FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

KATHERINE G. POTTER; CHARLES B. 

KRIEGER,

Plaintiffs-Appellants,

v.

B. WAYNE HUGHES; PUBLIC

STORAGE, INC., a California

corporation; B. WAYNE HUGHES, No. 06-56082

Jr.; TAMARA HUGHES GUSTAVSON; D.C. No.

DANN V. ANGELOFF; MARVIN M.  CV-04-10607-GPS

LOTZ; HARVEY LENKIN; RONALD L. OPINION HAVNER, Sr.; THOMAS J. BARRACK,

Jr.; ROBERT J. ABERNETHY; WILLIAM

C. BAKER; URI P. HARKHAM;

DANIEL C. STATON; JOHN T. EVANS;

JOHN REYES; DAVID GOLDBERG; A.

TIMOTHY SCOTT,

Defendants-Appellees. 

Appeal from the United States District Court

for the Central District of California

George P. Schiavelli, District Judge, Presiding

Argued and Submitted

March 4, 2008—Pasadena, California

Filed October 10, 2008

Before: J. Clifford Wallace, Ronald M. Gould, and

Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Gould;

Dissent by Judge Ikuta

14395
COUNSEL

Edward M. Gergosian and Robert J. Gralewski, Gergosian &

Gralewski, LLP, San Diego, California, for the appellants. 

David Dinielli and Shoshana Bannett, Munger, Tolles &

Olson LLP, Los Angeles, California, for appellees B. Wayne

Hughes, Jr., and Tamara Hughes Gustavson. 

Richard B. Spector, Corbett, Steelman & Spector, Irvine, California, for appellees Dann V. Angeloff, Thomas J. Barrack,

Jr., Robert J. Abernethy, William C. Baker, Uri P. Harkham,

Daniel C. Staton, and John T. Evans. 

14398 POTTER v. HUGHES
John M. Potter and Scott G. Lawson, Quinn Emanuel

Urquhart & Hedges LLP, San Francisco, California, for

appellees Marvin M. Lotz, Harvey Lenkin, Ronald L. Havner,

Jr., John Reyes, David Goldberg, A. Timothy Scott, and Public Storage, Inc. 

OPINION

GOULD, Circuit Judge: 

In this shareholder’s derivative action, Plaintiff-Appellant

Katherine Potter (“Potter”) alleges that the DefendantsAppellees (collectively, “Defendants”), who are managers and

directors of Public Storage, Inc. (“PS”), wrongfully managed

PS. The district court dismissed the action on the grounds that

Potter failed to make an adequate demand on the Board of

Directors of PS (“Board”) before filing her suit. We affirm. 

I

PS is a California corporation that is publicly traded on the

New York Stock Exchange. Potter and Co-Plaintiff Charles

Krieger (“Krieger”) filed a derivative complaint against PS

and sixteen individual defendants on December 30, 2004,

alleging twelve causes of action including waste of corporate

assets, breach of fiduciary duty, fraud, and violation of the

Sarbanes-Oxley Act of 2002, 15 U.S.C. §§ 7201-7266. These

allegations related to three alleged transactions: (1) PS’s

acquisition of an entity known as PSIC (“PSIC transaction”);

(2) the use of PS resources to provide services to a Canadian

business owned by the Hughes family, who are prominent

members of the Board (“Canadian transaction”); and (3) PS’s

payment of management and advisory fees to entities owned

by other defendants (“M&A transaction”). Upon Defendants’

motion to dismiss, the district court dismissed the complaint

with leave to amend, concluding that Krieger and Potter did

POTTER v. HUGHES 14399
not satisfy the requirements of Rule 23.1 of the Federal Rules

of Civil Procedure and California law.1

Potter and Krieger filed an amended complaint on July 12,

2005, alleging the same twelve causes of action but this time

relating them to only two transactions, the PSIC transaction

and the Canadian transaction. Defendants once again moved

to dismiss, and the district court dismissed the second complaint, concluding that Krieger failed the contemporaneous

ownership requirement and that Potter failed to make an adequate demand on the Board. 

Krieger does not appeal his dismissal, so this appeal concerns only the adequacy of Potter’s demand on the Board.

However, Krieger plays a major role in the facts leading to

Potter’s appeal. Krieger sent a demand letter to the Board on

November 21, 2002. This letter complained of the PSIC transaction but did not discuss the Canadian transaction. It also did

not mention Potter by name, but noted that “[t]wo individuals

. . . who reside in Southern California where the lawsuit will

be filed will join with me to bring the action.” Potter alleges

that she was one of the two unnamed individuals to whom

Krieger was referring in the letter. 

On January 6, 2003, Krieger and attorney Douglas Connon

(“Connon”) met with members of the special committee

established by the Board to investigate the allegations in the

November 21 letter. At the meeting, Connon told the members of the committee that he was representing Potter and that

he had her power of attorney. In a series of later letters, dated

1Rule 23.1 imposes only a pleading requirement with regard to demand;

the substantive demand requirement is an issue of state law. Kayes v.

Pacific Lumber Co., 51 F.3d 1449, 1463 n.10 (9th Cir. 1995). Because PS

is a California corporation and the suit is in California, California law is

applicable. However, the parties and this opinion rely in part on Delaware

law because the California courts have held that California and Delaware

law on the demand requirement are identical. See Oakland Raiders v.

Nat’l Football League, 93 Cal. App. 4th 572, 586 (Cal. Ct. App. 2001).

14400 POTTER v. HUGHES
March 19, 2003, April 7, 2003, June 23, 2003, and November

1, 2003, Krieger wrote to the Board reiterating the complaints

relating to the PSIC transaction that he had raised in the

demand letter, and also asked the Board to provide him information concerning the Canadian transaction. When the Board

did not take action that Krieger and Potter found satisfactory,

they sued. 

