FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: DIGIMARC CORPORATION 

DERIVATIVE LITIGATION.

GEORGE DIAZ, derivatively on

behalf of Digimarc Corporation,

Plaintiff-Appellant,

No. 06-35838

v.

D.C. Nos.

BRUCE DAVIS; E. K. RANJIT;  CV-05-01324-HA

PHILLIP J. MONEGO; PETER W. CV-05-01325-HA

SMITH; ALTY VAN LUIJT; BRIAN J.

OPINION GROSSI; JIM ROTH; JAMES T.

RICHARDSON; JOHN TAYSOM;

WILLIAM A. KREPICK; GEOFFREY

RHOADS; and DIGIMARC

CORPORATION, a Delaware

corporation,

Defendants-Appellees. 

Appeal from the United States District Court

for the District of Oregon

Ancer L. Haggerty, District Judge, Presiding

Argued and Submitted

August 26, 2008—Seattle, Washington

Filed December 11, 2008

Before: Thomas G. Nelson, Michael Daly Hawkins, and

Jay S. Bybee, Circuit Judges.

Opinion by Judge Bybee

16229
COUNSEL

Mark Umeda, Jeffrey Fink, and Rebecca Peterson, Robbins,

Umeda & Fink, LLP, San Diego, California, for the appellant.

Adam Gonnelli, Lubna Faruqi, and Beth Keller, Faruqi &

Faruqi, LLP, New York, New York, for the appellant.

Richard Baum, Julia Markley, and Banu Ramachandran, Perkins Coie LLP, Portland, Oregon, for the appellees. 

16232 IN RE: DIGIMARC CORP.
OPINION

BYBEE, Circuit Judge: 

George Diaz, sometime shareholder of Digimarc Corporation, filed this action derivatively on the corporation’s behalf.

Diaz alleges that the individual defendants, who are current

and former officers and directors of Digimarc, breached their

fiduciary duties to the corporation and its shareholders by

issuing misleading financial statements and misrepresenting

the business and prospects of Digimarc in violation of California corporations law and section 304 of the SarbanesOxley Act, 15 U.S.C. § 7243. The district court dismissed his

Sarbanes-Oxley claim on the grounds that there is no private

cause of action for a violation of section 304 and then

realigned Digimarc as a plaintiff, thereby destroying diversity

jurisdiction over Diaz’ state law claims. For the reasons

explained below, we agree with the district court that there is

no private right of action under section 304, and that the District of Oregon accordingly lacked federal question jurisdiction over the suit. We disagree, however, with the district

court’s realignment of Digimarc as plaintiff for the purpose of

determining diversity jurisdiction and therefore remand to that

court for proceedings consistent with this opinion. 

I

On September 13, 2004, Digimarc, a publicly-traded Delaware corporation headquartered in Oregon (and a selfdescribed “leading supplier of secure personal identification

systems” including personal identification documents and

driver licenses based on digital watermarking technology),

publicly announced that, due to accounting errors, the corporation had likely overestimated earnings for the previous six

quarters. The announcement cited the improper capitalization

of internal software development costs as the most likely

cause of these accounting errors. In short, the corporation had

failed to record the costs of internal software development as

IN RE: DIGIMARC CORP. 16233
expenses on its balance sheet, thereby artificially inflating its

net earnings over the relevant period. 

Although the full extent of the accounting errors (approximately $2.7 million in overstated earnings) was not revealed

until April 5, 2005, when Digimarc formally issued a restatement of earnings, class action lawsuits were filed within one

month of the September 13, 2004, announcement. On September 28, 2004, a class action complaint alleging violations

of sections 10(b) and 20(a) of the Securities Exchange Act

was filed (and eventually consolidated with two others) in the

District of Oregon. See Zucco Partners, LLC v. Digimarc

Corp., 445 F. Supp. 2d 1201 (D. Or. 2006). The Appellant in

this action, meanwhile, filed a shareholder derivative suit in

early October against Digimarc and certain of its officers and

directors in California Superior Court for San Louis Obispo

County. This action, which was consolidated with a similar

suit filed by Patrick Sheehan in the same court, pled state law

claims for violations of California Corporations Code

§ 25402, breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. 

Other shareholders sought a more direct means of remediation. Shortly after the California Superior Court actions were

filed, Christopher Beasley sent a letter to the Chair of Digimarc’s Board of Directors demanding that the Board take

action to rectify the alleged breaches of fiduciary duties

described in the California Superior Court complaint. The letter specifically demanded the Board “commence a civil action

against each of the Directors and Officers to recover for the

benefit of the Company” damages for misconduct and disgorgement of bonuses, stock options, and other incentive compensation. 

In response to the derivative actions and the demand letter,

Digimarc created a Special Litigation Committee (“SLC”) by

board resolution on January 5, 2005, for the purpose of inves16234 IN RE: DIGIMARC CORP.
tigating the breaches of fiduciary duty alleged in the California Superior Court action and the Beasley letter. The Board

endowed the SLC with the broad adjudicative power “to

undertake and supervise any action necessary and appropriate

to implement any [factual findings it made],” and to “determine whether or not the Company shall undertake or defend

against any litigation against one or more of the present or

former directors or officers of the company.” 

