended Class A ction Complaint, Ex

. A at 14, Nov. 10, 2010.

The F und disclosed in its re gi stration statement, a nd reiterated in prospectuses issued thereafter, that its policy of tracking the L e hman I ndex was “fundamental,” which means that it “cannot be chang ed without approval of the holders o f a majority

of the outstanding voting securities (as defined in

2 T h e f or m e r L eh m an In d ex is n o w k n o w n as th e B arclay s U .S. A g g reg ate B o n d In d ex

. It cu rren tly “ co m p rises a to tal o f 8 ,2 8 6 b o n ds an d is w o rth n early $ 1 7 trillio n .” Caro ly n Cu i
, Ba rc l a

ys Ag g Ha d Mo dest Orig in
, W all St. J
., Ap r. 2
, 2 0 13
, h t tp ://o n lin e.w sj .co m /article/ SB 1 0 0 0 14 2 4 1 2 78 8 7 3 2 4 8 8 36 0 45 7 8 3 9 8 8 8 0 6 79 9 4 9 6 7 0 .h tm l. “ [A ]b o u t $ 6 6 3 b illio n o f in stitu

tio n al assets is in v ested in 2 70 U.S. co re f i x e d

in co m e p o rtf

o lio s, 7 5 % of w

h ich are ben ch m ark ed ag ain s t th e B arclay s A g g In d ex .” Id

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the [ I CA] ).” Schwab I nvestments, Reg istration Statement 5, 14 (F orm N-1A) (J an. 16, 1998), Prospectus 10 (F orm N-1A, Part A) (Nov. 1, 1997, as a mended J a n. 15, 1998); see a l

s o Michael Glaz e r, Prospectus Disclosure and Delivery Requirements, in Mutual F u n d R egulation § 4:3.6 (Clifford E. Kirsch ed., 2d ed. 200 5 )

. T h e F und was also precluded from investing twenty -five percent or more of the F und’s total assets in any o ne industry
, u nless necessary to track the L ehman I ndex

. Schwab I nvestments, Reg istration Statement 41 (F orm N-1A) (J an. 16, 1998), Statement of Additio nal I nformation 11 (F orm N-1A, Part B ) (Nov. 1, 1997, a s amended J an. 15, 1998).

Northstar F inancial Advisors, I n c. (“Northstar”) is a reg istered investment a dvisery and financia l p lanning f irm that manag es discretionary and non-discretionary accounts on behalf of investors and had over 200,000 shares of the F und under its manag ement. I n Aug ust 2008, Norths t ar filed this shareholder c lass action ag ainst the defendants, a lleg ing that they d eviated from the F und’s f undamental investment policies and ex posed the F u nd and its shareholders to tens o f millions of dollars in losses.

Northstar has identified two classes of potential plaintiffs: (1) a “Pre-B r each” class
, consisting of those who purchased shares of the F und on o r prior t o A u gu s t 31, 2 007, and w ho continued to hold their shares as of Aug ust 31, 2007, a nd (2) a “B reach” class, consisting of those who purchased shares of t h e F und during the period September 1, 2007 throug h F ebruary 27, 2009. Northstar alleg es that Aug ust 31, 2007 was the last day of the fiscal y ear preceding the o ne during which the F und first beg an deviating from its r equired f undamental investment policies, and that on F ebruar y 2 7
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This case has a l e n gt h y and complicated procedural history that includes t he dismissal of successive amended complaints for failure to state a cog niz able c a u se of action. Specifically
, the Third Amended Complaint, which is based

on the F u nd’s unauthoriz e d deviation from its fundamental investment objectives, alleg e s five causes of action o n behalf of each of the two identified classes, for a total of ten claims: breach of fiduciary duty ag ainst the Trustees 3 (counts one a nd six ); breach of fiduciary duty ag ainst Schwab A dvisor ( c ounts two and seven); aidingand abetting breach of fiduciary duty
ag ainst the Trustees (counts three a nd eig ht); aiding a

nd abetting breach of f

i d u ciary duty a g ainst Schwab A dvisor (counts four and n ine); breach o f the I nvestment A dvisory and Admin istration Ag r eement (“I AA”) between Schwab Trust and Schwab Advisor. T h e last cause of a ction is based

on the alleg ations that the investors are third-party beneficiaries of the I AA. The Th i rd A mended Complaint also incorporates by reference a breach of contract c ause o f action a g ainst the Schwab Trust that was a lleg ed in the Second Amended Complaint, but dismissed w i t h p r ejudice on

an earlier motion to d ismiss. The incorporation by r e ference

was included to preserve Northstar’s rig ht to appeal from the dismissal of this cause of action with prejudice.

STANDARD OF REVIEW

W e review de novo the d istr i c t j u dg e’s order g ranting a motion to dismiss. Manzarek v. St. Paul Fire & Marine Ins.

3 “ T ru stees” is a co llectiv e ref eren c e t o t he t ru stees o f Sch w ab T ru st: d ef en d an t s Marian n B y erw alter, Do n ald F. Do rw ard
, W illiam A

. Hasler, Ro b ert G. Ho lm es, Gerald B

. Sm ith
, Do n ald R. Step h en s, Mich ael W

. W ilsey
, Ch arles R. Sch w ab
, Ran d all W

. Merk
, J o s e p h H. W en d er, an d J oh n F. Co g an

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Co.
, 519 F .3d 1025, 1 0 3 0 (9th Cir. 2008). On a motion to dismiss, “[ w] e accept factual alleg ations in the complaint a s true and c onstrue the pleading s in the lig ht most favorable to the non-moving party

. ” Id

. at 1 031. “[ W ] e may co n s i d e r materials incorporated into the complaint or matters of public record.” Coto Settlement v. E isenberg
, 593 F .3d 1031, 1038 (9t h C ir. 2010). W e may also consider “documents ‘whose
contents are alleg ed in a complaint and whose authenticity no pa rt y questions, but w hich are not phy sically attached to the [ plaintiff’s] pleading .’” Knievel v. ESPN
, 393 F. 3 d 1068, 1076 (9th Cir. 2005) (alter a t ion in orig inal) (quoting In re Silicon Graphics Inc. Sec. Litig.
, 183 F .3d 970, 986 (9th Cir. 1999)); see a lso Ecological Rights Found. v. Pac. Gas & Elec. Co.
, 7 1 3 F. 3 d 5 02, 5 11 (9th Cir. 2013). T his is sometimes referred to a s the “inco r p oration by reference” doctrine. Knievel
, 3 93 F .3d at 107 6 ; see also Lapidus v

. Hecht , 232 F .3d 679, 682 (9th Cir. 2000).

Among the documents we c o n s i der pursuant to that doctrine are three sets o f the Schwab Trust’s filing s with the Securities and Ex chang e Commission: (1) the R e gi stration Statement of December 29, 1997; (2) the Reg i s tration Stateme n t o f J anuary 16, 1998, which was filed with the Prospectus and Statement of Additional I nformation o f November 1, 1997, as amended J anuary 15, 1998; a nd ( 3) the Prospectus and Statement of Additional I nformation o f November 1 5, 2004. W hile all of these document s a re referred t o i n t he c omplaint, the entire content of e ach document does not appear to be part o f t h e record. Nevertheless, “ [ i] t is a

ppropriate to take judicial notice of this information, as it was made p ublicly available by [ the SEC]
, and neither party disputes the authenticity of the [ documents]

or the accuracy of the information di splay ed therein.” Daniels-Hall v. Nat’l Educ. Ass’n
, 629 F .3d 9 92, 998–99 (9thN O R T H S T A R F I

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Cir. 2010) (citing F ed. R. Evid. 201); see also Dreiling v. A m

. Express Co.
, 458 F .3d 942, 946 n.2 (9th Cir. 2006) (W e “may consider documents referred to in the complaint or any matter

su b ject to judicial notice, such as SEC filing s.”). I ndeed, defendants, who mig h t otherwise be a g g rieved by their u se, created and filed them w ith t he SEC. Under these circumstances, it is appropriate for us to consider them h ere. See 1 Christopher B

. Mueller & L aird C. K irkpatrick, Federal Evidence § 2:8 at 359–61 (4th ed. 2013).

D ISCUSSION

I. Standing

W e p ause before addressing the merits to discuss the issue of whether Northstar has standing

. N orthstar filed its initial

c lass action complaint on behalf of investors in the F und o n Aug ust 28, 2008. Northstar owned no shares of the F u nd, but it broug ht the action in its own name, wit h o u t obtaining an

as s i gn m e nt of claims from an investor in the F und. Subsequ e ntly
, in a comparable case broug h t by a n asset manag ement firm, the Second Circuit held that “ the minimum requirement for injury -in-fact i s t h at the plaintiff have leg al title to, or a pro p r i e t a r y interest in, the claim.” W .R. Huff Asset Mgmt. Co. v

. D el o itte & Touche LLP
, 5 49 F

. 3d 100, 108 (2d Cir. 2 008). On D ecember 8
, 2008, aft er W .R. Huff

was decided, Northstar obtained an assig nment of c laim from a client-shareholder.

D efendants arg ue that because standing must b e determined at the t i m e a c omplaint is filed, and because Northstar did n ot obtain an assig nment of claim until several months after the orig inal complaint was filed, the assig nment could not cure Northstar ’ s o rig inal lack of standing

. TheN O R T H S T A R F I

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d i strict judg e (Susan I llston, J .), to w hom the case was t h e n assig ne d
, d ismissed Northstar’s complaint for lack o f standing with a sug g e stion that this defect could be cured b y filing an amended c omplaint. Northstar Fin. Advisors, Inc. v

. S c h w a b Invs.
, 609 F

. Supp. 2d 938, 942 (N.D. Cal. 2 00 9 ). Northstar followed her sug g estion. After Schwab r enewed its motion to dismiss t he amended complaint, the district court judg e to whom the case had b e e n reassig ned (L u c y Koh, J

.) declined to order the dismissal of the complaint because to do

so would have “elevate[ d] form over substance” and thus she treated the prior order a s g ranting plaintiff lea v e to file a supplemental pleading under Rule 15(d) i n s tead of an amended complaint pursuant to Rule 15(a). Northstar Fin. Advisors, Inc. v. Schwab Invs.
, 781 F

. Supp. 2d 926, 932–33 (N.D. Cal. 2011). I n so doing
, she observed that, “[ a ] lthoug h th e r e i s no published Ninth Circuit authority on this point,
courts in other c ircuits have found t h a t parties may cure standing deficiencies throug h supplemental pl e a d ing s.” Id.
at 933 (citing
, inter alia
, Travelers Ins. C o

. v

. 633 Third Assoc. , 973 F .2d 82, 8 7–88 (2d Cir. 1992)). W e review this ruling de novo , Renee v. Duncan
, 686 F .3d 1002, 1010 (9th Cir. 2012), and we a g ree with J udg e Koh’s application o f F ed. R. Civ. P. 15(d).

Rule 1 5(d) permit s a supplemental pleading to correct a defective complaint and circumvents “ the needless f o rmality and ex p ense of instituting a new action when events occurring a fter the orig inal filing indicated a rig ht to relief.” W r ig ht, Miller, & Kane, F e deral Pract i ce and Procedure: Civil 3d § 1505, pg s. 262–63. Moreover, “ [ e ] v en thoug h [ Rule 1 5(d)] is phrased in t erms of correcting a deficient
statement of ‘ claim’ or a ‘ d ef e nse,’ a lack o f subject-matter jurisdiction should be tr eated like any other defect for
purposes of defining the prope r s c o p e of supplementalN O R T H S T A R F I

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pleading .” Id

. at § 1 507, p g

. 273. I n d e e d
, in Matthews v

. Diaz
, 426 U.S. 67 (19 7 6 )
, the Supreme Court addressed the issue in a case in which an applicant f or Medicare had failed
to f ile his application until after a n amended complaint h ad been filed joining him as an a dditional complainant in a n asy et uncertified class a ction. I n holding that this jurisdictional defect could be cured by a supplemental pleading
, the Supreme Court observed:

Althoug h 42 U .S.C. § 405(g ) establishes fili ng of an application as a nonw a ivable condition of jurisdiction, Espin osa satisfied this condition while the c a se was pending in the District Court. A s u pplemental complaint in the District Court would have e liminated this jurisdictional issue; since the record discloses, bot h b y affidavit and stipulation, that the jurisdictional condition was satisfied, it is not too late, even now, to supplement t he complaint to alleg e this fact.

Id. at 75 ( internal citations omitted). This ho l d i n g is consistent with Rockwell Int’l Corp. v. Un i ted States
, in which the Supreme Court subs e quently held that “when a plaintiff f iles a complaint in federal court and then voluntarily amends the complaint, c o urts look to the amended complaint to determine jurisdiction.” 549 U.S. 457, 473–74 (2007).

W e add here a brief discussion of the thoug htful holding of the Court of Appeals for t h e Fe d e ral Circuit that summariz e s the c ase law addressing supplemental p leading s. There, “[ a] s an initial matter, the parties dispute[ d] whether
t h e a lleg ations in [ the plaintiff’s] Amended Complaint that concern actions taken after the filing of the initial complaintN O R T H S T A R F I

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can be used to establish subject matter jurisdiction.” P rasco, LLC v. Medicis Pharm. Corp.
, 537 F .3d 1 329, 1337 (F ed. Cir. 2008). Rely ing o n Ru l e 15(d) and Matthews v. Diaz
, the Court of Appeals treated the complaint as a supple m e n t al

com p l a i nt and held that it was sufficient to cure the orig inal complaint’s jurisdictional defect:

Thus, w h i l e “[ l] ater events may not create jurisdiction where none ex isted at the time o f filing
, ” the proper focus in det e rmining jurisdiction are “the f

acts ex isting at the time the complaint under c onsideration was filed.” GAF Bldg. M

a terials Corp. v. Elk Corp.
, 90 F .3d 479, 483 (Fe d.Cir.1996) (emphasis added) (quoting Arrowhead Indus. W ater, Inc.

v. E c olochem Inc.
, 846 F .2d 731, 734 n. 2 (F ed. Cir. 1988)); see also R o ckwell In t ’l Corp. v. United States
, 5 49 U.S

. 4 5 7, 127 S.Ct. 1397, 1409, 167 L .Ed.2d 190 (2007) (“[ W ] hen a p l aintiff files a complaint in federal court and then v oluntarily amends the complaint, c ourts look to the amended

c o m p l a i n t t o d e t e r m i n e j u r i s di c t i o n

. ”) ; Connectu LLC v. Zuckerberg
, 5 22 F .3d 82 (1st Cir. 2008). As the district court accepted Prasco’s Amended Complaint
, it is the Amended Complaint that is currently un d e r consideration, a

nd it is the facts alleg ed in this complaint that form the basis for our review.