II

Having doubts about the foundation for federal question

jurisdiction under 28 U.S.C. § 1331, the panel by order raised

the issue of subject matter jurisdiction sua sponte and

received additional briefing. Having reviewed the briefing and

having considered the matter further, we take no position on

whether Appellants’ complaint raises a sufficient federal

question under 28 U.S.C. § 1331 because we instead conclude

that we may consider at the outset whether Potter satisfied

Federal Rule of Civil Procedure 23.1. Deciding that Rule 23.1

was not satisfied, we hold that the complaint should be dismissed and we need not further address jurisdiction. 

[1] Supreme Court precedent is clear that we “may choose

among threshold grounds for denying audience to a case on

the merits.” Wilbur v. Locke, 423 F.3d 1101, 1106 (9th Cir.

2005) (quoting Ruhrgas AG v. Marathon Oil Co., 526 U.S.

574, 585 (1999)); see also Ruhrgas AG, 526 U.S. at 584

(“While Steel Co. [v. Citizens for a Better Environment, 523

U.S. 83 (1998),] reasoned that subject-matter jurisdiction necessarily precedes a ruling on the merits, the same principle

does not dictate a sequencing of jurisdictional issues.”). These

precedents apply most commonly where both of the competing threshold issues go to the court’s power under the Constitution. 

[2] However, there are non-constitutional grounds on which

we may dismiss a suit before considering the existence of federal subject matter jurisdiction. These include jurisdictional

POTTER v. HUGHES 14401
grounds that are discretionary, such as pendent jurisdiction or

Younger abstention, see Steel Co., 523 U.S. at 100 n.3,

grounds of prudential standing, such as statutory standing, see

National R. R. Passenger Corp. v. National Ass’n of R. R.

Passengers, 414 U.S. 453, 465 n.13 (1974) (“Since we hold

that no right of action exists, questions of standing and jurisdiction became immaterial.”), and grounds that are “logically

antecedent to the existence of any Article III issues,” such as

class certification under Federal Rule of Civil Procedure 23,

see Ortiz v. Fibreboard Corp., 527 U.S. 815, 831 (1999);

Amchem Prods. v. Windsor, 521 U.S. 591, 612-13 (1997). 

[3] In this case, the issue of whether Potter satisfied the

demand pleading requirements of Rule 23.1 is “logically antecedent” to the issue of whether we have jurisdiction over this

action. Pursuant to Rule 23.1, a putative derivative plaintiff

can initiate a derivative action only if he or she makes an adequate demand on the Board under applicable state law. Fed.

R. Civ. P. 23.1 (2008); see also Kayes, 51 F.3d at 1463 n.10.

Therefore, unless we determine that a proper demand was

made, there is no lawsuit over which to exercise jurisdiction.

Thus, as in Ortiz and Amchem, the jurisdictional issue would

not exist but for this court’s determination regarding the adequacy of Potter’s demand. Accordingly, it is appropriate for

us to reach the Rule 23.1 issue first. See Ortiz, 527 U.S. at

831; Amchem, 512 U.S. at 613. 

[4] We note also that a valid demand is a requirement for

statutory standing under California law. Shields v. Singleton,

15 Cal. App. 4th 1611, 1618 (1993). Although California

courts do not define the limits of our jurisdiction, this required

demand supports our conclusion that the satisfaction of the

requirements of Rule 23.1 is a logical antecedent to federal

jurisdictional questions. See Ortiz, 527 U.S. at 831 (noting

that Rule 23 certification is “logically antecedent to Article III

concerns, and . . . pertain[s] to statutory standing, which may

properly be treated before Article III standing”). 

14402 POTTER v. HUGHES
Accordingly, we address whether Rule 23.1 was satisfied

both because compliance with Rule 23.1 is ‘logically antecedent’ to assessing Article III issues, and because this raises an

issue of state statutory standing.2

III

The parties disagree about the applicable standard of

review. Potter argues that because her complaint was dismissed, we should review the district court’s dismissal de

novo. Defendants argue that district court determinations

regarding the demand requirement for derivative actions are

reviewed for abuse of discretion. 

Defendants are correct. Although dismissals for failure to

state a claim are reviewed de novo, the district court’s determination that Potter did not comply with Rule 23.1 or California law regarding the demand and regarding demand futility

is reviewed for abuse of discretion. In re Silicon Graphics Inc.

Sec. Litig., 183 F.3d 970, 983 (9th Cir. 1999); see also Greenspun v. Del E. Webb Corp., 634 F.2d 1204, 1210 (9th Cir.

1980) (“The district court determined that Greenspun failed to

make a demand and that such a demand would not have been

futile. We must affirm unless the district court abused its discretion in reaching this conclusion.”). 

2The dissent argues that our consideration of the demand requirement

prior to the jurisdictional issue is improper under Sinochem Int’l Co. v.

Malaysia Int’l Shipping Corp., 127 S. Ct. 1184 (2007). In Sinochem, the

Supreme Court recognized that a federal court may proceed to other nonjurisdictional threshold issues without first satisfying itself of its jurisdiction, if “the resolution of the [other] issue is clear while the jurisdictional

issue is difficult.” Dissent at 14413. Nothing in Sinochem, however, abrogates the rule established in Ortiz and Amchem. Sinochem merely states

another exception to the general rule that “federal courts normally must

resolve questions of subject matter jurisdiction before reaching other

threshold issues.” Dissent at 14413. The Sinochem exception is in addition

to the one articulated in Ortiz and Amchem. Because we rely on Ortiz and

Amchem in this case, the requirements of Sinochem are immaterial to our

present determination. 