Initially, Alty van Luijt and Jim Roth, both directors of

Digimarc named as defendants in the California Superior

Court action, were appointed as sole members of the SLC. On

June 6, 2005, however, van Luijt and Roth were replaced by

Lloyd Waterhouse, Bernard Whitney, and William Miller—

all board members of Digimarc who were not named as

defendants in the California Superior Court action and who

were not affiliated with the company during the time period

at issue. The SLC also retained the law firm Farleigh Witt to

assist in the investigation of claims against individual officers

and directors. One of the SLC’s initial actions was to send a

letter dated February 25, 2005 to Beasley inviting him to participate in the investigation. The SLC did not send similar letters to Diaz or Sheehan at that time. 

Digimarc’s approach to the California action was decidedly

less generous. The corporation moved in California Superior

Court to dismiss the consolidated derivative action on grounds

of forum non conveniens. This motion was granted on July 29,

2005, and the case was dismissed. The court conditioned its

order to dismiss on an agreement by Digimarc and the individual defendants to submit to the jurisdiction of an Oregon

state court (in which Beasley, unsatisfied with the SLC’s letter, had also filed a derivative action), and an agreement that

the statute of limitations pertaining to any claims based on the

same facts alleged in the California Superior Court actions

would be tolled from the date of filing the California Superior

Court actions. 

IN RE: DIGIMARC CORP. 16235
Instead of filing in Oregon state court, however, Diaz and

Sheehan each added a Sarbanes-Oxley claim and brought separate derivative actions in the District Court for the District of

Oregon on August 25, 2005. Specifically, these actions

asserted claims for disgorgement under section 304 of the

Sarbanes-Oxley Act, 15 U.S.C. § 7243, and state law claims

for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and

violations of the California Corporations Code. The actions

further alleged that the individual defendants, the directors

and officers of Digimarc,1 were liable to Digimarc for an

unspecified sum of damages and declaratory and equitable

relief. The district court consolidated the actions on September 29, 2005. 

On September 9, 2005, shortly after the district court

actions were filed, the SLC sent a letter to counsel for Diaz

and Sheehan, inviting them to “have input in our investigation” and to participate in the next committee meeting on

October 5, 2005. Three days later, the SLC sent another letter

to Beasley’s counsel, advising him of the committee meeting

and the ongoing investigation. 

A little over a month later, on October 17, 2005, the individual defendants in this case filed a motion to dismiss the

consolidated complaint for lack of jurisdiction, pursuant to

Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). The

individual defendants argued that because section 304 of the

1The verified shareholder derivative complaint filed by Patrick Sheehan

specifically named as defendants Bruce Davis, CEO and Chairman of the

Board of Digimarc; E. K. Ranjit, CFO and Treasurer of Digimarc until

2004; Geoffrey Rhoads, Chief Technology Officer and director of Digimarc until 2003; Phillip Monego, director of Digimarc since 1996; Peter

Smith, director of Digimarc since 2000; Alty van Luijt, director of Digimarc since 2000; Brian Grossi, director of Digimarc since 2000; Jim Roth,

director of Digimarc since 2003; James Richardson, director of Digimarc

since 2003; John Taysom, director of Digimarc until 2003; and William

Krepick, director of Digimarc until 2004. 

16236 IN RE: DIGIMARC CORP.
Sarbanes-Oxley Act did not create a private right of action,

the district court could not assert federal question jurisdiction

over that claim, and that because Digimarc corporation should

be aligned as a plaintiff in the action, the parties were not

diverse and the district court lacked jurisdiction over the

plaintiffs’ remaining state law claims. 

Meanwhile, after the motion to dismiss was filed but before

the district court ruled, the SLC finished its investigation and

reported its findings and recommendations on February 18,

2006. The SLC concluded that “[w]ith respect to the facts, . . .

there was insufficient evidence to establish that any of the

defendants violated applicable standards of conduct, intentionally or otherwise,” and that “the evidence overwhelmingly

indicated that . . . there was simply no malfeasance or nonfeasance such that would entitle the Company (or someone suing

on its behalf) to prevail on any of the claims alleged in the

Derivative Litigation.” Accordingly, the SLC recommended

that “the defendants’ substantial defenses, and the risks, costs,

and burden of litigation . . . establish[ ] that pursuit of the

Derivative Litigation [is] not in the best interest of the Company and its shareholders.” 

The district court subsequently granted the individual

defendants’ motion to dismiss on August 11, 2006. The district court concluded that there was no private right of action

under section 304, and thus that “plaintiffs lack[ed] standing

to assert the only federal law claim alleged in the Complaint.”

Additionally, the district court held that Digimarc should be

aligned as a plaintiff in the action because the company was

not “actively antagonistic” to the derivative plaintiffs. Once

Digimarc was realigned as a plaintiff, the district court dismissed the remaining claims for lack of diversity jurisdiction.