Id

. See also F

eldman v. Law Enforcement Assocs

. Corp.
, 752 F

. 3d 339, 347 (4th Cir. 2014) (“[ W] e construe the present complaint a s a supplemental p leading u n d er Rule 15(d), thereby curing the d e fect which otherwise would haveN O R T H S T A R F I

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deprived the district court of jurisdiction under Rule 15(c).”); Black v. Sec’y of

Health and Human Servs.
, 93 F .3d 7 81, 790 (F ed. Cir. 1996) (“Nonetheless, a defect in the plaintiff’s
case, even a jurisdiction defect
, ca n be cured by a supplemental pleading under Rule 15(d) in appropriate circumstances.”); United Partition Sys., Inc. v. United States
, 59 Fe d

. Cl. 627, 644 (F ed. Cl. 2004) (“The Supreme Court has interpreted F ed. R. Civ. P. 15(d) to permit supplemental pleading s in which a plaintiff may correct a jurisdictional defect in its complaint by informing the c ourt of po stcomplaint events.”).

J udg e Koh’s holding is also c onsistent with the approach
to the F ederal Rules of Civil Procedure taken by J udg e Clark, “the principal arch itect of the F ederal Rules of Civil Procedure.” Zahn v. I

nternational Paper Co

. , 414 U.S. 291, 297 (1973). Thus, in Hackner v. Guaranty Trust Co. of New Y o rk , 117 F .2d 95 (2d Cir. 1941), the complaint was subject
to dismissal because the plaintiffs did n o t alleg e damag e s sufficient to satisfy the minimum a mount required to invoke subject-matter jurisdiction on the basis of d i v e rsity o f ci tiz enship. An amended complaint was then filed which added a plaintiff, E unice Eastman, w hose alleg ed da m a ges

were “well o ver the requirement.” Id

. at 98. Speaking f or the Se co n d Circuit, J udg e Clark wrote that subject-matter jurisdiction wa s proper n otwithstanding the fact that it was first established by the a ddition of E astman as a pla i n t iff in the amended complaint:

Since [ Eastman] alleg es g rounds of suit in the f e d e ral court, the only question is whether o r not she must beg in a new suit ag ain b y herself. Defendants’ claim that one cannot amend a nonex istent action is purely formal,N O R T H S T A R F I

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in the lig ht of the w ide and fle x ible content g ive n to the concept of a ction under the new rules. A ctually she has a c laim for r elief, an action in that sense; as the Supreme Court has pointed out, there is no p articular mag ic in the
way it is instituted. S o l o ng as a defendant ha s had service r easonably calculated to g ive him actual n otice of the p r o c e eding s, the

r e q u irements of due process are satisfied. H e n c e n o f

o r m i d a b l e o b s t a c l e t o a continuance of the suit appears here, whether the matter is treated as o n e of amendment o r of power of the court to add or substitut e parties, F ederal Rule 21, o r of commencement of a new action by filing a complaint with the clerk, R u le 3. I n any event we think this action can continue with r e spect to E a stman

w i thout the delay a

nd ex pense of a new s u i t , which at long last will merely bring the parties to the point where they now are.

Id

. (quotations and citations o mitted); see also F ed. R. Civ. P. 1 (which provides that the Rules of Civil Procedure “should be construed and administered to secure the just, speedy
, a nd inex pensive determination of every action and proceeding ”).

Our dis s e nting c olleag ue relies on Morongo B and of Mission Indians v. California State Board of Equalization
, 858 F

. 2d 1376 (9th Cir. 1988), for the proposition that “where the district court does not have subject matter juri s d i c t ion

over a matter a t the time of fi l i n g , subsequent events do not confer subject matter jurisdiction on the district court.” Dissent a t 67–68. We find this arg u ment inapposite because, unlike the p r e s ent c ase, Morongo did not involve aN O R T H S T A R F I

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supplemental pleading
, much less one with alleg ations o f events that occurred after the commencement of the action.

W h ile Morongo does contain the b road statement that “subject matter jurisdiction must ex ist as of the tim e the action is c o m m enced” and that a lack of subject-matter jurisdiction at the outset cannot be cured subs e quently
, it is

now clear
, i f i t w a s not then, that this rule is more nuanced than the infl e x i bility sug g e sted by its lang uag e—both as it relates to curing jurisdictional defects throug h supplemental pleading s, s ee, e.g. , Matthews
, 426 U.S. 67, and other circumstances in which defects in subject-matter jurisdiction

were cured b y the substitution, add i t ion, or elimination of a party , see, e.g. N

ew m an-Green, Inc. v. Alfonzo-Larrain
, 490 U.S. 826, 830 (1989); M ullaney v. Anderson
, 342 U.S. 415 (1952); California Credit Union League v

. City of Anaheim
, 190 F .3d 997, 1000 (9th Cir. 1999). Nevertheless,

we need not belabor this issue because, in order to decide this
case, it is enoug h to say that the rule as stat e d in Morongo does not e x tend to supplemental pleading s filed pursuant to F ed. R. Civ. P. 15(d).

The same is true of Righthaven LLC v. Hoehn
, 716 F .3d 1166 (9th Cir. 2013), which the dissent relies on for the “g eneral principle that ‘ jurisdiction is based on facts that ex ist
at the time of filing .’” D issent a t 67. Of course, a g eneral principle, which Righthaven observed was subject to at least

a few ex ceptions, is sig nificantly different from the h a rd a nd fast rule that the lang uag e i n M orongo sug g ested. I ndeed, Righthaven acknowledg ed the possibility of additional

ex c e ptions and left open the question of whether “permitting standing b ased on a property interest acqu i r e d after filing ” sh o u ld be added to the list of e x ceptions. Righthaven
, 716 F .3d a t 11 7 1 ( “W e n eed not decide whether theN O R T H S T A R F I

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c i r c u m stances of this case call for a new ex c eption to th e g eneral rule, however
, because Rig hthaven lacked standing either way .”).

Nor does the Supreme Court’s holding in Grupo Dataflux

v. A tlas Global Group, L.P.
, 541 U.S. 567 (2004), co m pel a contrary result. There, diversity jurisdiction w a s lacking at the ti m e t he lawsuit was c ommenced b ecause the p laintiff

was a T ex a s-based limited partnership that incl u d ed two Mex ican c i t i z ens as members and the defendant was a Mex ican corporation. Id. at 569. After a ve r d i ct was rendered in favor of the plaintiff, the d istrict court g ranted the defendant’s motion to dismiss for lack of jurisdiction. Id. On appeal, the plaintiff partnership arg ued that the Mex ican partners had left the partn e rs h i p in a transaction consummated the month before the trial beg an. Id. A sharply divided Supreme Court held that this chang e in the

c o mposition in the membership o f the partnership was insufficient to cure the initial jurisdict i o n al defect. Specifically
, it held that the time-of-filing rule “measures all

c halleng e s to subject-matter jurisdiction premised u p o n diversity of citiz enship ag ainst the state of fa cts that e x isted
at the time o f filing—whether the c h alleng e be broug ht shortly after filing
, after trial, or even f or the first time on appeal.” Id. at 571. Moreover, notwithstanding sig nificant departures from the time-of-filing rule in diversity cases where the parties have c hang ed a f ter the filing o f the complaint o r o n appeal, see Newman-Green
, 490 U.S. at 830, it declined to depart from th i s r u l e where the post-filing chang e in c ircumstances “arose not from a c h a n ge in the parties to the action, but from the chang e in the citiz enship o f

a continuing party .” Grupo D ataflux
, 541 U.S. at 575 (citing Conolly v. Taylor , 27 U.S. 556 (1829)).N O R T H S T A R F I

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Nevertheless, we d o n ot reg ard that holding as d ispositive here. F irst
, the present case does not involve the issue o f diversity jurisdiction. See Connectu LLC v. Zu c kerberg
, 522 F

. 3d 82, 92 (1st Cir. 2008) ( “W hile the Court [in G rupo D ataflux ] relied upon the time-of-filing rule to thwa r t a n effort to manufacture diversity j u risdiction during the pendency of an a cti on, the decision operates ex clusively in the realm of diversity jurisdiction.”). More sig nificantly
, unlike Grupo Dataflux
, the present case involves the filing o f

a supplemental pleading that became the operativ e pleading in the c ase on which subject-matter jurisdiction must be based.

Nor we do not see a

ny c onsideration of policy that would justify a rule, for which o ur dissenting colleag ue arg u es, that

a party such as Northstar must f ile a new complaint instead o f

a supplemental pleading because of a post-complaint assig nment from a party that had standing

. The dissent does
not d ispute
, n o r c a n it, that the assig nee of a cause of action stands in the shoes of the assig nor, Hoffeld v

. United States
, 186 U.S. 273, 276 (1902), and unquestion ably has the same standing to file a complaint that the assig nor could have filed. Sprint Communications Co. v

. A P CC Services
, 554 U.S. 269, 271 ( 2008). I ndeed, the dissent c oncedes that “had Northstar accepted the dismissal without prejudice and then filed a new complaint after

it obtained an assig n ment of rig hts, it would have had standing and a personal stake in the outcome of this litig ation.” Dissent at 65 n.5 (emphasis in orig inal).

A rule that would turn on the label attached to a pleading is dif f i c u l t f o r us to a ccept. As the Eleventh Circuit has observed in a case in w hich an amended complaint contained jurisdictional alleg ations that w ere b ased on post-complaint events, “[ e] x cept for the technical distinction between filingN O R T H S T A R F I

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a new complaint and f

i l i n g an amended complaint, the case would have been properly filed.

. . . W e therefore hold that

we have jurisdiction over this a p p e al and we will reach the merits.” M.G.B. H

omes , I n c. v. Ameron Homes, Inc.
, 903 F .2d 1486 (11th Cir. 1990).

Perhaps r eflecting sensitivity to having a case turn on the technical distinction between a n e w complaint a nd a supplemental p leading
, the d issent sug g ests a policy reason for the hy pertechnical rule it advocates. Thus, it arg ues that permitting a plaintiff to proceed by supplemental pleading alleg ing a p ost-complaint assig nment of the claim has adverse pract i ca l effects. Dissent at 70. More specifically
, “[ u] ninjured parties, p articularly those in search of c la ss action lead plaintiff status, c ould sue first, then trawl for those truly and timely injured. Today the major i t y g reen-lig hts those who would race to the cour t h o use and bend F ederal Rules of Civil Procedure a nd Article I I I standing requirements to g ain an edg e over othe r claimants who a re not as fleet of foot.” Id.

Under current law, however, the benefit that the dissent
sug g ests g oes to the winner of the race to the courthouse does
not ex ist. Presumably
, the dissent is referring to the f act that counsel for the lead plaintiff b ecomes c lass counsel. I n 2003, however, Cong ress amen d e d Fe d. R. Civ. P. 23 to set out discrete standards for the appointment of class counsel. Thus, Rule 23(g ) now provides that in appointing clas s co unsel,
courts should con s i d er : the work counsel has d one in identify ing claims, counsel’s ex perience in such m atters, counsel’s knowledg e of the applicable law, a nd the resources that counsel will commit to r epresentation

. Fe d

. R. Civ. P. 23(g ) (1)(A); W rig ht, Miller, & Kane, F ederal Practice a ndN O R T H S T A R F I

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P rocedure: Civil 3d § 1802.3, pg s. 322–24. 4 Under thes e circumstances, it would be an abuse of d iscretion to appoint

an attorney as c lass counsel solely because he may have w on the race to the courthouse.

More sig nificantly
, the present case was not o ne in which Northstar won a race to the courthous e and in w hich its attorney s were appointed lead counsel for that reason. I ndeed, by the time it obtai ned the assig nment from Henry Holz
, over three months had passed since the complaint was filed. This was more than enoug h time for a c ompeting plaintiff to f

ile a complaint. N o such complaint was filed. I n sum, whatever merit there may be to the dissent’s concern, it is not prese n t i n this case and has been substantially eliminated by the 2003 amendments t o the F ederal Rules o f Civil Procedure. Moreover, that a supplemental pleading can only be filed with the p ermissio n of the district judg e provides additional protection ag ainst the misuse o f the pleading for strateg ic g amesmanship.

Thus, we ag ree that J udg e Koh did not ab u s e h e r discretion in p ermitting Northstar to fil e a supplemental pleading a fter a post-complaint assig nment from a party that

c l e a r l y had standing

. See Northstar
, 781 F

. Supp. 2d at 931–33.

4 Eig h t y ears b ef

o re th e am en d m en t t o Ru le 2 3, alth o u g h in a d if f eren t

w ay , Co n g ress elim in ated t h e race to th e c o u r t h o u se in secu rities class

a ctio n s w h en it en acted th e P riv ate L itig atio n Secu rities Ref o rm Ac t o f 1 9 9 5 (P L SRA ). 1 5 U.S.C. § 7 7 z- 1(a)(3 )(B )(iii); 1 5 U.S.C. § 7 8 u4 (a)(3 )(B )(iii).N O R T H S T A R F I

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II. Merits

B e fore we review e ach of Northstar’s claims
, we g ive a brief overview of the c as e , a nd ex p lain how the v arious claims relate to each other

. W e beg in with the v arious
go v erning documents of the F u nd to which we have already mad e reference. The Ag reement and Declaration of Trust, and its by laws, e stablish the Trust and g overn its internal affairs, and are g overned by Massachusetts law. The F und’s prospectus is issued by the Schwab Advisor on behalf of the F und on an annual basis. T he State m e nt of Additional I nforma t i o n , or “SAI
, ” produced at the same time as the prospectus, is made available to investors freely on demand, althoug h it does not need to be mailed to them automatically

. S e e G l a z e r , P r o s

p e c t u s D i s c l o s u r e a n d D e l i v e r y Requirements
, in Mutual Fund Regulation § 4:3.2 ( citing Sec. & Ex ch. Comm’n, F orm N

- 1 A a t 7, available at http://www.sec.g ov/about/forms/formn- 1a.pdf ( last visited Aug . 29, 2014)).