POTTER v. HUGHES 14403
IV

[5] Federal Rule of Civil Procedure 23.1 permits a plaintiff

to bring a shareholder derivative suit if two requirements are

met. First, the plaintiff must have owned shares in the corporation at the time of the disputed transaction (the “contemporary ownership requirement”). Second, the plaintiff must

“allege with particularity the efforts, if any, made by the

plaintiff to obtain the action the plaintiff desires from the

directors” (the “demand requirement”). However, failure to

meet the demand requirement may be excused if the facts

show that demand would have been futile. Smith v. Sperling,

354 U.S. 91, 96-97 (1957); Fed. R. Civ. P. 23.1 (2008). In this

appeal, the questions are whether Potter adequately made a

demand and, if not, whether the lack of demand is excused as

futile. 

A

We first consider whether Potter made a valid demand on

the Board for either or both of the transactions raised in the

complaint. The parties do not dispute that a valid demand

must give the board of directors the opportunity to consider

and act upon the proposed litigation by presenting to the

board the ultimate facts of each cause of action and the action

which plaintiff wishes the board to take to remedy the alleged

wrongdoing. Shields, 15 Cal. App. 4th at 1618; see also Lewis

v. Sporck, 646 F. Supp. 574, 578 (N.D. Cal. 1986) (listing factors). 

Defendants argue that although these elements were generally present in Krieger’s letters regarding PSIC, Potter failed

to make a valid demand about that transaction because she

was not named in the demand letter. The November 21, 2002

demand letter was sent by Krieger alone and it did not mention Potter by name. Potter argues that the mere absence of

her name should not invalidate an otherwise valid demand,

and that the Board was informed of Potter’s participation at

14404 POTTER v. HUGHES
the time of the January 6, 2003 meeting, which Potter’s attorney, Connon, attended. 

[6] The gist of the Defendants’ position is that the identity

of the plaintiff shareholder is a required element of a valid

demand, and for us the dispositive issue is whether Defendants are correct in this respect. Stated another way, the key

issue is whether Potter failed to make a demand by remaining

anonymous in Krieger’s letters. 

[7] In support of their contention, Defendants rely primarily

upon a Delaware case, Smachlo v. Birkelo, 576 F. Supp. 1439,

1444 (D. Del. 1983). In Smachlo, the district court considered

a demand letter sent by a shareholder’s attorney. Like

Krieger’s letter in this case, the demand letter in Smachlo did

not identify the shareholders making the demand, stating only

that the attorney-author “represent[s] the owners of approximately 2,000 shares of El Paso stock . . . .” Id. The district

court in Smachlo concluded that the letter was not a valid

demand because it failed to include the name of the shareholder making the demand, and that “a company’s board of

directors should not be required to act upon the demand of an

alleged shareholder when that shareholder fails to properly

identify himself.” Id.

[8] Smachlo is directly on point. Although the case applies

Delaware law, California law, as we have said, is identical to

Delaware law on the demand requirement. See Oakland Raiders, 93 Cal. App. at 586 & 586 n.5 (noting reliance on Delaware law); Shields, 15 Cal. App. 4th at 1621 (noting that

California and Delaware law are substantively identical on the

demand requirement). 

[9] Potter’s efforts to distinguish Smachlo do not persuade

us. It is of no moment that the letter in Smachlo did not identify any potential plaintiffs, while the November 21, 2002 letter identified Krieger, because Krieger’s known presence does

not relieve Potter of the obligation to make a valid demand.

POTTER v. HUGHES 14405
A plain reading of Rule 23.1 also supports this result. Rule

23.1 requires particularized pleading of the efforts undertaken

by the plaintiff. In this case, Potter has alleged only that

Krieger undertook efforts to demand action by the Board.

Even if Krieger purported also to represent additional

unnamed plaintiffs in Southern California, and one of these

unnamed plaintiffs was Potter, the complaint simply does not

show that Potter herself undertook any efforts to demand

action from the Board. 

The facts here make the attempt to distinguish Smachlo

especially unconvincing, because the district court held that

Krieger could not bring a derivative suit because he failed the

contemporaneous ownership requirement. Because Krieger

was not qualified to make a demand due to his lack of contemporaneous ownership, it would be an odd result if Potter

were allowed to remain anonymous in reliance on the demand

made by Krieger, who beyond doubt did not satisfy Rule 23.1.

The identity of the shareholder is also an important practical element of a demand. The identity of the complaining

shareholder may shed light on the veracity or significance of

the facts alleged in the demand letter, and the Board might

properly take a different course of action depending on the

shareholder’s identity. Before a demand letter can properly

invoke a duty of a corporate board to take action to correct

alleged wrongdoing, the board is entitled to know with specificity the identity of the person making the demand. See generally 5 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE

§ 23.1.08 (“The demand requirement permits the board to correct the alleged wrong, encourages intra-corporate dispute resolution, and allows the board to use its expertise and

resources to control litigation.”). 

This is not merely a technical or unimportant requirement.

Rather, the general rule of American law is that the board of

directors controls a corporation. Accordingly, strict compliance with Rule 23.1 and the applicable substantive law is nec14406 POTTER v. HUGHES
essary before a derivative suit can wrest control of an issue

from the board of directors. As a leading treatise observes,

“[t]he demand requirement is designed to promote the basic

principle of corporate governance that the board of directors,

and not individual shareholders, manages the affairs of the

corporation.” Id.