Diaz filed a timely appeal to this court. 

Diaz appeals both grounds. First, he argues that the district

court had federal question subject matter jurisdiction because

section 304 of the Sarbanes-Oxley Act permits a cause of

IN RE: DIGIMARC CORP. 16237
action. Second, he argues that even if the district court lacked

federal question jurisdiction, the district court should not have

realigned Digimarc as a plaintiff and, consequently, the district court had diversity jurisdiction over the state law claims.

We consider each claim in turn. 

II

Diaz first contends that the district court erred in determining that section 304 of the Sarbanes-Oxley Act does not contain a right of action allowing private parties to sue for

noncompliance. We review a district court’s decision involving interpretation of a federal statute de novo. Olympic Pipe

Line Co. v. City of Seattle, 437 F.3d 872, 877 n.12 (9th Cir.

2006). 

Section 1331 of Title 28 grants federal district courts original jurisdiction over “all civil actions arising under the Constitution, laws, or treaties of the United States.” Additionally,

28 U.S.C. § 1367(a) furnishes district courts with supplemental jurisdiction over “all other claims that are so related to

claims in the action within such original jurisdiction that they

form part of the same case or controversy.” The only basis

Diaz asserts for federal question jurisdiction is section 304 of

the Sarbanes-Oxley Act. If private plaintiffs have a right of

action to sue under section 304, the District of Oregon had

subject matter jurisdiction over both the Sarbanes-Oxley

claim and the state law claims asserted in this case. See Merrell Dow Pharms. Inc. v. Thompson, 478 U.S. 804, 808

(1986); Am. Well Works Co. v. Layne & Bowler Co., 241 U.S.

257, 260 (1916) (opinion of Holmes, J.) (“[A] suit arises

under the law that creates the cause of action.”). If, however,

section 304 does not contain a private right of action, the district court properly dismissed the Sarbanes-Oxley claim for

lack of subject matter jurisdiction, see Merrell Dow Pharms.,

478 U.S. at 807-12. 

[1] Section 304 of the Sarbanes-Oxley Act of 2002 provides for the forfeiture of certain bonuses and profits when

16238 IN RE: DIGIMARC CORP.
corporate officers fail to comply with securities law reporting

requirements. The statute provides in relevant part: 

(a) Additional compensation prior to noncompliance with Commission financial reporting requirements 

If an issuer is required to prepare an accounting

restatement due to the material noncompliance of the

issuer, as a result of misconduct, with any financial

reporting requirement under the securities laws, the

chief executive officer and chief financial officer of

the issuer shall reimburse the issuer for— 

(1) any bonus or other incentive-based or equity

based compensation received by that person from the

issuer during that 12-month period following the

first public issuance or filing with the Commission

(whichever first occurs) of the financial document

embodying such financial reporting requirement; and

(2) any profits realized from the sale of securities of the issuer during the 12-month period. 

15 U.S.C. § 7243(a). The statute also allows the Securities

and Exchange Commission to exempt “any person” from the

effect of the forfeiture penalty. 15 U.S.C. § 7243(b). 

[2] “[T]he fact that a federal statute has been violated and

some person harmed does not automatically give rise to a private cause of action in favor of that person.” Touche Ross &

Co. v. Redington, 442 U.S. 560, 568 (1979) (quotation omitted). Instead, the statute must either explicitly create a right of

action or implicitly contain one. Id. at 575. Whether this language contains a private right of action is a question of first

impression in this court. 

IN RE: DIGIMARC CORP. 16239
A

[3] Section 304 does not explicitly create a private right of

action because nothing in the text of the section makes any

mention of a cause of action. Other sections of the SarbanesOxley Act demonstrate how Congress expressly creates private rights of action. Section 306, for example, provides that

“[a]n action to recover profits in accordance with this subsection may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any

security of the issuer . . . .” 15 U.S.C. § 7244(a)(2)(B)

(emphasis added). By contrast, section 304 does not mention

the availability of any action to enforce its mandates, nor does

it explicitly describe a forum in which suit may be brought or

a plaintiff for whom such a forum is available. Accordingly,

any private right of action within section 304 must be implied

from the statute’s language, structure, context and legislative

history. Opera Plaza Residential Parcel Homeowners Ass’n v.

Hoang, 376 F.3d 831, 836 (9th Cir. 2004). 

B

We next turn to whether section 304 creates an implied private right of action. So far as we can determine, no circuit has

yet answered this question, except in dicta. Pirelli Armstrong

Tire Corp. Retiree Med. Benefits Trust v. Raines, No. 07-

7108, ___ F.3d ___, 2008 WL 3166142, at *10 (D.C. Cir.

Aug. 8, 2008) (holding that defendant’s directors’ decision

not to bring suit under section 304 for disgorgement by CEO

and CFO was within the business judgment rule, since “§ 304

does not create a private right of action”). However, a number

of district courts have squarely addressed the issue and have

concluded that there is no such right. See Pedroli ex rel.