I n 1997, a prox y statement w as submitted to and approved by the F u nd’s investors. I t included two relevant p roposals which we have already described in detail. B riefly
, Proposal 2 stated that the Trust would “seek[ ] to track the investment results of [ the L ehman I ndex ] throug h the use o f an index ing
strat e gy

. ” Proposal 3 stated that the Trust would not invest

more than 25% of the F und’s total assets in an y i n d u s try

. These fund a m e ntal investment o bjectives could be chang ed only by shareholder vote. Subsequent reg istration statements and prospectuses reflected these chang es.

Northstar’s orig inal complaint alleg ed f our causes o f action arising from the Fu n d ’s alleg ed violations of the fundamental investment p olicies. F irst, Northstar claimed aN O R T H S T A R F I

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private rig ht of action under Section 13(a) of the I n vestment Company Act. Second, Northstar alleg ed that all of the defendants had b re ached their fiduciary duties to the shareholders. Third, N o r thstar claimed that all of the defendants had b reached the contract between the inve s t o rs and the F und, contained in the F und’s prospectuses a n d its 1997 prox y statement. F inally , Northstar claimed that a ll o f the de f e n d a nts had violated the implied covenant of g ood faith and fair dealing

.

On an interlocutory appeal, we rejected Northst ar’s theory that it had a private rig ht of action under th e I n vestment Company Act. Northstar Fin. A d visors, Inc. v. Schwab Invs.
, 615 F .3d 1106 (9th Cir. 2 010). Nevertheless
, t h e district judg e h a d allowed Northstar to r eplead its state law claims, specify ing under which state’s law they w ere a sserted and on which documents they relied. Northstar Fin. Adv i s o r s, Inc. v. Schwab Invs. , 609 F

. Supp. 2d 938, 945 (N.D. Cal. 2009).

Northstar then filed an amended complaint that left those claims at r isk of dismissal under th e S e c u r ities L itig ation Uniform Standards Act of 1 998 (“SL USA”), 15 U .S.C. §§ 77p, 78bb, because it contained alleg ations that sug g ested
t h a t its claims were based on misrepresentations. SL U S A bars certain state law c lass actions that alleg e “an untrue statement o r omission of a material fact [ or] the use[ ] of any manipulative or deceptive device o r contrivance,” 5 1 5 U .S.C.

5 T h e m i srep resen tatio n m u s t also b e “ in

co n n ectio n

w ith th e p u rch ase

o r sale o f a co v ered secu

rity .” T h ere is n o q u estio n th at th is class actio n is “ in co n n ectio n w ith th e p u rch ase o r sale” o f a co v ered secu rity
, an d th e d istrict j u d g e p ro p erly s o co n clu d ed

. N o rth sta r , 7 8 1 F

. Su

p p

. 2 d at 9 37 ;

see Merrill Lyn ch

, Pierce, Fen ner & S mith In c. v. Da bit
, 5 4 7 U.S. 7 1
, 8 6

– 8 7 (2 0 0 6 ). A s n o ted ab o v e, SL USA d o es n o t ap p l y i f t h e a c t i o n isN O R T H S T A R F I

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§ 77p(b), unless the g overning law is the law of the state that has chartered or org aniz ed the entity issuing the s e c urities. Id. § 77p(d)(1).

SL USA operates “wherever deceptive statements o r conduct fo r m the g ravamen or essence of the claim.” Freeman Invs., LP v

. Pac. Life Ins. Co.
, 704 F .3d 1110, 1115 (9th Cir. 2013). The district judg e ruled that the “central
t h eme” of the Second Amended Complaint was tha t t h e “defendants made misrepresentations about how investments in the F und would be manag ed.” Northstar
, 781 F

. Supp. 2d
at 9 3 4

. I n the district judg e’s view, the crux of Northstar’s

case w a s t h at the defendants’ statements about how the shareholders’ funds would be manag e d w ere false, or became false when the F u n d deviated from the index in 2007. Id. at 933–36. The district judge a lso noted that the Second Amended Complaint contained one specific alleg ation that the Trust gave a false ex planation for why the F und underperformed its index in its May 2008 semi-annual report. Id. at 936; SAC ¶¶ 96–97. The district judg e then dismissed the contract claims, with prejudice, for failure to state a claim

on the g round that they were barred by SL USA, and that they failed to alleg e a contract b e t w ee n the shareholders a nd the F und. Northstar
, 781 F

. Supp. at 9 33–40. The district judg e also rejected Nor t h s tar’s breach of fiduciary duty causes o f action under SL USA, bu t gave Northstar leave to replead them under Massachusetts law. Id.

Northstar repled the fiduciary duty causes o f action in its Third Amended Complaint and also amended its alleg ations in an effort to remov e t h e i r supposed focus on

b ro u g h t u n d er th e l a w o f th e state o f th e o rg an izin g en tity

. 15 U.S.C. § 7 7 p (d ).N O R T H S T A R F I

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misrepresentations. I ndeed, the Schw a b d efendants conceded in their motion to dismiss the Third Amended Complaint that “Northstar avoid ed SL USA p reemption for its fiduciary breach claims by asserting them under Massachusetts law a nd

com i ng w ithin the ‘Delaware carve-out’”—a term used to describe an ex ception to SL USA preemption if such a cause

o f action is a vailable under the law of the state t h a t h a d chartered or org aniz e d the entity issuing the securities. Def. Mot. to Dismiss Third A m. Compl

. 13 n.5; see 15 U .S.C. § 77p(d)(1); Madden v. Cowen & Co.
, 5 76 F .3d 957, 971 (9th Cir. 2 0 0 9 )

. Nevertheless, the district judg e held that the fiduciary duty claims had to be broug ht derivatively
, a nd dismissed them. Nort h s t a r Fin. Advisors, Inc. v. Schwab Invs.
, 807 F

. Supp. 2d 871, 876–8 1 (N.D. Cal. 2011). The district judg e also held that Northstar could not assert a claim

as a third-party beneficiar y of the I nvestment A dvisory Ag reement. Id. at 8 81–84. Presu m a b l y because she h ad dismissed the breach of contract cause of action in the Second A m e n d ed Complaint w ith prejudice, she did not address Northstar’ s a rgu ments as to these claims in the Third Amended Complaint. Nor did the district judg e decide whether the al l e ga tions in the Third Amended Complaint survived under SL

USA.

As we discuss in detail below, we r e verse the district

c o u r t’s dismissal of the breach of contract claims for f ailure
to alleg e a contra c t b etween the shareholders and the F und. W e also r everse the district court’s dismissal of the fiduciary duty and third-party beneficiary claims. W e d o not, however, reach the q u estion of whether any of Northstar’s c laims a re barred by SL USA. The district court has not y et had the need
to determine whether the alleg ations in the Third A m e n d e d Complaint c an survive under SL U SA, and should do so in the first inst a n c e. See, e.g. , Haskell v. Harris
, 745 F

. 3d 1269,N O R T H S T A R F I

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1271 (9th Cir. 20 14) (“[ W ] e a re a c ourt of review, not first view.”).

W ith this as a backdrop, we proceed to discuss the merits of Northstar’s complaint.

A. Breach of Contract Claim

Northstar arg ues that, once the shareholders approved the proposals reg arding the fundamen tal investment objectives o f the Schwab Trust, whi c h were described in the prox y statement, the Schwab Trust was contractually o b l ig ated to

c o m p ly with them in manag ing the F und. Moreover, Northstar arg ues that the subsequent d issemination of the fundamental invest m e nt objectives in the reg istration
statement and prospectuses for m e d a contract between the Schwab Trust and the “ex isting i n vestors [who] retained shares and new investo rs [ who] purchased shares in considerati o n f

or Schwab’s c ontractual oblig a tions.” Appellant’s B r. at 2 1; see a lso Appellant’s Reply B r. a t 7 n.8.

The Restatement (Second) of Contracts provides that “[ a] promise may be stated in words either oral or written, or may be inferred wholly o r partly from conduct.” Restateme n t (Second) of Contracts § 4 (1981). W hile contracts are often spoken of as ex press or implied, “ [ t] h e distinction involves

. . . no difference in leg al effect, but lies merely in the mode of manifesting assent.” Id. cmt. a

. “J ust as a ssent may be manifested by words or other conduct, sometimes i n c l uding silence, so intention to make a promise may be manifested in lang uag e or by implication from other c i r cumstances, including c ourse of dealing or usag e of trade or course o f performance.” Id. “The distinction between an ex press and

an implied c ontract, therefore, is of little importance, if it canN O R T H S T A R F I

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be said to ex ist at a l l

. ” 1 J oseph M. Perillo, Corbin on Contracts § 1.19 at 57 (rev. ed. 1993); see also 1 Richard A

. L o rd, W illiston on Contracts § 1:5 at 37–38 (4th ed. 20 0 7 ) (“An implied-in-fact contract requires proof of th e s a me elements necessary to evidence an ex press contract: m u t u al
assent or offer and acc eptance, consideration, leg al capacity and a lawful subject matter.”).

W h ile it is not necessary to characteriz e the contract here

as either ex p r e s s o r implied, a particularly instructive discussion of the concept of implied contracts, in circumstances analog ous to thos e present here, a ppears in T rustees of Dartmouth College v. W oodward
, 17 U

. S

. (4 W heat.) 5 18 (1819), one of the e a r liest cases a pply ing Article I
, Section 10 o f the Constitution, which provides that “[ n] o State shall

. . . p ass a ny

. . . L aw impairing the Oblig ation of Contracts.” The case arose out of an effort b y the State of New Hampshire to alter the terms of a corporate charter that had provided c e rtain g uarantees a s to the structure and g o vernance of Dartmouth Colleg e. As P ro fessor Tribe succinctly describes it, the Supreme Cou r t “ h e ld that New Ha mpshire c ould not p ack the Dartmouth Colleg e board o f
trustees and alter its f

aculty so as to chang e the colleg e into

a public institution in violation o f its 1769 charter from G e o r ge I I I .” L aurence H

. T ribe, American Constitutional Law 614 (2d ed. 1988)

. O f p a rticular r elevance h e re is the concurring opinion of J ustice Story
, who beg a n his discussion of this issue b y describing the creation of the corporation a nd the terms of its charter. Specifically , he observed:

The corporation w as ex pressly created for the
p urpose of distributing in perpetuity t h e chari t a ble donations of private benefactors. B y the terms of the ch arter, the trustees, a ndN O R T H S T A R F I

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their successors, in their c orporate capacity
, were to receive, hold and ex clusively manag e all the f unds so contributed. The crown, then,
upon the face o f the charter, p l e d g ed its faith that the donations of private benefactors should be perpetually devoted to their orig inal
purposes, without any interference on its own part, and should be for ever admin i s t e red b y the trustees of the corporati o n, unless its corporate franchises should be taken away b y due process of law.

Dartmouth College , 17 U.S. (4 W heat.) at 689.

J ustice Story then identified two implied contracts in this circumstance. F irst, “there was an implied contrac t on the part of the c rown, with every benefactor, that if he would g ive his money , it should be deemed a char i t y protected by the charter, and be administered b y the corporation, according to the g eneral law of the land. As, soon, then, as a donation was made to the corporation, there was an i m p l i e d contract

. . . that the crown w ould not revoke or alter the c ha rt e r, o r chang e its administration, without the consent of the

c orporation.” Id

. Second, “[ t] h ere was also a n impli e d
contract between the corporation itself, and e very b enefactor,
upon a like consideration, that it would administer h is bounty

a c c o r ding to the terms, a nd for the objects stipulated in t h e charter.” I

d . at 689–90. 6

6 J u stice S to ry ’ s o p in io n w as a co n cu rren ce an d w as j o in ed b y J u stice L iv in g st o n

. T h e o p in io n o f th e Co u rt w as w ritten b y Ch ief J u stice Marsh all, w

h o ag ree d t h a t th e ch arter co n s titu ted a co n t ract. Id

. at 6 4 3

– 4 4 , 6 5 1

.N O R T H S T A R F I

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The fundamental investment objectives of the S chwab Total B ond Market F und can be an al y z ed in the same

manner. I ndeed, when t h e y were adopted by the shareholders, they added a structural restriction on the power conferred o n the Trustees in the Ag reement and Declaration of Trust that can only be chang ed by a vot e o f t he shareholders. This created a “contract between the [ Trustees themse l v e s]
, and every [ investor] ”

— that the Schwab Trust “would administer his [ investment] according to t h e terms, and for the objects stipulated in the” two restrictions adopted by the shareholders of the F und. Id. at 6 90–91. Sig nificantly
, after the shareholders voted in favor o f the prox y statement that included these r e s trictions, they were subsequently reflected i n the F u nd’s r eg istration statements a nd prospectuses. Thus, a n y one who purchased shares in the F und after 1997, or held sh a res that he then owned, was leg ally and contractually entitled t o h a ve his investment
manag ed in accordance w ith the proposals in t h e prox y statement, unless the shareholders voted to permit otherwise.

The defendants arg u e that u ndertaking s in SEC filing s themselves cannot r eflect contractual o blig ations that can be enforced in a suit for breach of contract. This arg ument

c a n n ot b e reconciled with Lapidus v. Hecht
, 232 F .3d 6 7 9 (9th Cir. 2000), where the plaintiffs soug ht “to recover losses sustained by the mutual funds as a result of short sales made without shareholde r approval, alleg edly in violation of the
reg istration statement filed with the Securities and Ex chang e Commission.” Id. at 680. Specifically
, the def e n d an t , a Massachusetts business trust, had filed a “prospectus

. . . with the SEC [ that] provided that the trust could en g ag e in short sales of securities with a v a l u e of up to 25% of the value o fN O R T H S T A R F I

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the mutual fund’s total assets.” 7 Id

. at 681

. T h e t r ust later issued an amended prospectus which “authoriz ed the trust to enter into short sales of securities with a value of up to 40% of the mutual f

und’s total a ssets.” I

d

. N everthe l e s s , “ [ t] his amendment to the short s ales restriction was made without shareholder approval” and, subsequently
, “the mutual fund’s short sale position had in c reased to 2 5–35% of the mutual fund’s a ssets and the mutual fund suffered substantial losses.” Id

.