[10] Potter argues that her attorney’s attendance at the January 6, 2003 meeting with members of PS’s special committee amounted to a valid demand because the Board learned of

Potter’s identity at that time. But as Defendants point out, the

complaint does not allege that the attorney said anything at

the meeting that would amount to a legal demand. Nor does

Potter allege that the attorney submitted any demand to the

Board in writing, as California law requires. See Cal. Corp.

Code § 800(2). The Board was entitled to receive a valid

demand and was not required to piece together by inference

the disparate events that, if taken together, might have been

sufficient to require corporate action. Accordingly, the district

court did not abuse its discretion in concluding that Potter

failed to make an adequate demand. 

B

We next consider whether Potter sufficiently alleged that

making a demand on the Board would have been futile. Potter

argues that her suit should be allowed to proceed even if she

failed to make a valid demand, because making such a

demand would have been futile. The test for proving the futility of a demand for relief is whether the facts show a reasonable doubt that “(1) the directors are disinterested and

independent, or (2) the challenged transaction was otherwise

the product of a valid exercise of business judgment.” In re

Silicon Graphics Inc. Sec. Litig., 183 F.3d at 989-90 (citing

Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984) (overruled

on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del.

2000))). Potter has alleged demand futility on appeal only

with regard to the Canadian transaction. She alleges that the

POTTER v. HUGHES 14407
members of the Board were interested in the transaction or

were not independent because they were dominated by the

Hughes family, which held several seats on the Board. 

[11] Potter’s demand futility argument fails. Most significantly, Potter’s allegations are not complete and detailed

enough to excuse her from the demand requirement. “[I]n

order to evaluate the demand futility claim, the court must be

apprised of facts specific to each director from which it can

conclude that that particular director could or could not be

expected to fairly evaluate the claims of the shareholder plaintiff.” Shields, 15 Cal. App. 4th at 1622. 

[12] The complaint contains few details about the members

of the Board aside from the fact that they voted for the transactions that Potter disputes. These allegations, taken alone,

are insufficient as a matter of law. “[W]here mere approval of

corporate action, absent self-interest or other indication of

bias, is the sole basis for establishing the director’s ‘wrongdoing’ and hence for excusing demand on them, plaintiff’s suit

should ordinarily be dismissed.” Greenspun, 634 F.2d at 1210

(internal citation omitted). And while Potter does make some

specific accusations about the directors, only a few directors

are alleged to have any interests that might excuse demand if

held by a majority of the Board. A majority of the 13 directors

discussed in the complaint are not alleged to have any interest

that would make them unable to consider a demand made by

a shareholder. Also, that the Board appointed a special committee to consider Krieger’s demands regarding the PSIC

transaction reflects rather poorly on Potter’s argument that the

same Board would not have taken at least that step to consider

the Canadian transaction, which, Potter alleges, was a product

of the same self-dealing. 

Accordingly, Potter’s allegations do not create a reasonable

doubt as to the Board’s overall honesty or independence, and

she is not excused from the demand requirement.3 As we have

3Potter has also not shown that demand should be excused because the

Canadian transaction was not the result of valid business judgment. The

14408 POTTER v. HUGHES
explained, “[t]he task of demanding action under Rule 23.1 is

not onerous. No policy recommends eviscerating the demand

requirement as plaintiff would have us do.” Greenspun, 634

F.2d at 1210. 

AFFIRMED. 

IKUTA, Circuit Judge, dissenting: 

Katherine Potter (Potter) has filed a state law derivative

shareholder suit on behalf of nominal defendant Public Storage, Inc. The district court dismissed her suit on the ground

that her failure to name herself in the written demand presented by the plaintiffs to the corporation deprived her of

standing to maintain this action under Rule 23.1 of the Federal Rules of Civil Procedure.1

 Potter appeals, arguing that

California law does not require her to identify herself by name

in the written demand presented to the board of directors.

Before addressing this open issue of California law, however,

we should recognize our “independent obligation to inquire

business judgment rule is a “presumption that in making a business decision the directors of a corporation acted on an informed basis, in good

faith and in the honest belief that the action taken was in the best interests

of the company.” Aronson, 473 A.2d at 812. 

Potter alleges only that the Board failed to disclose the terms of the

Canadian transaction, and that PS was reimbursed for expenses at less than

the fair market value of the services rendered to the Canadian entities.

Absent an indication that the Board lacked good faith as a whole (or at

least in the majority), the allegations that some members were interested

in the transaction does not rebut the presumption that the board’s decision

was a legitimate business judgment. Telxon Corp. v. Meyerson, 802 A.2d

257, 264 (Del. 2002). 

1Rule 23.1(b)(3) requires a shareholder to “state with particularity: any

effort by the plaintiff to obtain the desired action from the directors or

comparable authority and, if necessary, from the shareholders or members;

and the reasons for not obtaining the action or not making the effort.” 

POTTER v. HUGHES 14409
into the presence or absence of subject matter jurisdiction,” In

re Excel Innovations, Inc., 502 F.3d 1086, 1092 (9th Cir.

2007), and dismiss this case for want of subject matter jurisdiction. In bypassing this jurisdictional question, the majority

strays from the Supreme Court’s direction in Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94 (1998) and Sinochem

Int’l Co. v. Malaysia Int’l Shipping Corp., 127 S. Ct. 1184,

1191 (2007), as well as from the Fifth Circuit’s interpretation

of these cases. See Rivera v. Wyeth-Ayerst Labs., 283 F.3d

315, 319 n.6 (5th Cir. 2002). 