Microtune, Inc. v. Bartek, 564 F. Supp. 2d 683, 685-86 (E.D.

Tex. 2008); In re Diebold Derivative Litig., Nos.

5:06CV0233, 5:06CV0418, 2008 WL 564824, at *2 (N.D.

Ohio Feb. 29, 2008); In re iBasis, Inc. Derivative Litig., 532

F. Supp. 2d 214, 223-25 (D. Mass. 2007); In re Infosonics

16240 IN RE: DIGIMARC CORP.
Corp. Derivative Litig., No. 06cv1336 BTM (WMc), 2007

WL 2572276, at *8-9 (S.D. Cal. Sept. 4, 2007); In re Goodyear Tire & Rubber Co. Derivative Litig., Nos. 5:03CV2180,

5:03CV2204, 5:03CV2374, 5:03CV2468, 5:03CV2469, 2007

WL 43557, at *7 (N.D. Ohio Jan. 5, 2007); Kogan v. Robinson, 432 F. Supp. 2d 1075, 1082 (S.D. Cal. 2006); In re

Whitehall Jewellers, Inc. S’holder Derivative Litig., No. 05 C

1050, 2006 WL 468012, at *8 (N.D. Ill. Feb. 27, 2006); In re

BISYS Group Inc. Derivative Action, 396 F. Supp. 2d 463,

464 (S.D.N.Y. 2005); Neer v. Pelino, 389 F. Supp. 2d 648,

657 (E.D. Pa. 2005); Mehlenbacher v. Jitaru, No.

6:04CV1118ORL-22KRS, 2005 WL 4585859, at *10 (M.D.

Fla. June 6, 2005). 

[4] Where a federal statute does not explicitly create a private right of action, a plaintiff can maintain a suit only if

“Congress intended to provide the plaintiff with a[n implied]

private right of action.” First Pac. Bancorp, Inc. v. Helfer,

224 F.3d 1117, 1121 (9th Cir. 2000). If not express, a right

of action must be implied because “private rights of action to

enforce federal law must be created by Congress.” Alexander

v. Sandoval, 532 U.S. 275, 286 (2001) (citing Touche Ross,

442 U.S. at 578). In the absence of clear evidence of congressional intent, we may not usurp the legislative power by unilaterally creating a cause of action. Touche Ross, 442 U.S. at

578 (“The ultimate question is one of congressional intent, not

one of whether this Court thinks that it can improve upon the

statutory scheme that Congress enacted into law.”). Accordingly, “[t]he judicial task is to interpret the statute Congress

has passed to determine whether it displays an intent to create

not just a private right but also a private remedy.” Alexander,

532 U.S. at 286 (citing Transamerica Mortgage Advisors, Inc.

v. Lewis, 444 U.S. 11, 15 (1979)). 

The Supreme Court has created a four-factor test for determining the existence of an implied private right of action “in

a statute not expressly providing one.” Cort v. Ash, 422 U.S.

66, 78 (1975). A court determining whether a private right of

IN RE: DIGIMARC CORP. 16241
action is implied in a statute must consider (1) whether the

plaintiff is “one of the class for whose especial benefit the

statute was enacted—that is, [whether] the statute create[s] a

federal right in favor of the plaintiff”; (2) whether “there [is]

any indication of legislative intent, explicit or implicit, either

to create such a remedy or to deny one”; (3) whether the cause

of action is “consistent with the underlying purposes of the

legislative scheme”; and (4) whether “the cause of action [is]

one traditionally relegated to state law, in an area basically the

concern of the States, so that it would be inappropriate to infer

a cause of action based solely on federal law.” Id. (internal

quotations and citations omitted). 

In analyzing the Cort factors we will focus on the second

factor (“whether Congress intended to provide the plaintiff

with a private right of action”) as “the key inquiry in this calculus.” Opera Plaza, 376 F.3d at 835. See also Orkin v. Taylor, 487 F.3d 734, 739 (9th Cir. 2007) (“Indeed, the three Cort

questions that are not explicitly focused on legislative intent

are actually indicia of legislative intent, such that the Cort test

itself is focused entirely on intent.”). Here, congressional

intent weighs decisively against finding a private right of

action. “We . . . begin . . . our search for Congress’s intent

with the text and structure of [the statute].” Alexander, 532

U.S. at 288; see also Lamie v. United States Trustee, 540 U.S.

526, 534 (2004) (“The starting point in discerning congressional intent is the existing statutory text . . . .”). In conducting

this examination, we must consider “the entire statutory

scheme provided by Congress in determining if a private

cause of action exists, noting that analogous provisions

expressly providing for private causes of action can imply

congressional intent not to create an implied cause of action.”

Opera Plaza, 376 F.3d at 836 (citing Touche Ross, 442 U.S.

at 571-74). 