On appeal, we addressed whether the plaintiffs could bring their action for violations of the I C A d irectly ag ainst
t h e defendant or whether the action had to be broug ht derivatively

. W e held that the Lapidus plaintiffs h ad adequat e l y alleg e d an injury “predicated upon a violation o f [ the] shareholder’s voting r i gh t s,” id

. at 683 (citing cases), and that those “alleg ations are sufficient to satisfy the injury requirement for a direct a ction under Massachusetts law,” id

. Sig nificantly
, the violation held to be adequately alleg e d was of the plaintiffs’ “ contractual rights as shareholders to vote

on p r o posed chang es to the short sale an d s e n i or security restrictions.” Id . (emphasis added). These restrictions were spelled out in the reg istration sta t e m e nt, id
., a nd in the “prospectus f

i l e d with the SEC,” id

. at 681. Lapidus ’s holding is directly applicable here because Northstar’s breach of contract c a u s e o f action rests on the d e viation b y defendants from two fundamental investment object ives, which required a shareholder vote to be chang ed, without first

7 A reg istratio n statem en t m u st “ in clu d e[] th e i n f

o rm atio n req u i red i n a Fu n d ’ s p ro sp ectu s [.]” Sec. & Ex ch

. Co m m ’ n , Fo rm N- 1 A at 7
, a va ila b le

a t h ttp : //w

w w .sec.g o v /ab o u t/f

o rm s/f o rm n

- 1 a.p d f (last v isited A u g

. 2 9
, 2 0 1 3 ). La

pid u s ap p e a rs to u se th e term s “ reg istratio n statem en t” an d

“ pro sp ectu s” in terch an g eab l y

.N O R T H S T A R F I

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obtaining shareholder approva l

. Until the fundamental investment objectives were amended by shareholder vote, the investors had a contractual rig ht to have the F und manag ed in accordance with those objectives. 8

McKesson HBOC, Inc. v. New Y ork S tate Common Retirement Fund, I

nc. , 339 F .3d 1087 (9th Cir. 2003 )
, upon which th e d i s trict judg e relied, does not support the defendants’ arg

ument. I n that case:

McKesson HB OC [sued] its own s hareholders for unjust e nrichment arising f rom a merg er between M c Kesson and H B O & Company (“HB OC”). McKesson claim[ ed] that the former HB OC shareholders [ we] re the be n eficiaries of a windfall trig g ered b y alleg ed accounting improprieties by HB OC. The shareholders, according to M c Kesson,

ex c hang ed a

rtificially inflated shares o f HB OC for fully -valued M c Kesson shares in the merg er transaction. McKesson [ wa nted]
to recov e r t h e ex cess value from the shareholders.

Id

. a t 1 0 8 9

. McKesson soug ht recovery for unjust enrichment, which was potentially available only if there was

no g overning contract b etween the parties. Id

. at 1089, 1091. W h ile McKesson HBOC ultimately held that there was no

8 W e r e l y o n L a

pid u s at t h is j u n ctu re so lely f

o r its h o l d in g th at

u n d ertak in g s in SEC f

ilin g s m ay g iv e rise to an im p l ied co n tractu al

o b lig atio n

. W e d iscu ss at p ag es 4 5 to 4 7 b elo w , th e ef f ect o f t h e h o ld in g

o f La p i d u s o n w h eth er a n a c t io n f

o r b reach o f co n tract an d b reach of f id u ciary d u ty m ay b e b ro u g h t d irectly

.N O R T H S T A R F I

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r e c o v ery for unjust enrichment, e v e n if there were n o g overning contract, i t f

i rst addressed whether the Merg er Ag reement or the relevant Prox y Statement/P r o s pectus (“Prospectus”) was a contract that g overned McKess o n ’s claims ag a inst the shareholders.

F irst, McKesson HBOC held that “it is clear from the tex t and the s i gn a t o ries to the ag reement that the only p arties to the Merg e r Ag reement w ere the c orporations them selves.” I d

. a t 1091. Second, it held that “ the Prospectus w as n o t a n offer by McKesson to the HB OC shareholders to enter into a bilateral contract separate and apart from t h e M e rg er Ag ree ment.” Id

. at 1 092. Specifically
, McKesson HBOC

ex p lained that, a l t h oug h the “Prospectus references the Merg er Ag reement, a dvising shareholders that ‘[ t] he merg er cannot be completed u nless the stoc k h olders of both companies approve the m e rg er ag reement and the transactions associated with it,’” such “references do not

. . . convert McKesson’s solicitation of the s hareholders’ v ote into a c ontractual off

e r

. ” Id

. Thus, McKesson HBOC concluded that “the Prospectus did not serve as the basis for

a contract between McKesson and the s h a r eholders.” Id

. at 1093.

Sig nificantly
, McKess on HBOC disting uished the scenario it addressed from a “ tender o ffer situation, w here the
courts have found a c ontract between the corporation and an individual shareholder who tenders shares[ .] ” Id

. at 1092; see also 6 A F letcher Cy c. Corp. § 2841.10 at 358 (rev. ed. 2 013) (“A binding contract is created when the shareholder tenders his or her securities in accordance with the terms o f the offer.”). U nlike a tender offer, “the shareholders [ i n Mc K e s son] did not tender their shares.” McKesson HBOC
, 339 F .3d at 1092–93. Moreover, “shareholders who objectedN O R T H S T A R F I

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to the merg er could not separately opt out or contract out o f the merg er. I n dividual shareholders were not in a position o f contracting with McKesson, and shareholder ratification did not convert the Prospectus into a contract.” Id a t 1093.

This case is clearly disting uishable from M c Kesson HBOC

. F irst, the p a r t i e s to the c o ntract at issue in this case

are the Trustees a n d the shareholders of the F und. Second, the breach of c ontract cause of a ction is predicated, in p art, on the a pproval of the f

undamental investment objectives by the sh a r e h o lders. Once those objectives were adopted, they sig n i f i c a ntly restricted the discretion which the Ag reement and D eclaration of Trust conferr ed on the Schwab Trust to manag e th e Fu n d. Moreover, the F und’s reg istration
statement and prospectuses reflected the ad o p t ion of those restrictions. T he acquisition of the securi t i e s constituted an acceptance of the offer.

Nor does In re Charle s Schwab Corp. Securities Litigation
, No. C 08-01510 W HA, 2009 W L 1371409 (N.D. Cal. May 15, 2009) [ hereinafter “ Charles Schwab ”]
, on which d efendan t s r e ly
, and w hich involved leg al issues comparable to this case, constitute p ersuasive authority to the contrary

. The d istrict judg e there first stated that “[ t] he Ninth Circuit h as never addressed wheth e r m u tual fund disclosure documents c o nstitute a contract under these precise circumstances.” I

d

. a t * 3. Nevertheless, as Lapidus makes clear, this is not an accurate statement of N i n t h Circuit law. See 232 F

. 3d a t 683. Moreover, we do not find persuasive the
arg ument that Lapidus is disting uishable because it “did not involve contract claims but rather statutory claims under the [ I CA.] ” Cha r l e s S

c h wab
, 2 009 WL 1371409, a t *5. The plaintiffs’ a

bility in Lapidus to bring a direct action u nder the I C A was based upon a breach of their “contractual rig hts a sN O R T H S T A R F I

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s h a r eh o lders to vote on proposed chang es to the short sal e and senior security restrictions[ .] ” Lapidus
, 232 F .3d at 683. These c ontractual rig hts were d e r i v e d from the reg istration statement and the prospectus. Id . at 681, 683.

W e find equally unpersuasive the arg u ment that “the prospectuses

. . . here at issue are not c ontracts but rather a re mandatory reg ulatory disclosure documents.” C h arles Schwab
, 2009 W L 1371409, at *3. The prospectus, which is the primary selling document, offers to sell shares to investors in a mutual f

und w h ich will invest the proceeds in the m a nner described in the p rospectus, unless shareholders

a p prove a proposal to do otherwise. I n deed, the Securities and E x chang e Comm i ssion urg es investors to “ request a nd read the fund’s pro s p ectus before making an investment decision.” Mutual Fund Prospectus
, Sec. & Ex ch. Comm’n, h t t p : / / w w w

. s e c

. g o v / a n s w e r s / m f p r o s p e c t u s t i p s

. h t m ( l a s t visited Sept. 5, 2014). The mere f act that Cong r ess has chosen to ensure that investors a r e fully informed of the fundamental investment objectives of mutual funds hardly provides a license to ig nore the objecti v e s , enshrined b y shareholder approval, which a mutual fund has oblig ated itself to pursue. Nor does it alter the fact that the purchase o f those shares constitutes an accept a n c e of the offer by the investor. I ndeed
, a s p reviously observed, this is precisely how t h e s hareholders b ecame parties to the Ag reement a nd Declaration of Trust. Ag reement and Declaration of Trust 4 (“ Every Shareholder b y virtue of having become a Shareholder s h a l l be held to have ex pressly assented a nd
ag reed to the terms h ereof and to have b ecome a p a rty hereto.”).

Moreover, the district judg e in Charl es Schwab did not cite an y a u thority f

or his sug g estion that a “mandatoryN O R T H S T A R F I

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reg ulatory disclosure document” cannot form the basis for an implied contract. Lapidus holds o t h e rwise and the district judg e in Charles Schwab acknowledg ed that, “in c ertain circumstances prospectuses can constitute a contra ct

. ” Charles Schwab
, 2 009 WL 1371409, a t * 5

. I ndeed, even before the enactment of the Securities Act of 1933, “the term ‘prospectus’ was well u nderstood to r e f er to a document solicitin g the public to acquire securities from the issuer.” Gustafson v. A lloyd Co., Inc.
, 513 U .S. 561, 57 5 ( 1 995) (citing Black’s Law Dictionary 959 (2d ed. 1910)).

I n sum, we conclude that the mai l ing of the prox y statement and the adoption of the two fundamental i n vestment policies a fter the shareholders voted to appro v e them, a nd the annual repres e n t ations b y the F und that it would follow t h e s e policies are sufficient to form a contract between the shareholders on the one h a n d a nd the F und a nd the T rust o n the other. The F und offered the shareholders the rig ht to invest on these terms, and the shareholders accepted by so investing

. The c onsideration for th e c ontract was the shareholders’ investment, or continued investment, in the F und, and the p arties’ o bject was lawful. The conduct of the parties thus fulfills all the requirements f o r a binding contract under traditional common law principles. See L ord, W illiston on Contracts § 1:5 at 37–38 (4th ed. 2007).

W e are aware that J udg e Koh hel d t h a t , under the particular circumstances of th i s case, Northstar failed to successfully alleg e the formation and b reach of a c ontract. 781 F . Supp. 2d at 939. She reasoned that:

[ A] September 1, 2006 Statement o f Additional I n formation w as issued which stated that the F und w o u ld, from then on,N O R T H S T A R F I

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cease t o treat “mortg ag e-backed securities issued by private lenders” as a separate industry and therefore c ould invest more than 25% o f the F und’s assets in this area would

s e e m to defeat Plaintiffs’ c o ntract claim. I f this became a term o f the c ontract b etween Plaintiffs and the Trust when investors held o r subsequently purchased shares, then the Trust could not have breached this contract by overinvesting in MB S, as Plaintiffs claim.

Id . at 940.

W e are not persua d e d

. Northstar alleg ed that the SAI ’s
statement that “the f

unds h a v e determined that mortg ag ebacked securities issued by private lenders are not part of any industry for the purposes of the fun d s ’ concentration policies,” Northstar Fin. Advisors, Inc. v. Schwab Invs. , No. 5:08-cv-04119-L HK (N.D. Cal.), Statement of Add itional I nformation (Sept. 1, 2006) at 8, Doc. No. 1 5 2

- 2
, was an improper attempt to circumvent the F u nd’s concentrat ion policy that limited investment i n o ne industry to 25% of its
assets because no vote was taken to approve it. This position

was supported by a complaint filed by the Securities and Ex chang e Commission, which alleg e d “that the Schwab trust devi ated from its p olicy o n concentration for the Schwab Total B ond Market F u n d

. . . by deciding to not treat mortg ag e-b a c k e d s e cu ri t i e s a s a n i ndustry without shareholder a p proval.” Appellees’ B r

. 13 ( citing SEC v

. Charles Schwab Inv. Mgmt. Inc.
, No. 11-cv-00136 (N.D. Cal.), Compl. ¶¶ 24–28, Doc. No. 1).

Specifically
, the SEC charg ed that b e f o r e Aug ust 2006, the 25% concentration policy stated that “ [ b] a sed onN O R T H S T A R F I

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characteristics of mortg ag e-backed secu r i t i e s , [t h e T o t a l B ond F und] has identified m o rtg ag e -backed securities issued b y private lenders and n o t g u aranteed by the U.S. g overnment ag encies o r instrumentalities a s a separate indust ry for
purposes of [ the] fund’s co n c e ntration policy .” S EC v

. Charles Schwab Inv. Mgmt. Inc.
, No. 11-cv-00136 (N.D. Cal.), Compl. ¶ 25, Doc. N o. 1; see also Schwab I nvestments, Statement of Additional I nformation (F orm N-1A, Part B ) 9 (Nov. 15, 2004). The position of the SEC was that, because Schwab had identified mortg ag e-backed securities issued b y private lenders as an industry
, “ the Total B ond F und could not invest more than 25% of [ its] assets in non-ag e ncy MB S without o btaining shareholder approval under Section 13(a)” of the I CA. SEC v. Charles S chwab S chwab Inv. Mgmt. Inc.
, No. 11-cv-00136 (N.D. Cal.), Compl. ¶ 25.

J udg e K oh’s reliance on the September 1, 2006 SAI
, even if correct, overlooks the fact that the F und’s conce ntration
p o licy w as only one o f the two f undamental investment objectives f

r o m which the defendants could n ot depart without shareholder approval. The primary vi o l ation was “causing the F u nd to deviate from its fundamental investment objective to ‘seek to track the inv e s t ment results’ of the L e hman B rothers U.S. A g g reg ate B ond I ndex

. . . ‘ throu gh the use o f an index ing strateg y

. ’” The complaint then g oes on to alleg e that the “F und also deviated fro m its stated fundamental investment obje c t i ve by investing more than 25% of its total assets in U. S

. a g ency and non-ag ency mortg ag e-backed securities and CMOs.”

The SAI did not provide an y n o tice that the defendants intended to d epart from the first of the fundamental objectives

w hich oblig ated the F und to “ seek to track the inves t m e n t results” of the L ehman I ndex . Thus, even if J udg e Koh wasN O R T H S T A R F I

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correct in h er analy sis with respect to the breach of the second investment objective, as to w hich notice was provided i n t h e SAI
, the complaint still sufficiently states a claim f o r breach of contract. This is true w ith r espect to those w ho purchased before September 1
, 2006 and held on to their shares afterward, and those who purchased after that date.