I

“[A] federal court generally may not rule on the merits of

a case without first determining that it has jurisdiction over

the category of claim in suit (subject-matter jurisdiction) and

the parties (personal jurisdiction).” Sinochem, 127 S. Ct. at

1191. Put another way, “[j]urisdiction is power to declare the

law, and when it ceases to exist, the only function remaining

to the court is that of announcing the fact and dismissing the

cause.” Steel Co., 523 U.S. at 94 (quoting Ex parte McCardle,

7 Wall. 506, 514 (1868)). 

The Supreme Court has clarified that this general rule has

exceptions: “a federal court has leeway ‘to choose among

threshold grounds for denying audience to a case on the merits.’ ” Sinochem, 127 S. Ct. at 1191 (quoting Ruhrgas AG v.

Marathon Oil Co., 526 U.S. 574, 585 (1999)). For example,

a district court “may dispose of an action by a forum non conveniens dismissal, bypassing questions of subject-matter and

personal jurisdiction, when considerations of convenience,

fairness, and judicial economy so warrant.” Id. at 1192. In

addition, a district court could dispose of a case on threshold

grounds, such as abstention under Younger v. Harris, 401

U.S. 37 (1971), discretionary refusal to entertain pendent

jurisdiction, see Moor v. County of Alameda, 411 U.S. 693,

715-16 (1973), and dismissal under the rule of Totten v.

United States, 92 U.S. 105 (1875), which prohibits suits

14410 POTTER v. HUGHES
against the government arising out of covert espionage agreements. Sinochem, 127 S. Ct. at 1191.2

The Supreme Court has also held it may avoid reaching

subject matter jurisdiction and instead dismiss an action for

failure to meet class certification requirements under Rule 23

of the Federal Rules of Civil Procedure. See Ortiz v. Fibreboard Corp., 527 U.S. 815, 831 (1999); Amchem Prods. v.

Windsor, 521 U.S. 591, 612-13 (1997). As noted by the Fifth

Circuit, this is a “limited exception for suits in which the class

certification issues are ‘logically antecedent to the existence

of any Article III issues,’ ” and the class certification itself

“create[s] the jurisdictional issue.” Rivera, 283 F.3d at 319

n.6 (quoting Amchem, 521 U.S. at 612). In Amchem, the proposed class of plaintiffs included persons whom the defendants alleged lacked Article III standing to sue because they

had not sustained a cognizable injury or because their injury

2National Railroad Passenger Corp. v. National Ass’n of Railroad Passengers, 414 U.S. 453, 465 n.13 (1974), mentioned by the majority,

addresses a different issue. The question before the Supreme Court was

whether there was a private cause of action to enforce compliance with a

federal statute. Although “[t]he issue has been variously stated to be

whether the Amtrak Act can be read to create a private right of action to

enforce compliance with its provisions; whether a federal district court has

jurisdiction under the terms of the Act to entertain such a suit; and whether

the respondent has standing to bring such a suit,” id. at 455-56, the case

did not actually raise a federal subject matter jurisdiction issue. As the

Supreme Court explained in Steel Co.: 

[I]n [National Railroad Passenger Corp.], we did not determine

whether a cause of action existed before determining that the

plaintiff had Article III standing; there was no question of injury

in fact or effectiveness of the requested remedy. Rather, National

Railroad Passenger Corp. determined whether a statutory cause

of action existed before determining whether (if so) the plaintiff

came within the “zone of interests” for which the cause of action

was available. The latter question is an issue of statutory standing. It has nothing to do with whether there is case or controversy

under Article III. 

523 U.S. at 96-97 (internal citation omitted, emphasis in original). 

POTTER v. HUGHES 14411
was not redressable. Id. at 612. If the class did not meet the

substantive prerequisites imposed by Rule 23,3 the Court

would not need to determine the Article III standing issue.

Accordingly, the Court determined that the class certification

issues were “logically antecedent” to jurisdictional issues in

Amchem and Ortiz because the jurisdictional issues “would

not exist but for the [class-action] certification.” Amchem, 521

U.S. at 612 (internal quotation marks and citations omitted,

alterations in original); see also Ortiz, 527 U.S. at 831. 

Neither Sinochem nor the class action certification cases,

Amchem and Ortiz, change the Supreme Court’s command

that we address subject matter jurisdiction at the outset in the

“mine run of cases,” and reach other issues first only where

the jurisdictional issue is “difficult to determine” and the

other ground is relatively “less burdensome.” Sinochem, 127

S. Ct. at 1194; accord Ruhrgas, 526 U.S. at 587-88 (stating

that “expedition and sensitivity to state courts’ coequal stature

should impel the federal court to dispose of [the issue of subject matter jurisdiction] first”). In Sinochem, the court was

faced with “a textbook case for immediate forum non conveniens dismissal,” while the subject-matter jurisdiction issue

“presented an issue of first impression.” 127 S. Ct. at 1194.

Moreover, “[d]iscovery concerning personal jurisdiction

would have burdened Sinochem with expense and delay.” Id.

3Fed. R. Civ. Proc. 23(a) provides: 

(a) Prerequisites. 

One or more members of a class may sue or be sued as representative parties on behalf of all members only if: 

(1) the class is so numerous that joinder of all members is

impracticable, 

(2) there are questions of law or fact common to the class,

(3) the claims or defenses of the representative parties are

typical of the claims or defenses of the class; and 

(4) the representative parties will fairly and adequately protect the interests of the class. 

14412 POTTER v. HUGHES
Requiring the court to address jurisdictional issues in such circumstances would disserve judicial economy. Id. As the Court

clarified: 

If . . . a court can readily determine that it lacks jurisdiction over the cause or the defendant, the proper

course would be to dismiss on that ground. In the

mine run of cases, jurisdiction will involve no arduous inquiry and both judicial economy and the consideration ordinarily accorded the plaintiff’s choice

of forum should impel the federal court to dispose of

those issues first. 