[5] The language of section 304 is at best ambiguous about

an intent to create a private right of action. Diaz argues that

section 304’s language is analogous to that of section 901(a)

16242 IN RE: DIGIMARC CORP.
of Title IX of the Education Amendments of 1972, 20 U.S.C.

§ 1681, which the Supreme Court found to contain an implied

private right of action. See Cannon v. University of Chicago,

441 U.S. 677 (1979). It is clear, however, that the “rightscreating’ language so critical to the Court’s analysis in Cannon” is “completely absent” (Alexander, 532 U.S. at 288)

from section 304. Unlike section 901(a), which expansively

provides that “no person . . . shall be subjected to discrimination under any program or activity receiving Federal financial

assistance,” see 20 U.S.C. § 1681(a), section 304 does not

create a right to disgorgement in shareholders. Instead, it

speaks in terms of the remedy, detailing when and under what

circumstances a CEO and CFO must reimburse an issuer. See

15 U.S.C. § 7243(a) (“[T]he chief executive officer and chief

financial officer of the issuer shall reimburse the issuer

. . . .”). 

[6] The fact that both Title IX and section 304 use the hortatory “shall” is irrelevant. It is the “no person” language in

Title IX, conspicuously absent from section 304, which gives

Title IX its remunerative force. Section 304 focuses on “the

person regulated” rather than the “individual[ ] who will ultimately benefit from [the statute’s] protection,” and thus does

not provide a private right of action. Alexander, 532 U.S. at

289. 

Although the language and structure of section 304 do not

indicate congressional intent to create a private right of action,

we must also “examine the entire statutory scheme provided

by Congress” to satisfy our inquiry into legislative intent.

Opera Plaza, 376 F.3d at 836. Where “analogous provisions”

expressly provide for a private right of action, we must infer

that Congress did not intend to create a private right of action

in the statutory section at issue, see id., because “when Congress wished to provide a private damages remedy, it knew

how to do so and did so expressly.” Touche Ross, 442 U.S.

at 572. 

IN RE: DIGIMARC CORP. 16243
Here, Appellant and Appellees debate which is the most

“analogous provision” within the Act with which to compare

section 304. Diaz points to section 303, which prohibits officers and directors from “tak[ing] any action to fraudulently

influence, coerce, manipulate, or mislead any independent

public or certified accountant” for the purpose of creating

misleading financial statements. 15 U.S.C. § 7242(a). Diaz

notes that section 303, unlike section 304, contains a specific

restriction on private enforcement—it gives the Commission

“exclusive authority to enforce this section.” Id. § 7242(b).

Diaz also cites section 804, which amended 28 U.S.C.

§ 1658’s statute of limitations period for certain actions and

provides that “nothing in this section shall create a new, private right of action.” Pub. L. No. 107-204, Title VII, § 804(c),

116 Stat. 801. Appellees, meanwhile, highlight section 306,

which prohibits insider trading during “pension fund blackout

periods” and requires a disgorgement of profits from officers

and directors who engage in such trading. 15 U.S.C. § 7244.

Section 306, unlike section 304, explicitly creates an “action

to recover profits” that “may be instituted at law or in equity

in any court of competent jurisdiction by the issuer, or by the

owner of any security of the issuer [under certain circumstances].” Id. § 7244(a)(2)(B). 

Diaz cannot satisfy his burden to show that section 304

creates a private right of action by pointing to other sections

in Sarbanes-Oxley that expressly disclaim private enforcement. It would turn Cort on its head to hold that by making

clear it did not intend to create a private right of action in sections 303 and 804, Congress affirmatively intended to create

rights of action in sections where it omitted such an express

denial. Furthermore, section 804 does not create a new remedial scheme—instead, it merely extends a statute of limitations for certain actions and adds prophylactic rather than new

private-right-of-action language. 

[7] Sections 304 and 306, meanwhile, both require noncompliant directors and officers to reimburse the issuer by

16244 IN RE: DIGIMARC CORP.
disgorging the profits of their noncompliance. Compare 15

U.S.C. § 7243(a)(1) (“[T]he chief executive officer and chief

financial officer of the issuer shall reimburse the issuer.”),

with 15 U.S.C. § 7244(a)(2)(A) (“Any profit realized by a

director or executive officer . . . shall inure to and be recoverable by the issuer.”). It is true that both sections’ disgorgement remedies are equitable (in the sense that they require

wrongdoers to reimburse the issuer for ill-gotten gains) and

that we have previously acknowledged that where the statutory remedy is “an equitable one, we are more inclined to perceive in Congress’ silence a presumption that an individual

may pursue a claim.” Helfer, 224 F.3d at 1125. But setting

section 304 against section 306 prevents us from reading an

implied private right of action into section 304. Again, in

addition to creating the disgorgement remedy, section 306

also expressly creates a private right of action to enforce this

remedy. 15 U.S.C. § 7244(a)(2)(B). Accordingly, we cannot

find in Congress’ silence in section 304 an intent to create a

private right of action where it was not silent in creating such

a right to similar equitable remedies in other sections of the

same Act.2 Opera Plaza, 376 F.3d at 836 (citing Touche Ross,

442 U.S. at 571-74). 

Because the text and the structure of the Sarbanes-Oxley

Act do not demonstrate an intent to create a private right of

2Diaz suggests that the structure of the remedy under section 306

required Congress to spell out the private remedy in that section but not

under section 304. Specifically, Diaz claims that section 306, unlike section 304, has a demand requirement that compels a shareholder bringing

a private right of action under section 306 first to make a demand on the

directors of the issuer to bring the action before maintaining it derivatively. See 15 U.S.C. § 7244(a)(2)(B). To the extent this argument has any

merit, however, it cannot explain why Congress also explicitly gave the

issuer a private action to disgorge under section 306 but not section 304.