Particularly as to those who p urchased before September 1, 2006 and held o nto their shares, we are not pr e p a r e d t o

assume that the SAI itself w as sufficient to p r ovide adequate notice. An SAI , “affords the F und a n opportunity to ex pand discussions of the matters desc r i bed in the prospectus b y including additional information that the F und believes may be of intere s t to some investors.” Glaz er, P rospectus Disclosure and Deli v e r

y Requirements
, in Mutual Fund Regulation § 4:3.2 (quoting Sec. & Ex c h

. Comm’n, F orm N1A a t 7, available at h ttp://www.sec.g o v/about/forms/formn1a.pdf (last visited Sept. 5
, 2 014)). “ T h e S A I is not automatically p rovided investors but must be available free o f charg e upon r equest.” I d

. M o reover, the SAI may be specifically incorporated “by refere n c e into the prospectus without delivering the SAI w ith the prospectus.” Id

. § 4:3.1[ D]

. W hile there may be sop h isticated shareholders who make the effort to ask for an SAI or read it with the care necessary to dig est the r el evant parts of a long a nd multifaceted document, w e think i t i s reasonable to a ssume that there a

re many ordinary shareholders who d o not do so. I ndeed, e ven if a mutual f und co u l d a lter a fundamental investment ob

j e c t i v e b y the v ehicle o f an SAI
, it should provide current shareholders with clear an d u nambig uous notice of the alteration that it wishes to make.N O R T H S T A R F I

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B. Breach of Fiduciary Duty Claim

Northstar alleg e d that the Schwab defendants b reached their fiduciary duties by failing to e n s ure that the F und was manag ed in a ccordance with the f un d amental investment objectives and by chang ing the F und’s fundamental investment objectives without o btaining required shareholder authoriz ation. The district judg e hel d t h a t Northstar “ failed
to successfully alleg e a breach of an y d u t y owed directly to F und investors, and that these claims w o u l d have to be asserted derivatively .” North star Fin. Advisors, Inc. v

. Schwab Invs. , 807 F

. Supp. 2d 871, 876 (N.D. Cal. 2011).

Defendants conceded at oral arg ument that the alleg ations in the o perative comp l aint are sufficient to state a c ause o f action for breach of fiduciary d u ty

. They a r gue, however, that the Trustees did not owe a f idu c iary duty to the beneficiaries of the Schwab Trust—namely
, the shareholders. I nstead, they arg ue that because o f the “close resemblance o f

a mutual f und operated as a Massachusetts B usiness Trust to

a corporation,” the Trustees should b e t r e ated in the same way as corporate directors, who “owe fiduciary duties to the corporation r a ther than to its shareholders.” Appellees’ B r. at 48. This arg ument provides the predicate for the claim that N o r t h s tar was required to proceed by way of a derivative action.

There are sever a l d e f

i ciencies in this arg ument. F irst, it

s i m p l y ig n ores the plain terms of the Ag reement a nd Declaration of Trust.N O R T H S T A R F I

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The document states ex pressly that:

the T rustees hereby declare that they will hold all cash, securities a

nd other assets, which they may f

r om time to time a c quire in any

manner as Tr u s t e es h ereunder I N TRUST to manag e a n d d ispose of the same

. . . for the
pro rata benefit of the holders fr o m time to time of Shares in this Trust.

Ag reement and Declaration of Trust 1. W e are not aware of
any Massachusetts case that hol ds that ag reements of this kind c annot b e enforced directly by the benef i c i a r ies of a trust.

Second, the Supreme J udicial Court of Massachusetts has he l d t hat “[ i] t is ax iomatic that the

. . . trustees [ stand] in a fiduciary r e l a t ionship to a ll the beneficiaries of the trust.” Fogelin v. Nordblom , 521 N.E.2d 1007, 1011 (Mass. 1988); see also D ukeminier, Sitkoff & L indg ren, W ills, Trusts, and Estates 556 (“In manag ing the p ortfolio, [ t h e trustee] is subject to a fiduciary oblig ation to ” t h e investors in the mutual f und); J ohn H. L ang bein, The Secret Life of the Trust: The Trust as a n Instrument of Commerce
, 107 Yale L .J

. 165, 166 (1997) (“The familiar standar ds of trust fiduciary law protect trust beneficiaries o f all sorts, reg ardless of whether the trust implements a g ift or a b u s i n ess deal (unless, o f

c o u r s e , t h e t e r m s o f t h e t r a n s a c t i o n e x p r e s s l y contraindicat e ).”). W h ile the Supreme J udicial Court o f Massachusetts has acknowledg ed similarities b etween corpor a t i o n s a

nd business trusts, it has held that business
trusts “are not corporations, nor are they entities apart from the trustees.” Swartz v. Sher
, 184 N.E.2d 51, 53 (1 9 6 2 ). Under these c ircumstances, there is no log ical basis for theN O R T H S T A R F I

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a r gu m e n t that the trustees of a mutual fund org aniz ed as a Massachusetts business trust owe a fiduciary duty to the trust, rather than the shareholders, and that for this reason they a re limited to a derivative action on behalf of the trust.

Lapidus v. Hecht
, 232 F

. 3d 679 (9th Cir. 2 000), upon which defendants r ely
, does n ot suppo r t t h eir position. Lapidu s i n v o lved two discrete claims of wrong doing

. The first, which i s c o m p arable to the cause of action here, was based o n d eviations from the investment objectives of the mutual fund and the issuance o f s e nior securities without shareholder approval. Id. at 681 (citing 15 U

. S

. C. § 80a13(a)(2)–(3) )

. The second c ause of action involved the issuance of senior securities in violation of section 15 U .S.C. § 80a-18(f).

Lapidus first a ddressed the issue of whether a direct action could be broug ht for the depar t u r e f rom the mutual fund’s investment objectives and the issua n c e o f senior securities without shareholder approval

. Lapidus
, 232 F .3d
at 683. W e held that, “ [ t] o b ring a direct a c t i o n u nder Massachusetts law, a plaintiff mu s t a l l eg e an injury d istinct from th a t s u f

fered by shareholders g e nerally or a wrong involving o n e of h is or her c o n tractual rig hts, such as the rig ht to v ote. Lapidus
, 2 32 F .3d a t 6 83 (emphasis added). W e then went on to observe that the plaint iffs alleg ed “violations of their contractual rig hts as shareholders to v ote

on p r o posed chang es to the short sale and senio r s e c u rity restrictions.” Id. Such claims could be broug h t d irectly

. Id.

Lapidus then addressed the second cause of action based

on “the alleg edly improper issuance of senior securities,” id.
at 6 83, in violation of federal law, id. a t 6 81 n.3. T h is action could n ot be broug ht directly because it failed both parts o fN O R T H S T A R F I

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the d isjunctive test. F irst, the injury was not distinct from the injury to all shareholders holding t h e same series of stock because the alleg ed improper “issuance of senior securities

. . . would b e a n injury to the trust g enerally .” Id. at 683. Second, the alleg ed impr o p e r issuance was “unconnected to any violation of voting rig hts” or a ny other contractual rig ht. Id.

The first prong o f the test was applied with respect to both

causes of a ction in Lapidus
, namely
, that to bring a direct action under Massachusetts/Delaware law, “a pla intiff must alleg e a n injury disti n c t from that suffered by shareholders
g enerally

. ” Id

. W e r efer to “Massachusetts/ D elaware” law because L a

p i d us relied on two Delaware cases and o ne Massachusetts case apply ing Delaware law fo r the circumstances under which a di r e c t action may be broug ht

“ u n d e r Massachusetts law[ .] ” 232 F .3d at 683. T h e Delaware l a w h a s since chang ed. Thus, in Tooley v

. Donaldson, Lufkin, & Jenrette, Inc.
, 845 A.2d 1031, 1036–39 (Del. 2 004), the Supreme Court of Delaware reje c t e d, a s “confusing ,” the concept “that an action cannot be direct if all stockholders a

re equally affected or unless the stockholder’s injury is separate and distinct from that suffered by other stockholders.” Id. at 1038–39.

Moreover, even if that prong survived the holding in Tooley
, a direct action in this case would be appropriate under the second pron g of the disjunctive test applied in Lapidus because the plaintiffs alleg e “ a wrong involving one of [ their] contractual rig hts a s

. . . shareholder[ s] .” 232 F .3d at 683. Norths t a r ’ s breach of contract cause of action rests on the deviation by defendants from two fundamental investm ent objectives, which r e q

uired a shareholder vote chang e, without f irst obtaining shareholder approval. The rig h t to v o t e,N O R T H S T A R F I

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however, is not the only contractual rig ht at issue. I nstead, it is inex tricably intertwined with the restrictions placed on the power of the Trustees to invest the assets of the F und. Until the fundamental investmen t objectives were amended b y shareholder vote, the investors had a contractual rig ht to have the F und manag ed in accordance with those objectives.

The third deficiency in defendants’ arg ument that this action must b e broug ht derivatively is that the distinction between direct and derivative actions has little meaning in the
contex t of mutual funds, at least on the f acts present here. A publicly held corporation, in contrast to a mutual fund,
eng ag es in a business, e.g. , the buy ing and selling of widg ets, in which the accretion of share price is g en e r ally the by

product of business success, and the depletion of share price

can be the by -product of ei t h e r unsuccessful business decisions or misconduct by f iduciaries. The particular facts in the latter scenario will determine whether claims against corporate officers a

re derivative or direct in nature (or both). See Tooley
, 845 A.2d 1031. I n a mutual fund, however, there is no business o ther than acquiring investmen t instruments for the purpose of increasing the net asset value “for the pro rata benefit o f the holders

. . . of Shares in this Trust.” Ag reement and Declaration of Trust 1. Any decrease in a mutual fund’s share pr i c e flows d irectly and immediately to the shareholders

. T h is is particularly true w hen such an injury results from the failure to comply w ith a fund’s fundamental investment o b

j e ctives. Thus, such misconduct supports a direct action.

There may be scenarios where a mutual fund trustee can be sued only derivatively —for ex a mple, if h e embez z les
assets held by the f

und, the injury may be first to the mutual fund and only secondarily to the i n v e s t o rs in the fund. B utN O R T H S T A R F I

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that is n ot this case. Rather, this ca s e a lleg es a failure to follow trading restrictions, the v e ry essence of the F und’s busines s , w h ich, accepting the alleg ations as true, c aused a diminution in shareholder v alue. The claim supports a direct action because the impact is d i r e c tly o n the investors in the F und and a recovery would not be d ependent on demonstrating an injury to the Schwab Trust. Cf. Tooley
, 845 A.2d a t 1039 (holding th at a c o rporate stockholder w ho bring s a d irect action “must de m o n s t rate that the duty breached was owed to the stockholder a nd that he or she can prevail without showing an injury to the corporation”).

Even i f we were to accept d efendants’ attempt to analog iz e the F u n d to a p u b licly held corporation, their
arg ument that Northstar may only sue d erivatively would f ail. Sig nificantly
, the Principl es of Corporate Governance promulg a ted by the A m er ican L aw I nstitute (“AL I ”)
recog niz e that in circumstances comparab l e to this case, a direct action may be appropriate. Thus, in a comment to § 7.01, the section that is c a ptioned “ Dir e c t and D erivative Actions Disting uished,” the AL I observes:

I n some instances, actions that essentially invo l v e the structural relationship o f the shareholder to the corporation (whi c h thus should be seen as direct ac t ions) may also give rise to a derivative a ction when t h e corporation suffers or is threatened w ith a loss. One ex a mple would b e a case in which

a corporate official knowing ly a cts in a

manner that the certificate of incorporation denied the official au t h o rity to do, thereby violating both specific restraints imposed b y the shareholders and th e official’s duty o fN O R T H S T A R F I

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c ar e. I n such cases, the plaintiff may opt t o plead either a d irect or a derivative action, o r to bring both actions simultane o u sly
, unless the court finds that the p lai n t i ff is unable to provide fair a

nd adequate representation pursuant to § 7.02(a )(4) (Standing to Commence and Maintain a Derivat i v e Action).

American L aw I nstitute, P rinciples o f Corporate G o vernance § 7.01, cmt. c (1994). 9

T h e present case involves the same kind of structural relationship of shareholders to t h e S c hwab Trust that the foreg oing comment addresses. O f course, we deal h ere with

an ag reement and declaration of trust rather than a certificate of incorporation. T he adoption by the sh a r e h o lders of the fundamental investment objectives of t he F und effectively imposed a restraint on the structural r e lationship in the

9 T h e Ch ief Rep orter’ s f o rew o rd states th at “C o m m e n ts ex p ress th e

v iew s o f th e [A m eric a n L aw ] In stitu te.” A L I, Prin cip les o

f Co rp o r a te Go vern a nce XXV. S ectio n 7.0 1
, to w h ich th is co m

m en t ap p lies, h as b een rep eated ly cited w i th f

av o r by th e S u

p rem e C o u r t o f Delaw are. S ee To o ley
, 84 5 A .2 d at 1 0 3 6 ; Grimes v. D o n a ld
, 6 7 3 A .2 d 1 2 0 7 (Del. 1 9 9 6 ),

o verru l ed o n o th er g ro u n d s b y Bre h m v

. E isn er , 7 4 6 A .2 d 2 4 4 (Del. 2 0 0 0 ). In d eed
, in Grimes
, th e Su p rem e Co u

rt o f Delaw are ex p ressly cited

an d ap p l ied th e co m

m en t q u o ted ab ov e. Id

. at 12 1 3

. W h i l e th e p resen t

case d o es n o t d irectly in v o l v e th e ap plicatio n of D elaw are law
, Delaw are h as b een d escrib ed ap t ly as “ b y f ar th e m ost im

p ortan t co rp o rate j u risd ictio n [.]” Melv in A ro n Eisen b erg & J am es D

. Co x , Co rp o ra t io n s

a n d Oth er Bu sin ess Org a n iza tio n s 1 03 1 (1 0th ed

. 2 0 1 1 ). In deed
, as w e p rev io u sly o b s erv ed
, in La p id us w e relied o n t

w o Delaw are cases an d on e Massach u setts case ap p ly in g Delaw are l aw f o r th e circu m stan ces u n der

w h ich a d irect actio n m ay b e b ro u g h t “ u n d er Mas s a c h u s etts law [.]” 2 3 2 F.3 d at 6 83

.N O R T H S T A R F I

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Ag reement and Declaration of Trust comparabl e t o an amendment o f a c ertificate of incorporation. The alleg ations in the complaint, althoug h not in haec verba
, are sufficient to support an arg ument that the T rustees “violat[ ed] b oth specific r estraints imposed b y the shareholders a nd the official[ s’] d

uty of care

. ” AL I
, Principles of Corporate Governance § 7.01, cmt. c

. T hus, even if the same rules that apply to corporations are applied to the Schwab T rust, this is the kind of case in which “the plaintiff may opt to plead either a direct or a derivative action[ .] ” I d

.
Moreover, there is another reason, directly r o o ted in Massachusetts case law, which provi des a basis for permitting

a direct act ion even ag ainst a corporation. W hile Massachusetts cases g enerally preclude direct actions “where corporate r ecovery for misdeeds by a corporate f idu ciary is

a vailable under traditional corporate law,” they contain t h e sig nificant caveat that “such recovery [ must] provide[ ] a just

measure of relief to the complaining stockholder[ .] ” Crowley

v. Commc’ns for Hosps., Inc.
, 573 N.E.2d 996, 1004 (Mass. App. Ct. 1991); see also Diamond v

. Pappathanasi
, 25 Mass. L

. Rptr. 500, 2009 W L 1539792, at *7 (Mass. Super. Ct. 2009) (“[ S] hareholders may resort to a direct, personal action
ag ainst a miscreant fiduciary where . . . a corporate recovery would n o t provide a just measure of relief to the complaining shareholder.”). We h ave likewise a cknowledg ed that, even where c orporate shareholders ha v e been releg ated to pursue their claims in a d e r i vative action, a d irect a ction may be appropriate t o provide a remedy to shareholders who have been injured and who would not recover under the traditional rules g overning derivative actions. See
, e.g. , E a g l e v. A m

. Tel. & Tel. Co. , 769 F

. 2d 541, 546 (9th Cir. 1985).N O R T H S T A R F I

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This case is one in w hich a recovery by the Schwab Trust “would n ot provide a just measur e of relief to the complaining shareholder.” Diamond
, 2009 W L 1539792, at *7. A ny recovery in a de r i v a t i v e action would simply increase the net asset value of the F und at the time a n y damag es w ere r ecovered. Consequently
, as defendants conceded at oral arg ument, if a d e r ivative suit is successfully prosecute d
, all current shareholders would participate in the
recovery by the Schwab Trust even if t h ey were not shareholders during the relevant time period, and injured former shareholders would n o t necessarily participate in the
recovery at all.