Id. (internal quotation marks and alterations omitted).

In sum, federal courts normally must resolve questions of

subject matter jurisdiction before reaching other threshold

issues. Only where the other issue itself creates the jurisdictional issue (as in the class action certifications under Rule 23

in Ortiz and Amchem), or the resolution of the issue is clear

while the jurisdictional issue is difficult, see Sinochem, 127

S. Ct. at 1194, is it appropriate for the court to proceed without confirming jurisdiction. 

II

In this case, the district court dismissed Potter’s claim on

the ground that Potter lacked standing under Rule 23.1 of the

Federal Rule of Civil Procedure due to her failure to make a

valid demand on the Public Storage board of directors. The

majority agrees with this approach. Maj. op. at 14402. In my

view, the majority has gone astray, first by misconceiving the

nature of Rule 23.1, and second by deciding a threshold issue

that is neither clear nor logically antecedent to the jurisdictional question. 

The majority starts down the wrong path by characterizing

the threshold question in this case as being “whether Potter

POTTER v. HUGHES 14413
satisfied the demand pleading requirements of Rule 23.1,” and

asserting that “[p]ursuant to Rule 23.1, a putative derivative

plaintiff can initiate a derivative action only if he or she

makes an adequate demand on the Board under applicable

state law.” Maj. op. at 14402. But Rule 23.1(b) of the Federal

Rules of Civil Procedure is a rule of pleading only; it does not

impose any substantive demand requirement. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96-97 (1991). As Kamen

held:

[A]lthough Rule 23.1 clearly contemplates both the

demand requirement and the possibility that demand

may be excused, it does not create a demand requirement of any particular dimension. On its face, Rule

23.1 speaks only to the adequacy of the shareholder

representative’s pleadings. Indeed, as a rule of procedure issued pursuant to the Rules Enabling Act,

Rule 23.1 cannot be understood to “abridge, enlarge

or modify any substantive right.” 28 U.S.C.

§ 2072(b). 

Id. at 96 (emphasis in original). Rule 23.1(b)(3) required Potter only to “state with particularity: any effort . . . to obtain

the desired action from the directors . . . and the reasons for

not obtaining the action or not making the effort.” Id. Potter’s

complaint met these formal pleading requirements: She stated

that she “made a formal written demand on the Board of

Directors,” and that though the original demand letter identified her merely as a plaintiff, she was identified by name at

a subsequent meeting with a Public Storage Special Committee formulated to investigate the plaintiffs’ demand for suit.

Neither the district court nor the majority disputes that Potter satisfied Rule 23.1’s formal pleading requirements. Rather,

the majority holds that the district court correctly dismissed

Potter’s action on a different threshold ground, namely, that

her action is deficient on the merits because she failed to

establish the substantive adequacy of her demand as required

14414 POTTER v. HUGHES
under California corporate law. Maj. op. at 14402, 14406-07.

In effect, the majority holds that this issue of state law is an

appropriate “threshold ground[ ] for denying audience to a

case on the merits.” Sinochem, 127 S. Ct. at 1191 (quoting

Ruhrgas, 526 U.S. at 585) (alteration added). 

I disagree with this conclusion. Sinochem, Ortiz, and

Amchem made only limited exceptions to the general rule that

we must address our jurisdiction first. They do not support

dismissing an action based on a threshold ground that raises

an unsettled issue of state law. California courts have not considered whether California law requires plaintiffs bringing a

derivative action to identify themselves by name in a written

demand. In declaring that California law imposes such a

requirement, the majority relies on a two-step analysis. First,

the majority notes California decisions that stand generally for

the proposition that “corporate law developed in the State of

Delaware . . . is identical to California corporate law for all

practical purposes.” Oakland Raiders v. Nat’l Football

League 93 Cal. App. 4th 572, 586 n.5 (Cal. Ct. App. 2001);

see also Shields, 15 Cal. App. 4th 1611, 1621 (1993). Second,

the majority relies on Smachlo v. Birkelo, 576 F. Supp. 1439

(D. Del. 1983), in which a federal district court considered

whether the plaintiff had met the demand requirement to bring

a shareholder derivative suit. 

In Smachlo, the court’s jurisdiction was premised on diversity and exclusive federal jurisdiction for claims alleging violations of Section 10(b) of the Securities Exchange Act, 15

U.S.C. § 78j(b) and Rule 10b-5 of the Securities and

Exchange Commission, 17 C.F.R. § 240.10b-5. Id. at 1441.

The district court held that a shareholder demand letter was

inadequate because, among other faults, it failed to identify a

single complaining shareholder, gave the board only a twoweek deadline for action, and answered the corporation’s

request for additional information by filing the derivative

complaint. Smachlo, 576 F. Supp. at 1444-45. But the district

court did not identify the source of law from which it derived

POTTER v. HUGHES 14415
this requirement. Although the majority asserts that Smachlo

“applies Delaware law,” Maj. op. at 14405, the district court

cited no Delaware case and provided no indication that it was

applying Delaware law. 

Based on this two-step analysis, the majority concludes that

a decision by a federal district court sitting in Delaware has

established a bright line California rule that plaintiffs lack

standing to bring a derivative action unless they identify

themselves by name in a written demand to the corporation.

But the majority points to no California or Delaware case

holding that the failure to self-identify constitutes a failure to

make a valid demand. As noted, Smachlo does not expressly

interpret Delaware law, and more fairly stands for the limited

proposition that a putative derivative plaintiff must permit the

board, as part of its reasonable investigation of the claims at

issue, to ascertain the identity of the shareholder. See id. Considering that the directors of Public Storage were informed in

a pre-suit meeting of Potter’s identity, the demand in this case

was arguably sufficient under Smachlo. Smachlo is thus a thin

reed on which to avoid consideration of our subject matter

jurisdiction in favor of a dismissal on state standing grounds.