See id. (“An action to recover profits in accordance with this subsection

may be instituted at law or in equity in any court of competent jurisdiction

by the issuer, or by the owner of any security of the issuer [who has satisfied the demand requirement].”) (emphasis added). 

IN RE: DIGIMARC CORP. 16245
action under section 304, we need not delve into the first (federal right in plaintiff’s favor), third (general statutory purpose), and fourth (nature of the action) Cort factors. As we

have previously recognized, “[t]hat the first two Cort factors

weigh against finding a private right of action is dispositive

of our inquiry.” Opera Plaza, 376 F.3d at 837 (citing California v. Sierra Club, 451 U.S. 287, 297 (1981)); Oliver v.

Sealaska Corp., 192 F.3d 1220, 1224 (9th Cir. 1999)). Even

if we assume that Diaz would prevail under the first Cort factor, this is not enough to offset the clear text and structure of

section 304. We also observe that nothing that Diaz has

argued with respect to the third or fourth Cort factors calls

into question our conclusion. See Neer, 389 F. Supp. 2d at

655-57 (analyzing the legislative history of section 304 and

determining that nothing in the legislative history demonstrates congressional intent to create a private right of action).

[8] Accordingly, we conclude that section 304 does not

create a private right of action. Because Diaz’s section 304

claim was the only basis for federal question jurisdiction, the

district court correctly determined that it lacked federal question jurisdiction over Diaz’s suit. Thus the only possible basis

for the district court’s jurisdiction over the plaintiff’s remaining state law claims is diversity.3

3Despite lacking federal question jurisdiction, a district court may in

some circumstances exercise supplemental jurisdiction over state law

claims which accompanied a dismissed federal claim. See 28 U.S.C.

§ 1367. Under 28 U.S.C. § 1367(c), however, a district court may decline

to exercise supplemental jurisdiction over state law claims where, as here,

“the district court has dismissed all claims over which it had original jurisdiction.” This decision “lies within the district court’s discretion,” see Foster, 504 F.3d at 1051, and is reviewed for abuse of such discretion. See

Acri v. Varian Assoc., Inc., 114 F.3d 999, 1000 (9th Cir. 1997) (en banc).

Because neither party has raised the issue of supplemental jurisdiction,

however, “we are not required, sua sponte, to decide whether the district

court abused its discretion under § 1367(c).” Id.

16246 IN RE: DIGIMARC CORP.
III

Diaz argues that subject matter jurisdiction over the

remaining state law claims may be maintained on diversity

grounds because the district court’s decision to realign Digimarc Corporation as a plaintiff (thereby destroying diversity

jurisdiction) was error. We review the district court’s legal

conclusions de novo, Kroske v. U.S. Bank Corp., 432 F.3d

976, 979 (9th Cir. 2005), and its factual determinations “necessary to establish diversity jurisdiction” for clear error.

Kroske, 432 F.3d at 979. Cf. Prudential Real Estate Affiliates,

Inc. v. PPR Realty, Inc., 204 F.3d 867, 872-73 (9th Cir. 2000)

(“The issue of alignment for purposes of diversity jurisdiction

requires a court to look beyond the pleadings to the actual

interest of the parties.”). Because we find there was antagonism between the derivative plaintiffs and Digimarc’s directors and officers at the time the suit was filed, we conclude

that the district court erred in its decision to realign the corporation as a plaintiff. 

A

[9] Section 1332 of Title 28 confers jurisdiction on federal

courts where there is diversity of citizenship between plaintiffs and defendants. Diversity jurisdiction requires complete

diversity between the parties—each defendant must be a citizen of a different state from each plaintiff. Strawbridge v.

Curtiss, 7 U.S. (3 Cranch) 267, 267 (1806). This requirement

would be satisfied if the parties were aligned as asserted in the

complaint: while Diaz and Sheehan are citizens of New York,

the individual defendants are citizens of California, Oregon,

the Netherlands, and the United Kingdom; and Digimarc is

incorporated in Delaware and has its principal place of business in Oregon. See 28 U.S.C. § 1332(a)(1), (a)(2), (c)(1). 