Sig nifica n tly
, the remedy ag reed to in a n enforcement action by the SEC avoids such “a[ n] [un] just measure of relief
to the complaining [ shareholders] .” Crowley
, 573 N.E.2d at 1004. The action, a s we have previously observed, was based

on the a lleg ation “that the Schwab Trust improperly deviated from its policy on c oncentration f or th e [ Fu n d ]

. . . b y d e ciding to n ot treat mortg ag e-backed securities as an industry w ithout shareholder approval.” Appellees’ B r

. at 13 (citing SEC v. Charles Schwab Inv. Mgmt. I nc. , No. 11-cv00136 ( N.D. Cal.), Compl. ¶¶ 24–28, D oc. No. 1). A consent judg ment w as entered requiring the Schwab Trust to disg org e profits a nd prejudg ment interest. A p p ellees’ B r. at 13–14 (citing SEC v. Charles Schwab Inv. Mgmt. Inc.
, No. 11-cv00136 (N.D. Cal.), Consent to Enter J

. ¶ 2, Doc. No. 2). The Schwab Trust, however, did no t s h are in the r ecovery

. I nstead, the settlement proceeds were deposited by the defendants into “ a fund for d istribution to adversely affected investors, including investors in the [ F und.] ” Appellees’ B r. at 1 4 (citing SEC v. Charles S chwab Inv. Mgmt. Inc.
, No. 11-

cv -00136 ( N.D. Cal.), Order Approving Distribution PlanN O R T H S T A R F I

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with Modification, Doc. No. 37). This kind of remedy could be obtained if this direct class action is successful.

Halebian v

. Berv
, 931 N.E.2d 986 ( M a s s. 2010), upon which defendants rely
, d o es not compel a contrary r esult. T h e d e f endants correctly arg ue that Halebian held, in an appropriate case, a shareholder of a m u tual f und may be forced to resort to making a demand o n the Trustees to file a derivative action. N evertheless, Halebian did not address the circumstances under which such a course of action would be required. I nst e a d
, it held that “ the statute reg ulating derivative actions [ Mass. Gen. L aws ch. 1 56D, §§ 7 .40–7.47] applies to a sharehol d e r b ring ing such a claim ag ainst a corporation or a b u siness trust.” Id . at 988 n.4. B e cause the plainti ff h a d filed a d erivative a ction, Halebian went on to address the narrow issue o f “whether the L eg islature intended that the p rovisions for dismissal under § 7.44 apply only to derivative proceeding s that are ‘commenced after rejection o f a demand,’ or to any derivative proceeding where a plaintiff shareholder’s demand has been rejected by the corporation.” Id . at 989.

Moreover, the alleg ations in that case were quite u n l i ke
t h e misconduct alleg ed here. I n Halebian
, the plainti f f claimed that the trustees failed to eng ag e i n c ompetitive bidding in their selection of an investment adviser. Id

. at 988. A derivative suit was arg uably appropriate in the case because the injury to the shareholders was the attenuated result of an improper trust ex penditu r e ( t he investment adviser’s fee).

Nor are we persuaded by the policy arg uments defendants rely on to suppor t t reating this case as a derivative action. Defendants arg ue that “[ b] y requ iring shareholders to demandN O R T H S T A R F I

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that a corporation bring a claim befo r e f i ling a derivative action, derivative action rules allow d isinterested directors to halt suits that are m e ritless o r contrary to the c orporation’s i n t erest and allow them to ex ercise their judg ment a n d

oversee litig ation in the best interest of the compan y

. ” Appellees’ B r

. at 4 6–47 (citing Mass. Gen. L aws c h 156D, § 7

. 4 2 ; Daily Income Fund
, 4 6 4 U.S. at 533; Halebian
, 457 Mass. at 626). Moreover, they g o on t o arg u e that, “apply ing derivative action rules in this contex t

. . . en sures that disinterested trustees rema in primarily responsible for
manag em e n t o f a trust’s litig ation.” Appellees’ B r. a t 47. This arg u ment is particularly unpersuasive in l i gh t of the

manner in which Massachusetts business trusts that operate mutual fu n d s conduct business. The Supreme Court has
recog niz ed that mutual funds are “ ty pically org aniz ed a

nd underwritten by the same f irm that serves a s the company ’s ‘investment advisor.’” Kamen
, 50 0 U

. S

. at 93. They a re essentially

puppets of the investment adviser.

Moreover, althoug h fun d b oards have been r equired to include a percentag e of independent d irectors, “the definition of ‘independent’ is fairly loose w hen it comes to fund board

mem b e rs[ .] ” Shipman, So W ho Owns Y

our Mutual Fund?
, W a ll St. J
., May 5, 2 003, at R1. As one commentator h a s observed:

An independent director can’t be an employ ee of the fund investment adviser or a member o f the imm e diate family o f an employ ee. Other restrictions also apply

. B u t former employ ees of the fund’s investment adviser or the adviser’s affiliates are considered to be independent w hen it comes to se r v i ng o n a fund boa rd. So, for ex ample, J oseph S.N O R T H S T A R F I

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DiMartino, who was president of Dre y f u s Corp. for a doz en y ears before be c o m ing chairman of the f

und boards f

o r the Drey fus fund g roup, is conside re d an independent director.

Id

. I ndeed, notwithstanding the requirement that 40 percent of the m e m bers of the mutual fund board be “independent” from the adviser, 15 U.S.C. § 80a-10(a), Cong r ess r e quired that the shareholders of the F und approve the initial contract fo r a n y a dviser. 15 U.S.C. § 80a-15. This r equirement reflected the fact that the trustees of a m u t u a l fund “cannot seriously be ex pected to induce a rm’s-leng th barg aining

. A s the SEC long ag o recog niz ed, any so-called independent directors would ‘obviously have to b e s atisfactory to the dominating stockholders who are in a position to c ontinue to elect a responsive b oard.’” Fox
, 692 F .2d at 259 ( q uoting I n

re Petroleum & Trading Corp.
, 11 S.E. C

. 3 8 9, 393 (1942)). Under these circumstances, it is wrong to sug g es t t hat “apply ing derivative action rules in this contex t

. . . ensures that disinterested trustees remain pr imarily responsible for
manag ement o f a trust’s litig atio n

. ” A ppellees’ B r. a t 47. This is particularly true here because one of the principal defendants, a side from the T r u s t e es themselves, is the Schwab Advisor.

There are, of course, oth e r “ r easons

. . . commonly advanced f

o r disting uishing between a derivative action, which is bro u ght on the corporation’s b ehalf ag ainst either corporate f

iduciaries or third persons, and a direct a c t i o n, which is broug ht on a shareholder’s o wn behalf ag ainst either corporate fiduciaries or the corporation itself.” Eisenberg & Cox
, Corporations and Other Business Organizations 1064. The f irst has been described a s “theoretical: Since aN O R T H S T A R F I

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corporation is a leg al person separate from its shareholde r s,

an injury to the c orporation is n ot an injury to its shareholders. This proposition is somewhat dubious, because
every injury to a corp o r at i on must also have an impact, however slig ht, on the shareholders as well.” Id

. The other, and more compelling
, reasons of p o l icy are summed up in W atson v. Button a s f

ollows: “(1) to avoid a multiplicity o f suits by each injured shareholder, ( 2) to protect the corporate creditors, and (3) to protect all the stockholder s since a corporate recovery benefits all e q u a lly .” 235 F .2d 235, 237 (9th Cir. 1956); see also E isenberg & Cox
, Corporations and Other Business O rganizations 10 6 4

. Sig nificantly
, two o f these three policy ob

j e ctives, which defendants also put forward here, are a meliorated by the v ery nature of the class action, w hich is desi gn ed to avoid a multiplicity of suits b y shareholders and which contain procedural mechanisms to

ensure that all members of the class a re treated equally

. Moreover, to the ex tent that one of the reasons for favoring a derivative suit is a co n c e rn f or the protection of c reditors, it is enoug h to say here that the defendants do not a rg ue that the concern is at issue in this case.

C. Third-Party Beneficiary Breach of Contract Claim s

T h e S c hwab Trust e ntered into a n ag reement with th e Schwab Advi sor to serve as its investment adviser a nd administrator of the F und. T h e Schwab Advisor ex pressly
ag reed to “ u se the same skill and care in providing such services as i t would use in providing services to fiduciary
accounts if it had investment responsibili t i e s for such accounts.” The pri n c i pal duty of the Schwab Advisor, a s prescribed in the I AA with the Schwab T r u st, was to “determine from time to time what sec urities and other investments [ w ould] be p u rchased, retained, or sold by theN O R T H S T A R F I

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[ F und] .” This ag r eem e n t with the Schwab Advisor was

ex p res s l y a p p roved by the shareholders of the F und. Northstar alleg es that the Schwab Advisor breached the I A A b y manag ing the F und in a manner inconsistent w ith t h e F un d ’ s fundamental investment objectives, and that the shareholders may

hold the Schwab Advisor liable for such a breach as third-party

beneficiaries of the I

AA.

The I AA ex pressly states that it “shall be g overned by the laws of the State of California.” Under California Civil Code § 1559, a critical element of a third-party cause of action is a showing that the contract was “ made ex pressly for the benefit of a third person.” T h e phrase, however, has been held not to

mean “ex clusively
, ” H

a rtman Ranch Co. v. Associated Oil Co.
, 7 3 P.2d 1163, 1170 ( Cal. 1 937), “solely
, ” Le Ballister v

. Redwood Theatres, Inc.
, 36 P.2d 827, 8 27 (Cal. Dist. Ct. App. 1934), or “ primar[ il] y , ” Montgomery v. Dorn
, 145 P. 148, 151 (Cal. Dist. Ct. App. 1914), for the b e n efit of a third
person. Similarly
, the term has b een construed not to require that performance be rendered “directly” to the beneficiary
, Lucas v. Hamm
, 364 P.2d 685, 688 ( Cal. 1 9 6 1 )
, or that the beneficiary be specifically named or identified in the c ontract, Garratt v. Baker , 56 P.2d 225, 226 (Cal. 1936).

“Consequently
, its c onnotat ive meaning having been destroy e d by

judicial interpretation, the term ‘ex pressly ’ has

now com e to mean merely the neg ative of ‘incidentally .’” Kay S. B ruce, Martinez v. Socoma Companies : Problems in Determining Contract B e nefici a r ies’ Rights
, 27 Hasting s L

. J

. 137, 149 (1975) (footnotes omitted). I ndeed, the Supreme Court of California has ex plicitly held that “[ t] he effect of the section is to ex clude enforcement by persons who ar e o n ly incidentally or remotely benefited.” Lucas
, 364 P.2d at 689;

see also Spinks v. Equity Residential Briarwood Apartments
,N O R T H S T A R F I

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. 57

90 Cal. Rptr. 3d 453, 468 (Ct. App. 2009); J udith M. Kline & B rent A. Olson, California B u siness Law Deskbook § 8:28 (2012).

Under these circumstances, the critical issue is “‘[ w] h ether the third par t y i s an intended beneficiary .’” Balsam v. Tucows Inc. , 627 F

. 3d 1158, 1161 ( 9th Cir. 2 010) (quoting Prouty v. Gores Tech. Grp.
, 18 Cal. Rptr. 3 d 178, 18 4 ( C t

. App. 2004)). The r esolution of this issue, in turn, “‘involves c o n s t r u ction of the intention of the parties,
g athered from reading the contract a s a whole in lig ht of the circumstances under which it was entered.’” Id

. (quoting Prouty
, 1 8 Cal. Rptr. 3d a t 184) ; Restatement (Second) o f Contracts § 302, reporter’s note ( “A court in determining the parties’ intention s h ould consider the circumstances surrounding the transaction a s well as the actual lang u ag e o f the contract.” ( citing cases)). “I nsofar a s inte n t to benefit a third person is important in determining his rig ht to bring an action under a contract, it is sufficient that the promisor must have understood that the promisee had s u c h i n t ent.” Lucas
, 364 P.2d at 689.