Not only is the threshold issue identified by the majority an

open issue of California law, but nothing in Sinochem suggests that a state standing requirement would ever be an

appropriate threshold basis for dismissal. The threshold issues

identified in Sinochem as appropriate bases for dismissing a

case before reaching the question of the court’s jurisdiction

were federal procedural rules, not requirements of substantive

state law. See 127 S. Ct. at 1191-93. To dismiss a case on a

state standing requirement, a federal court must delve into

state law to clarify often fine distinctions between threshold

and merits-based issues, and may have to resolve an open

issue of state law. See Sinochem, 127 S. Ct. at 1192-93 (“The

critical point . . . [is that r]esolving a forum non conveniens

motion does not entail any assumption by the court of substantive ‘law-declaring power.’ ”). Sinochem provides no sup14416 POTTER v. HUGHES
port for dismissing an action on an issue of state standing as

uncertain as the demand requirement in this case. 

Nor does the exception for class action certifications in

Ortiz and Amchem avail the majority. As stated, Ortiz and

Amchem created only “a limited exception for suits in which

the class certification issues are ‘logically antecedent to the

existence of any Article III issues.’ ” Rivera, 283 F.3d at 319

n.6 (quoting Amchem, 521 U.S. at 612). Yet the California

standing question raised by this case is not logically antecedent to the question of our jurisdiction and does not create a

jurisdictional issue in the same way that class certification in

Amchem created questions about the Article III standing of

members of the class. See Rivera, 283 F.3d at 319 n.6 (stating

that the Amchem exception is not applicable to the question

whether the plaintiffs had standing because the “question

would exist whether Rivera filed her claim alone or as part of

a class; class certification did not create the jurisdictional

issue”). While the need to determine whether members of a

class meet Article III standing requirements does not arise

until a class has been certified, the jurisdictional issue

(whether there is a federal question or other basis for federal

jurisdiction) exists whether or not Potter has made an adequate demand under California’s corporate law. Although a

determination that Potter lacks standing under California law

to bring her derivative suit would certainly dispose of this

case, see Maj. op. at 14402, the same can be said about any

dispositive threshold issue. 

The majority’s approach allows a federal court to bypass

subject matter jurisdiction and dispose of a case by adjudicating a difficult state law issue, despite the Supreme Court’s

direction that we should generally address subject matter

jurisdiction at the outset. Sinochem, 127 S. Ct. at 1191. In my

view, we should join the Fifth Circuit, and address our lack

of subject matter jurisdiction at the outset, rather than rely on

the limited exception articulated in Amchem and Ortiz, which

POTTER v. HUGHES 14417
is not applicable here. See Rivera, 283 F.3d 315, 319 n.6 (5th

Cir. 2002). 

III

The correct path here is to consider our subject matter jurisdiction first. Under 28 U.S.C. § 1331, we have jurisdiction

over “only those cases in which a well-pleaded complaint

establishes either that [1] federal law creates the cause of

action or that [2] the plaintiff’s right to relief necessarily

depends on resolution of a substantial question of federal

law.” Franchise Tax Bd. v. Constr. Laborers Vacation Trust,

463 U.S. 1, 27-28 (1983). “The second basis for jurisdiction

arises when a federal court determines that ‘a state-law claim

necessarily raise[s] a stated federal issue, actually disputed

and substantial, which a federal forum may entertain without

disturbing any congressionally approved balance of federal

and state judicial responsibilities.’ ” Williston Basin Interstate

Pipeline Co. v. An Exclusive Gas Storage Leasehold & Easement in the Cloverly Subterranean Geological Formation,

524 F.3d 1090, 1100 (9th Cir. 2008) (quoting Grable & Sons

Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314

(2005)). Potter’s complaint does not allege a federal cause of

action,4 and the federal statutes Potter cites in her complaint

4Count I of the complaint asserts a claim for breach of fiduciary duty

against all individual defendants based upon the defendants’ completion

of the Public Storage, Inc. transaction. 

Count II asserts a claim against all individual defendants for waste of

corporate assets in light of the defendants’ alleged transfer of corporate

assets from Public Storage to the Hughes Family Defendants. 

Count III asserts a claim of violation of Cal. Corp. Code § 25402 (prohibiting insider trading under California law) against the Hughes Family

Defendants. 

Count IV asserts a claim for breach of fiduciary duty and seeks a constructive trust against the Hughes Family Defendants. 

Count V asserts a claim against the director defendants for aiding and

abetting the Hughes Family Defendants’ breaches of fiduciary duties. 

14418 POTTER v. HUGHES
do not provide for a private right of action. See 18 U.S.C.

§ 1350 (provision of the Sarbanes-Oxley Act requiring issuers

to certify periodic financial reports and providing criminal

penalties, but no cause of action, for violations of the section).

Nor am I aware of a basis for inferring such a private right.

See Alexander v. Sandoval, 532 U.S. 275, 286-89 (2001)

(holding that a court may not infer a private right of action

from a federal statute unless Congress has displayed “an

Count VI asserts a claim against all individuals for breach of fiduciary

duties and dissemination of “materially misleading and inaccurate . . . or

incomplete information.” Count VI also asserts that Public Storage “has

suffered damages . . . including . . . exposure to liability for violations of

federal law, including but not limited to, the provisions of the SarbanesOxley Act of 2002.” 

Count VII asserts a claim against all individual defendants for failure

to pursue claims against the Hughes Family Defendants “in breach of the

Individual Defendants’ fiduciary duties of care, loyalty and good faith.”