Although the plaintiff is generally the master of his complaint, diversity jurisdiction “cannot be conferred upon the

federal courts by the parties’ own determination of who are

IN RE: DIGIMARC CORP. 16247
plaintiffs and who defendants.” City of Indianapolis v. Chase

Nat’l Bank of City of New York, 314 U.S. 63, 69 (1941).

Instead, a court must realign the parties in order to protect our

judgments against artful pleading and ensure an actual “collision of interest.” Id. (quoting Dawson v. Columbia Ave. Sav.

Fund, Safe Deposit, Title & Trust Co., 197 U.S. 178, 181

(1905)); Dolch v. United Cal. Bank, 702 F.2d 178, 181 (9th

Cir. 1983). The court should determine the “collision of interest” by reference to the “principal purpose of the suit” and not

mere “mechanical rules.” Chase, 314 U.S. at 69-70.

B

Because a derivative lawsuit brought by a shareholder is

“not his own but the corporation’s,” the corporation “is the

real party in interest” and usually properly aligned as a plaintiff. Koster v. Lumbermens Mut. Cas. Co., 330 U.S. 518, 522-

23 (1947)). There is an exception, however, when a corporation’s officers or directors are “antagonistic” to those of the

shareholder plaintiff(s). Smith v. Sperling, 354 U.S. 91, 95-96

n.3 (1957) (citing Doctor v. Harrington, 196 U.S. 579, 587

(1905) (“The ultimate interest of the corporation made defendant may be the same as that of the stockholder made plaintiff, but the corporation may be under a control antagonistic

to him, and made to act in a way detrimental to his rights.”)).

To determine whether antagonism exists, the court should

look to “the face of the pleadings and . . . the nature of the

controversy,” id. at 96, because “the very individuals who

have a stranglehold over the corporation are the people

against whom suit is sought to be brought and, therefore, in

any sense that has any meaning they are the defendants for

that reason,” id. at 103 (Frankfurter, J., dissenting). 

A corporation is generally antagonistic to a shareholder

plaintiff where “management is aligned against the stockholder and defends a course of conduct which he attacks,”

Smith, 354 U.S. at 95, or merely where “management—for

good reasons or for bad—is definitely and distinctly opposed

16248 IN RE: DIGIMARC CORP.
to the institution of [the derivative] litigation,” Swanson, 354

U.S. at 116. For example, where management “refuses to take

action to undo a business transaction or whenever . . . it so

solidly approves [of the transaction] that any demand to

rescind would be futile,” a court should find antagonism.

Smith, 354 U.S. at 97. 

C

Diaz objects to the district court’s analysis of antagonism

in two respects. First, he contends that the district court erred

in failing to give dispositive weight to allegations of fraud and

misconduct contained in the complaint. Second, he argues that

the district court improperly considered events that occurred

after the filing of the complaint—including the issuance of

letters from Digimarc’s Special Litigation Committee to Diaz

and Sheehan inviting them to participate in the committee’s

private investigation—when it determined that Digimarc’s

officers and directors were not antagonistic to the maintenance of a derivative suit. 

1

The scope of a district court’s inquiry for purposes of

antagonism was delimited in Smith v. Sperling, where the

Supreme Court cautioned “that the proper course is not to try

out the issues presented by the charges of wrongdoing but to

determine the issue of antagonism on the face of the pleadings

and by the nature of the controversy.” 354 U.S. at 96. 

Many courts have interpreted this admonition as normally

preventing the judiciary from “launching an extended evidentiary inquiry” when a shareholder derivative complaint alleges

fraud or malfeasance. Gabriel v. Preble, 396 F.3d 10, 15 (1st

Cir. 2005). See also Liddy v. Urbanek, 707 F.2d 1222, 1224

(11th Cir. 1983); Rogers v. Valentine, 426 F.2d 1361, 1363

(2d Cir. 1970). Some courts have even concluded that if “the

complaint in a derivative action alleges that the controlling

IN RE: DIGIMARC CORP. 16249
shareholders or dominant officials of the corporation are

guilty of fraud or malfeasance, then antagonism exists” and

no further analysis is necessary. ZB Holdings, Inc. v. White,

144 F.R.D. 42, 46 (S.D.N.Y. 1992); see also, e.g., Hildebrand

v. Lewis, 281 F. Supp. 2d 837, 846 (E.D. Va. 2003); Trabucco

v. Carlile, 57 F. Supp. 2d 1074, 1076 (D. Or. 1999). These

courts generally rely on the Court’s observation in Smith, that

“[t]he bill and answer normally determine whether the management is antagonistic to the stockholder.” 354 U.S. at 96. 

Other courts, however, have suggested that when determining the “nature of the controversy,” see Smith, 354 U.S. at 96,

judges may look to facts beyond the complaint and answer.

Reilly Mortgage Group, Inc. v. Mount Vernon Sav. & Loan

Ass’n, 568 F. Supp. 1067, 1074 (E.D. Va. 1983); see also

Lewis v. Odell, 503 F.2d 445, 447 (2d Cir. 1974) (considering

that “[t]he [defendant] has not only retained neutrality in its

responses to appellant’s complaints but has even reserved the

right to take control of the action”). 