Northstar has adequately alleg ed an “intent to bene f i t a third person.” Nor t h star has also plausibly alleg ed that the Schwab Advisor un d e r s t ood that it was the intent of the Schwab T rus t to benefit the shareholders of the F und. Moreover, compelling evidence lending plausibi l i t y to the third-party

beneficiary cause of action, based on the premise that the shareholders are intended beneficiaries of the I AA, is that Cong ress has required “that the contract bet w e en the adviser and the c om p an y be a pproved by a majority of the

c ompany ’s shareholders.” Kamen
, 5 00 U.S. at 93 (cit i n g 15 U.S.C. § 80a-15(a)); see also Navellier v. Sletten
, 262 F .3d 923, 944 (9th Cir. 2 0 0 1 ); David A

. Sturms & Renee M.N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 58

Hardt, Regulation of the Advisory Contract
, in Mutual Fund Regulation § 6:2.2 (Clifford E. Kirsch ed., 2d ed. 2005).

Th u s, the ag r eement between the Schwab Trust and the Schwab Adviso r ex plicitly provides “that it has been

a pproved by a vote of a majority of the outstanding v o t i n g securities of suc h Schwab F u nd, in a ccordance with the requirements under the [ I CA] .” This suffices to establish that the shareholders have more than a “ r emote” r elati o nship to the contract bet w een the Schwab Trust and the Schwab Advisor. Rather, it indicates the d i re c t relationship that the shareholders have with the I AA and the fact that they are the actual beneficiaries of the I AA. I ndeed, as we have held, the requirement for shareholder appro v a l
, which is imposed b y the I CA, “reflect[ s] the ju dg ment of Cong r ess that stockholders of the investment comp a n y have a substantial interest in e valuating the new ow n e r s of an investment
manag er.” Zell v. InterCapital Income Sec., I nc. , 675 F .2d 1041, 1047 (9th Cir. 1 982) (citing 15 U .S.C. § 80a-15(a)(4)).

T h e s ufficiency of the complaint is also supported b y a number o f California cases. Specifically
, i n Gilbert Financial Corp. v. Steelform Contracting C o. , 145 Cal. Rptr. 448 (Ct. App. 1978), the plaintiff, a p r o perty owner, entered into a contract with a ge n e ral contractor f or the construction of a building

. The g eneral contractor subcontracted work to the defenda nt. The California Court of Appeal held that the plaintiff w a s an intended beneficiary of the subcontract between the g eneral c o ntractor and the defendant, even thoug h the plaintiff was not specifica l l y named. Id

. at 450. I ndeed, the alleg ations in the complaint demonstrated that the subcontractor had, in ef

f e c t , assumed the role of the g eneral

c o ntractor to provide construction services f or the plaintiff

, such that the plaintiff was the “ultimate beneficiary ” of theN O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 59

contract between the subcontractor and t h e g e n e r a l contractor. Id . at 451.

Apply ing the reasoning of G ilber t , the F und’s shareholders are c o mparable t o the property owners, the Schwab Trust is comparable to the g eneral contractor, a nd the Schwab Advisor is c omparable to the s u b contractor. The Schwab T r u s t eng ag ed the Schwab Advisor to manag e a nd operate the F und in accordance with the fundam ental investment objectives that the s h a r eh olders h ad adopted. I n this situation, the Schwab Advisor’s manag ement of the F und directly affected whether the F und achieved its stated g oal o f tracking the L ehman I ndex

. Thus, the “ultimate beneficiary ” of the Sc h wa b Advisor’s c o n tractual duties were the shareholders.

A more recent case, Spinks v

. Equ i t y Residential Briarwood Apartments
, 90 Cal. Rptr. 3d 453 (Ct. App. 2009), is similarly analog ous. I n Spinks
, an employ er had contracted with a landlord to provide housing f o r an employ ee. Sometime thereafter, the employ er termin a ted the employ ee and directed the landlord to chang e the lock s o n t h e employ e e’s apartment, which the landlord did. The employ ee broug ht suit ag ain s t the landlord as a third-party b eneficiary of the c ontract between t h e e m ploy e r and the landlord. The California C o u r t of Appeal held that the employ e e h ad adequately alleg ed that she w as an intended third-party beneficiary

. See id

. at 475. I n so holding
, the co u rt n o t e d that “ the most basic aspect of [ the landlord’s] performance is its oblig ation to supply [ the employ er] with a place for its staff to live.” Id

. at 4 7 2. I n the present c ase, “the most basic

a s pect” o f the Schwab Advisor’s performance—proper l y manag ing the F und—is for the benefit of the shareholders.N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 60

Nor d oes the fact that the I AA contained an inureme nt clause providing that it “shall be binding upon and shall inure
to the b enefit of the p a rties h ereto and their respective successors,” preclude a third-party b eneficiary action in the
contex t of this case. The defendants cite cases holding that, because the parties specified one particular beneficiary in the contract, o ther beneficiaries are ex cluded. These cases a re not dispositive. The cases upon which the defendants rely do
not speak to this issue or ar e n o t controlling

. F or instance, Klamath W

ater Users Protective Ass’n v. Patterson
, 204 F .3d 1206 (9 t h Cir. 1999), involved a g overnmental contract, not

a private contract. “ P ar t i es that benefit from a g overnment contract are g enerally assumed to be incidental beneficiaries, and may n ot e nforce the cont ract absent a clear intent to the contrary .” Id. at 1211. A r i s t a Films, Inc. Emp. Profit Sh a r i ng Plan v. Gilford Sec., Inc.
, 51 Cal. Rptr. 2d 3 5 (Ct. App. 1996), the only California case t h e d efendants cite, concerned an arbitration contract, where the “overwhelming weig ht of authority ” w as a g ainst third-party enforcement, a nd which was g overned by New York law, not California law. Id. at 38.

The o ther cases on which the defendants rely a re all from
courts outside California and this circuit. At this stag e in the

case—a motion to d ismiss—we follow those courts that have ruled that any weig ht that shoul d b e g iven to an inurement clause is outweig hed by the oth e r evidence of the parties’ intent. E.g.
, Anwar v. Fairfield Greenwich Ltd.
, 728 F

. Supp. 2d 372, 430 ( S.D.N.Y. 2 010); see also S o lid Host, NL v

. Namecheap, Inc.
, 652 F

. Supp. 2 d 1092, 1119 (C. D

. Cal 2009) (“B ecause they involve factual questions o f i n t ent, third p arty beneficiary claims are often n o t ap p ropriate for resolution via motion to dismiss.”).N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 61

Under California law
, as the district judg e recog niz ed, a plaintiff may be a third-party b e n e f i c iary of a contract if he alleg es that he is a member of a class n amed or referred to in the contract , or if the contract discharg es a contractual duty owed to the p laintiff. Northstar
, 781 F

. Supp. 2d a t 942–43. W e hold, contrary to t h e district judg e , that Northstar has adequately alleg ed the ex istence of a contract between the Trust a nd the investors. Northstar has als o alleg e d that the I AA was d e sig ned to discharg e the Trust’s dutie s t o t h e shareholders under this c ontract. T herefore, Northstar’s alleg ations that the shareholders are third-party beneficiaries of the I AA survive the motion to dismiss. 1 0

Therefore, we hold that N o r t hstar’s alleg ations that the shareholders are third-party b eneficiaries of the I AA survive the motion to dismiss.

CONCLUSION

To summariz e:

1. W e h o l d that by filing a supplemental pleading alleg ing

a post-complaint assig nment from a p arty that clearly h ad standing
, Northstar has standing to prosecute this case.

2. W e r e verse the district judg e ’ s dismissal of Northstar’s breach of contract claim and hold tha t N o r thstar

10 T h e d istrict j u d g e f

o u n d t h at th e Fu

n d in v esto rs w ere “ n o t ex p licitly

m en tio n [ed ]” i n th e IA A

. No rth sta r , 8 0 7 F

. Su p p

. 2 d a t 8 8 4

. T h is is in co rrect : u n d er Sectio n 3 o f th e IA A
, th e S ch w ab A d v iso r ex p licitly

co n tracted t o “ p rep are th e T ru st’ s A n n u a l an d Sem i- A n n u al Rep o rts to Sh areh o ld ers.” W e d o n o t, h o w ev er, rest o u r co n clu s io n th at N o r t h s t a r h as ad eq u ately

alleg ed th at t

h e sh areh o ld ers are th ird

- p arty b en ef iciaries

o f th e IA A o n th is o n e ref

eren ce.N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 62

adequately alleg ed the f ormation of a contract b etween the investors and the Schwab Trust.

3. W e vacate the district j u d ge’s dismissal of the fiduciary duty claims and remand for the d istrict judg e to “address the o t h e r arg uments raised by the parties reg arding [ Northstar’s] claims for breach of fiduciary d uty [ .] ” Northstar , 807 F . Supp. 2d at 881.

4. W e reverse t h e district judg e ’ s dismissal of Northstar’s third-party beneficiary breach of contract claim a nd hold that Northstar adequately alleg e d that the investors are third-party

beneficiaries of the I

A A.

5. W e decline to address the effect o f SL USA on the v arious

common law causes of action. W e leave tha t t o the district court in the first instance.

REVERSED in part, V A C ATED in part, a nd REMANDED.

B EA, Circuit J udg e, dissenting :

W h en Northstar F inancial A dvisors, I nc. (“Northstar”) commenced this action by filing its c omplaint, it did not own,

nor had it e ver owned any Schwab Total B ond Mar k e t fund ( “F und”) shares. L ikewise, at the commencement o f t h i s action, Northstar did not own a ny claims of any o ne who h ad owned any o f such shares during the perio d w h e n the defendants are alleg ed improperly to have lowered the share value of the F u nd.N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 63

Hence, when Northstar sued for damag es on i t s o wn behalf and for those of the class o f share owners Northstar
soug h t to represent i n t h is class action, Northstar itself h ad not suffered any losses, nor did Northstar own any claims of others w ho had suffered l o s s e s the defendants h a d alleg edly caused. L ast, no other person w h o c l aimed to have been injured by

defendants joined Northstar as plaintiff.

Defendants moved to d ismiss Northstar’s complaint for lack of st an ding
, because Northstar failed to alleg e it h ad suffered an injury in fact. 1 N orthstar had no “case or controversy

” within the meaning of Article I I I o f the Constitution. 2

The district court quite properly g ranted defendants’

mo t i o n and d ismissed the complaint without prejudice, 3 but

1 A p arty seek i n g t o i n v o k e a f ed eral co u rt’ s j u

risd ictio n m

u st d em on strate th ree th in g s: (1 ) an “ i n j u ry in f act,” w h ich is an in v asio n o f

a leg ally p ro tected i n terest th at is “ (a) co n c r e t e an d p articu larized
, an d (b ) actu al o r im

m in en t, n o t co n

j ectu ral o r h y p o th etical”; (2 ) a cau sal relatio n sh ip b etw een th e in j u ry an d th e ch allen g ed co n d u ct, su ch th at th e in j u ry can b e fa i r l y traced t o th e ch allen g ed actio n o f th e d ef en d an t an d

n o t f ro m th e in d ep en d en t actio n o f s o m e th ird p arty n o t b ef o re th e co u rt;

an d (3 ) a lik elih o o d th at t h e in j u ry w ill b e red ressed b y a f av orab le d ecisio n

. Lu

ja n v. Defen d

ers o f Wi l d l i f e , 5 0 4 U.S. 5 5 5
, 5 60 –6 1 (1 9 9 2) (in t ern al q u o tatio n s an d citatio n s o m itted ).

2 Ceta cea n Cmty. v. Bu sh
, 3 8 6 F.3 d 1 1 6 9
, 1 1 7 4 (9 th Cir. 2 0 0 4 ) (“ A su i t b ro u g h t by a p lain tif

f w ith o u t A rticle III stan d in g is n o t a ‘ c a se o r

co n tro v ersy ,’ an d an A rticle III f ed eral co u

rt th eref o re lack s su

bj ect m atter j u risd ictio n

o v er th e su it.”).

3 A n arg u m en t can b e m ad e th at leav e t o am en d w as p erm issib ly g ran ted b ecau se it w as p o ssib le th at th e lack o f alleg atio n s co n stitu tin g stan d in g h ad b een an o v ersig h t. Ho w ev er, ev en t h at arg u m en t is f

o reclo sed in th is circu it. “ If j u r i sd ictio n i s l ack i n g at th e o u tset, [a] district co u rt h as n oN O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 64

then quite misg uidedly sug g ested that throug h an amended complaint, N orthstar could remedy its lack of standing by an assig nment of rig hts from a person who had b e en a F und shareholder during the period when defendants alleg edly injured the F und’s shareholders. More than three mon t h s later, Northstar found Henry Holz
, a man who had indeed owned F u nd shares during the period in question. Holz could claim injury in f

a c t ; h e d id have standing to sue. B ut for

reasons best known to himself, he chose neither to sue nor to join Northstar’s action. N orthstar procured an assig nment o f Holz ’ s claims ag ainst defendants.

North s t ar then filed an a mended complaint that alleg ed Holz ’ s a ssig nment of claims to Northstar. Defendants ag ain moved to dismiss on the g round that N orthstar still ha d n o t alleg ed facts s u fficient to establish Northstar’s standing to

s u e , only to have the district court deny the motion upon a n orig inal—but nonetheless erroneous—t h e ory

. The district

c o u r t noted that “in lig ht of [ the] previous holding that [an] assig nment [ of claims] would cure the [ N o r t h star’s] lack o f standing
, and direction to the [ Northstar] to file an amended complaint based on the assig n ment, it would be u nfair to [ Northstar] to punish them f o r r e ly ing on the [ prior district judg e’s] specific instructions.” Northstar
, 781 F

. Supp. 2d at

p o w er to do an y

th in g w ith t

h e case ex cep t d ism iss.” Mo ro ng o B a n d o f Missio n In d ia n s v. Ca l. S ta te B d

. o f Eq u a liza tio n , 8 5 8 F.2 d 1 3 7 6
, 1 3 8 0 (9 th Cir. 1 9 8 8 ) (in tern al q u o tatio n s an d citatio n s o m itted ). T h eref o re, “ [i]f j u risd ictio n w as lack in g , th e n [a] co u rt’ s v ario u s o rd ers, in clu d i n g th at g ran tin g leav e to am en d t

h e co m p lain t, w ere n

u llities.” Id

. at 13 8 1. T h is circu it h as reco g n ized n o ex cep tio n s to Mo ro ng o f o r th e retro activ e cu re

o f lack of stan d in g t h r ou g h a su p p lem en tal p lead in g o f p o st- co m p lain t

ev en ts.N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 65

932. 4 Of course, if this notion of “unfairness” were the law, parties benefitted by erroneou s ruling s of district courts a nd who took action in reliance on s u c h erroneous ruling s could not be made to g ive up those benefits.