Count VIII also asserts a direct and “aiding and abetting” claim for breach

of fiduciary duty against all individual defendants, alleging that the defendants “breached their fiduciary duties of care, candor, loyalty and full disclosure,” and exposed Public Storage “to liability for violations of federal

law, including the Sarbanes-Oxley Act.” 

Count VIII alleges that certain management defendants “executed certifications pursuant to 18 U.S.C. [§] 1350 as adopted pursuant to Section

302 of the Sarbanes-Oxley Act,” and that these management defendants

are required to return their compensation to Public Storage. 

Count IX asserts a claim against all individual defendants for “abuse of

. . . control” over Public Storage. 

Count X asserts a claim against all individual defendants for “Gross

Mismanagement.” As part of this claim, the complaint asserts that the

individual defendants “abdicated their responsibilities” under the

Sarbanes-Oxley Act, and by so doing, “breached their duties of care, diligence and candor in the management and administration” of Public Storage. 

Count XI asserts a claim of constructive fraud against all individual

defendants. 

Count XII asserts a claim of unjust enrichment against all individual

defendants. 

POTTER v. HUGHES 14419
intent to create not just a private right but also a private remedy,” and noting that statutes focusing “on the person regulated

rather than the individuals protected” fail to indicate the requisite congressional intent); see also Walzer v. UAL Corp., 05

Civ. 581 (CM), 2008 WL 87944, at *2 (S.D.N.Y. Jan. 2,

2008) (holding no private cause of action under the SarbanesOxley Act) (citing In re BISYS Group, Inc. Derivative Action,

396 F. Supp. 2d 463, 464 (S.D.N.Y. 2005)). The absence of

a federal private right of action undercuts the existence of

subject matter jurisdiction under § 1331. See Grable, 545 U.S.

at 317-18 (discussing Merrell Dow Pharm. Inc. v. Thompson,

478 U.S. 804 (1986)). 

The state law claims Potter raises also do not “necessarily

raise a stated federal issue, actually disputed and substantial,

which a federal forum may entertain without disturbing any

congressionally approved balance of federal and state judicial

responsibilities.” Grable, 545 U.S. at 314. In Grable, the

Court determined it had federal question jurisdiction over a

state claim where “the meaning of the federal statute” was an

essential element of a state quiet title action, “and the meaning of the federal statute [was] actually in dispute.” Id. at 315.

Although the complaint here alleges breach of fiduciary duty

to Public Storage by, among other things, failure to comply

with the Sarbanes-Oxley Act’s certification requirement, neither the complaint nor the parties raise a substantial dispute

regarding its meaning. Rather, the complaint raises claims

typical of state derivative actions; its assertions that defendants failed to comply with the Act are incidental. Because

the complaint does not “necessarily” raise a “disputed and

substantial” federal question, “[t]his case cannot be squeezed

into the slim category Grable exemplifies.” Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 681 (2006).5

5Potter argues also that its claims and Public Storage’s affirmative

defenses will require examination of the federal requirements relating to

a real estate investment trust (REIT). See 26 U.S.C. § 856. This issue does

not appear substantial within the context of the complaint. See Grable, 545

U.S. at 314, 317-18. 

14420 POTTER v. HUGHES
Potter argues that we have jurisdiction under 15 U.S.C.

§ 78aa, which provides, in pertinent part: 

The district courts of the United States and the

United States courts of any Territory or other place

subject to the jurisdiction of the United States shall

have exclusive jurisdiction of violations of this chapter [the Securities Exchange Act of 1934, 15 U.S.C.

§ 78a-78lll], or the rules and regulations thereunder,

and of all suits in equity and actions at law brought

to enforce any liability or duty created by this chapter or the rules and regulations thereunder. 

In Sparta Surgical Corp. v. Nat’l Ass’n of Sec. Dealers, 159

F.3d 1209, 1211-12 (9th Cir. 1998), we held that 15 U.S.C.

§ 78aa provided a basis for subject matter jurisdiction where

plaintiff’s carefully crafted state common law claims were

based exclusively on the question whether defendant’s conduct complied with federal law. Similarly, in California ex

rel. Lockyer v. Dynegy, Inc., 375 F.3d 831 (9th Cir. 2004), we

exercised jurisdiction over a complaint alleging only state law

claims where relief was “predicated on a subject matter committed exclusively to federal jurisdiction,” the “state lawsuit

turn[ed], entirely, upon the defendant’s compliance with a

federal regulation,” and “no state law liability could survive”

unless the plaintiff could prove a federal law violation. Id. at

841 (internal quotation marks omitted). 

In this case, however, Potter’s allusions to federal law play

a minor role in the complaint’s claims for state law breaches

of fiduciary duties. In the context of the myriad alternative

(and factually specific) bases for relief asserted by Potter for

each claim, the complaint does not fall under the Sparta rule.

Potter’s passing references to alleged breaches of federal law

(for which there is no private right of action) are insufficient

in this context to “convert a state law claim into a federal

cause of action.” Easton v. Crossland Mortg. Corp., 114 F.3d

979, 982 (9th Cir. 1997). 

POTTER v. HUGHES 14421
Potter’s complaint does not allege a federal cause of action,

raise a substantial disputed issue of federal law, or turn

entirely on the question whether defendants violated federal

law. Accordingly, there is no basis for subject matter jurisdiction. And because we should generally consider our subject

matter jurisdiction in the first instance, and there is a clear

path to do so in this case, I would vacate the decision of the

district court and remand with instructions to dismiss the case

for lack of subject matter jurisdiction.

14422 POTTER v. HUGHES