Thankfully
, there is no e x ception to the requirement o f standing based o n e a r lier d istrict court error. 5 I t is not

4 B y th en th e case w as reassig n ed to an oth er d istrict co u rt j u d g e.

5 “ Un f airn ess” b ased o n relian ce o n an e r r o n eo u s earlier d i strict co u rt

ru lin g m ig h t b e g ro u

n d s f o r certain relief

, s u ch as to llin g o f a d ead l in e. S ee S m ith v. Ra telle
, 3 2 3 F.3 d 8 13
, 8 1 9 (9 t h Cir. 20 0 3 ) ( “[ W ] e h av e

reco g n ized th at a d i strict co u rt’ s erro n eo u s d i sm issal o f a m ix ed h ab eas p etitio n is su f

f icien tly ex trao rd in ary to j u stif y eq u it a b l e to llin g .”). Bu t

w h en a j u d g e b lo w s a call o n sta n d in g , th e erro r creates j u risd ictio n w

h ere th e law d o es n o t , an d n o t io n s o f “ f airn ess” clash w ith co n stitu tio n al
req u irem en ts. T h e req u irem en t o f stan d in g e nsu res th at co u rts “ lim i t f ed eral j u risd ictio n to t h o s e cases in w h ich an ad v ersarial settin g is
g u aran teed b y th e p a r t i e s ’ ‘ p erso n al stak e’ in th e o u tco m e o f th e liti g a t i o n. ” La Du ke v. Nelso n , 76 2 F.2 d 1 31 8
, 13 2 2

– 23 (9 th C ir. 19 8 5) (citin g Wa r t h v. S

eld in
, 42 2 U.S. 4 9 0
, 4 9 8 (1 9 7 5 )). Req u irin g th at a p lain t i ff h av e an actu al in j u ry in f act “ ten d s to assu

re th at th e leg al
q u estio n s p r e s e n t e d to th e co u rt w ill b e reso l v ed
, n ot i n th e rarif ied
atm o sp h ere o f a d eb atin g so ciety
, b u t in a co n crete f

actu al c o n tex t

co n d u civ e to a realistic ap p reciatio n o f t h e c o n s eq u en ces o f j u d icial actio n .” Va lley Fo rg e Ch ristia n C o l l e g e v. America n s U

n ited f o r S ep a ra tio n o

f C h u rch a nd S t

a te, In c. , 4 5 4 U.S. 4 6 4
, 4 7 2 (1 9 8 2 ). O f

co u rse, h a d N o r th star accep ted t h e d ism issal w ith o u t p rej u dice an d th en f iled a n ew co m

p lain t a f ter it o btain ed an assig n m en t o f rig h ts, it w ou ld h av e h ad sta n d in g an d a p erso n al stak e i n t h e o u tco m e o f th is litig atio n

. T h e ease w ith w

h ich No rth star co u ld h av e o b tain ed stan d in g m ak e s its actio n s p u zzlin g at f

irst b lu sh

. Ho w ev er, h ad No rth star so ref iled
, it w ou ld also h av e risk ed i ts p o sitio n as th e f irst to h av e f

iled as rep resen tativ e o f

a class o f p lain tif

f s. A n y p erceiv ed im

p racticality

o f req u irin g No rth s tar to ad h ere to th e m o st b asic o f o u r Co n s t i t ut io n ’ s stan d in g req u i rem en ts sh o u ld n o t v itiate th e n eed to d o so

. S ee Sp rin t Co mmc’n s

. Co

. L.P, v. APCC S ervs. , 55 4 U.S. 2 6 9
, 3 0 5 (2 0 08 ) (Ro b erts, C.J
., d issen tin g ) (“ T h e Co u rt ch o o s es to elev ate ex p ed ien cy ab o v e th e s trictu res im p o sed b y th eN O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 66

“unfair” to lose a meritless point won earlier before an e rring judg e. W hat is “unfair” is not to apply the correct law. Here, both district court j u d g es erred. B ecause Northstar failed to al l e ge facts sufficient to constitute standing to sue in its

com p l a i nt, the district c o urt orig inally lacked subject matter jurisdiction. S

ee Cetace a n Cmty. v. B u sh
, 386 F .3d 1169, 1174 (9th Cir. 2004 )

. I t was not even permissible to g rant leave to amend to see if the standing d efect could somehow be remedied. See F ootnote 3, supra

. B ut even if permissible,

an amendment to alleg e a n ass i gn m e n t of rig hts which took place o ver three months a

fter the action w as commenced was useless to alleg e the standing N orthstar n eeded to commence the action in the first p lace. Morongo Band of Mission Indians v

. Cal. State Bd. of Equa l i z ation
, 858 F .2d 1376, 1381 (9th Cir. 1 988) (citing Mollan v

. Torrance
, 22 U.S. 537, 539 (1824) (jurisdiction “depends upon the state of thing s at the time of the action broug ht”); Nuclear Eng’g Co. v. Scott
, 660 F .2d 241, 248 (7th Cir. 1981) (“J urisdictional questions

are answered by reference to the time o f t h e f i ling of an

a c t ion

. . . .”); Mobil Oil Corp. v. Kelley
, 493 F .2d 7 8 4
, 7 8 6 (5th Cir. 1974) (jurisdiction “is determined at the outset of the suit”)). T o determine federal c ourt jurisdiction, “we look to the orig inal, rather than to the amended[ ] complaint.” Id.

The first d istrict c ourt judg e did not have jurisdiction to g rant leave to amend, and the second judg e could not—out o f considerations of “fairness”—allow an amendment o r a supplement to an orig inal c omplaint of which th e district court had no subject matter jurisdiction.

Co n stitu tio n

. T h at i s a trad eo f

f th e Co n stitu

t io n d o es n o t allo w

. . . . [T ]h e

ease w i th w

h ich [p lain t if

f ] can co m p l y w ith th e req u irem en ts o f A rticle III is n o t a reaso n t o a b a n d o n o u r p reced en ts; it is a reaso n to ad h ere to th em .”).N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 67

The maj o r ity and the district court opinion ex amine the l a w o f other circuits “because there is no published Nin t h Circuit authority ” as to whethe r “parties may cure standing deficiencies throug h supplemental pleading s.” Northstar
, 781 F

. Supp. 2 d at 933. I n dicta, 6 t h i s c ourt r eiterated the
g eneral principle that “jurisdiction is based on f acts that ex ist
at the time of filing ” and n o ted that the “Supr eme Court has enunciate d f

e w ex ceptions to this g eneral principle.

. . . So far, permitting standing b ased on a property interest acquired after filing is not one of them. ” R i ghthaven, LLC v. Hoehn
, 716 F .3d 11 6 6
, 1 1 71 (9th Cir. 2013). 7 I n any event, even if this panel were not bound by the dicta of Ri g h t h a ven , Morongo is dispositive: w here the district court does not have subject matter jurisdiction over a matter at the time of filing
, subsequent events do not confer subject matter jurisdiction on

6 T h is co u rt is b o u n d b y its o w n reaso n ed d icta. Un ited S ta tes v. Jo h n so n , 2 5 6 F.3 d 8 9 5, 9 1 4 (9 th Cir.2 0 0 1 ) (en b an c). Rig h th a ven ’ s dicta f its th is req u i rem en t.

7 In Rig h th a ven , a m ed ia co m p an y an d p u

blish er, Step h en s Med ia L L C, assig n ed its rig h t to su e f

o r in f rin g em en t o f co p y

rig h t to Rig h th av en L L C. 7 1 6 F.3 d 1 1 6 6, 1 1 6 8 (9 th Cir. 2 0 1 3). R ig h th av en th en su ed tw o w eb site

o p erato rs f

o r d i sp lay in g co n ten t o f w h ich S tep h en s Med ia w as t h e o rig in al

co p y rig h t o w n er. I d

. Def en d an ts f iled m o tio n s to d ism iss f o r lack of
stan d in g , assertin g th at Rig h th av en d id n o t h av e stan d in g to su e b ecau s e Step h en s Med ia h ad assig n ed o n ly a b are rig h t to su e. Un der circu it law
, assig n m en t o f th e b are rig h t to su e w ith o u t th e t ran sf er o f an a sso ciated

ex clu siv e rig h t d id n o t co n f er stan din g t o s u e o n Rig h t h av en

. Id

. at 1 1 6 8

– 6 9

. B ef

o re th e d istrict co u

rt ru led o n th e m o t io n s to d i s m i s s, Rig h th av en an d Step h en s Me d ia ex ecu ted a “ clarif icatio n an d

am en d m e n t ” to th e p rio r assig n m en t th at p u rp o rted to co n v ey all

o w n ersh ip rig h ts to Rig h t

h av e n

. Id

. at 11 6 9

. T h e d istrict co u rt g ran ted th e m o tio n s to d ism iss. Id . On ap p eal, w e af f irm ed b ecau se Rig h t

h av en d id n o t h av e stan d in g to su e at th e tim e of f i lin g , an d its su b se q u en t clarif icatio n an d am en d m en t d id n o t in clu de term s su f f icien t to co n v ey an

ex clu siv e co p y

rig h t. Id

. at 1 1 71

.N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 68

the district court. The district court has jurisdiction only to dismiss the complaint. 8

Nevertheless, the majority cites to limited ex c ept i o ns

w h e r e courts h ave allowed the c ure of jurisdictional defe c t s other than standing throug h additional pleading s. I n s h o rt, the district court and the majority arg ue that if a supplemental pleading can c ure defects in the orig inal complaint, and if that supplemental plea d ing can b e tacked onto the orig inal complaint, then N orthstar would retroactively have standing

as of its orig inal complaint, e ven thoug h “subject-matter jurisdiction depends on the state of thing s at the time o f the action broug ht.” R ockwell Intern. Corp. v. U

. S.
, 549 U.S. 457, 473 ( 2007) (internal quotations and citation omitted ). This arg ument misses one crucial point: “[ t] h e state o f thing s and the orig inally alleg ed state of thing s a r e n ot sy nony mous.” Id. T h erefore, even i f our circuit allowed supplemental p leading s to cure standing deficiencies, those

s upplemental pleading s must alleg e facts necessary to establish standing only as those facts existed a t the time of the original complaint

. This is not a novel concept in our circuit. See W ilbur v

. Locke
, 423 F

. 3d 1101 (9th Cir. 2005), abrogat e d o n other g

rounds by Levin v. Commerce Energy, Inc
., 5 6 0 U.S. 4 13 (2010) (“[ S] tanding is determined as o f the date of t h e f

i l i n g of the c omplaint

. . . . [ t] he party invoking the j u r isdiction of the court cannot rely on events that unfolded after the filing of the complaint to establish its standing

. ”) (in ternal quotations and citation omitted). I n other words, even thoug h “a p arty [ may ] serve a supplemental pleading setting out any transaction, occurrence, or event that

8 Rath er th an

ex ten d th e len g th

o f th is d issen t, I reco m

m en d th e read er sim p ly read th e op in io n s in Mo ro n g o an d Rig hth a ven , sh o u ld h e h av e an y d o u b t as to th eir ap p licab ility

.N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 69

happened after the d ate of the pleading to be supplemented,” F ed. R. Civ. P

. 1 5 (d) (emphasis added), the facts which establish a party ’ s s tanding must have ex isted when the orig inal complaint was filed

. T h u s a F ed. R. Civ. P. 15(d) supplemental pleading cannot validly alleg e post-comp laint transactions to cure a lack of standing

. 9
, 1 0

I f all a n uninjured party n eed do to g et around pesky Article I I I standing requirements is to file a complaint, then ask for liberal leave to supp l e ment u nder F ed. R. Civ. P. 15(d) to a lleg e after-acquired r ig hts of those who were timely injured, the long -standing g eneral r ule which requires injury

9 Of co u rse, I d o no t d i s p u te t h at plain tif

f s m ay cu re v ario u s j u risd ictio n al d ef

ects—o th er t

h an stan d in g —t

h ro u g h ad d itio n al p lead in g s th at alleg e relev an t p o s t -c o m p l ain t ev en ts an d co n d itio n s. T h e m aj o rity cites to sev eral su ch in stan ces (n o n e o f w h ich a re decisio n s f

ro m ou r circu it, an d n o n e o f w

h i c h a llo w ed th e retro activ e cu re o f lack of alleg atio n s o f in

j u ry -in

- f act th ro u g h a su

pp lem en tal p lead in g alleg in g a p o st- co m p lain t in j u ry in f act). S ee e.g

. , Newma n -Green In c. v. Alfo nzo

La rra in
, 4 90 U.S. 8 2 6
, 8 3 1– 3 8 ( 1 9 8 9 ) (th e Co u rt h eld th at an ap p ellate

co u rt m ay d r o p a n o n

- d iv erse d ef en dan t— u n d

er Fed

. R. Civ. P. 2 1

—

to p reserv e d iversity ju risd i ctio n o v er th e claim s o f a p lain tif f w h o s u f f ered in j u ry

- in

- f act b efo re th e orig in al co m plain t w as f

il e d ) ; Pra sco , LLC v. Med icis Ph a rm. Co rp

. , 5 3 7 F.3 d 1 3 2 9
, 1 3 3 5

– 3 7 (Fed

. Cir. 2 00 8 ) (th e Fed eral Circu it cited its ow n p reced en t th at allo w s co u rts to l oo k at “ f acts

ex istin g at th e tim e th e co m p lain t u n d

er co n sid era tio n w as f

iled ” (in tern al
q u o tatio n s an d citatio n

o m itted ) (em

ph asis in o rig in al)).

10 B ecau se I w o u ld d ism iss f o r lack o f stan d in g , I—lik e th e

m aj o rity —ex press n o v iew s as to w h eth er th e Secu rities L itig atio n Un i f o rm S tan d ard s A ct w o u ld p reem p t No rth star’ s claim

. I also ex p ress

n o v iew s o n th e claim s based o n breach o f co n tract, b reach of f i d u c i a r y

o b lig atio n s, or o th er claim ed g ro u n d s o f relief

. S ee Rig h th a ven , 71 6 F.3 d at 1 7 7 3

.N O R T H S T A R F I

N

. A D V I S O R S V

. S C H W A B I N V

. 70

in-fact at commencement o f the action f o r standing to ex ist quickly would lose all force. Uninjured parties, p a rticularly those in search of class a ction lead plaintiff status, could sue first, then trawl for those truly a n d timely injured. Today the majority g reen-lig hts those who w ould r ace to the courthouse and bend F ederal Rules of Civil Procedure and A rticle I I I standing requirements to g ain an edg e o ver other cl a i m a n ts who are not as fleet of foot. I respectfully

dissent.