As we have previously recognized in non-derivative cases,

a court determining alignment is permitted to “ ‘look beyond

the pleadings’ to the actual interest of the parties” and make

“factual determinations of the type ordinarily left to the district court and reviewed for clear error.” Prudential Real

Estate, 204 F.3d at 872-73 (citing City of Indianapolis, 314

U.S. at 69). Cf. Safe Air for Everyone v. Meyer, 373 F.3d

1035, 1039 (9th Cir. 2004) (citing Savage v. Glendale Union

High School, Dist. No. 205, Maricopa County, 343 F.3d 1036,

1040 n.2 (9th Cir. 2003)) (“In resolving a [Rule 12(b)(1)] factual attack on jurisdiction, the district court may review evidence beyond the complaint without converting the motion to

dismiss into a motion for summary judgment.” (emphasis

added)). Thus, mere allegations of fraud or malfeasance, without more, are not enough to determine conclusively the question of antagonism. See Smith, 354 U.S. at 97 (“This is a

practical not a mechanical determination.”). Instead, a court

may consider not only the “face of the pleadings” but “the

16250 IN RE: DIGIMARC CORP.
nature of the controversy.” Id. at 96. This is especially important in cases where, as here, the corporation has not yet

answered the plaintiffs’ complaint. Thus, the district court did

not err in failing to give dispositive weight to allegations in

the derivative complaint. 

2

[10] The district court did err, however, when it considered

facts that arose after the complaint was filed in federal court.

It is well-established that “the jurisdiction of the court

depends upon the state of things at the time of the action

brought.” Mollan v. Torrance, 22 U.S. (9 Wheat.) 537, 539

(1824). A court should therefore “measure[ ] all challenges to

subject-matter jurisdiction premised upon diversity of citizenship against the state of facts that existed at the time of filing

—whether the challenge be brought shortly after filing, after

the trial, or even for the first time on appeal.” Grupo Dataflux

v. Atlas Global Group, L.P., 541 U.S. 567, 571 (2004). This

is true “regardless of the costs” the rule entails. Id. Although

the district court’s inquiry is not confined to the face of the

pleadings, its consideration of “the nature of the controversy,”

Smith, 354 U.S. at 96, should be limited to the facts and circumstances known at the time the suit was filed. 

[11] In this case, the district court, when analyzing antagonism, supported its conclusion by noting that “Digimarc has

not only taken no action directly opposed to plaintiffs’ claims,

but has cooperated with plaintiffs by investigating their claims

actively and inviting them to participate in that investigation.”

Although Digimarc formed the Special Litigation Committee

and began investigation before the plaintiffs’ suit was filed on

August 22, 2005, it did not send letters to the named plaintiffs

inviting them to participate in the SLC’s investigation until

almost three weeks after the suit was filed, on September 9,

2005. Thus the district court’s consideration of this evidence

was erroneous. 

IN RE: DIGIMARC CORP. 16251
The district court supported its decision to consider the

invitation letters by concluding that the letters were “consistent” with an earlier invitation sent to the plaintiff in another

derivative suit (Beasley) in response to a November 8, 2004

demand letter sent by Beasley to Digimarc. Although the

Beasley invitation, dated February 25, 2005, was mailed

before the commencement of the derivative suit, and thus

properly considered by the district court in determining antagonism, its consistency with the subsequent letters to Diaz and

Sheehan cannot justify consideration of the subsequent letters

themselves. Such a consideration would transform the current

time-of-filing rule into a nebulous standard and violate the

Supreme Court’s charge to “adhere[ ] to the time-of-filing

rule regardless of the costs it imposes” in particular cases.

Grupo Dataflux, 541 U.S. at 571. 

D

[12] After evaluating the evidence, we find that antagonism

was present between Diaz and the controlling members of

Digimarc at the time the suit was filed. Diaz filed this action

against eleven current and former board members of Digimarc, seven of whom remain on the board and can fairly be

said to control the corporation. It is in the pecuniary interest

of these controlling board members to oppose the derivative

action, and all would be significantly harmed by an adverse

judgment here. No court has failed to find antagonism under

similar factual circumstances. 

Courts that have realigned corporate defendants in shareholder derivative actions have looked to several factors when

determining that the corporation was not actively antagonistic

to the suit. Several courts have abstained from finding antagonism where the corporation was no longer controlled by the

directors and officers named in the complaint. See, e.g., Lewis

v. Odell, 503 F.2d 445, 446-47 (2d Cir. 1974); Taylor v. Swirnow, 80 F.R.D. 79, 84 (D. Md. 1978); In re Penn Central Sec.

16252 IN RE: DIGIMARC CORP.
Litig., 335 F. Supp. 1026, 1041-42 (E.D. Pa. 1971); Tessari

v. Herald, 207 F. Supp. 432, 435-37 (N.D. Ind. 1962). 

Other courts have found antagonism absent where the

plaintiff, rather than the defendants, controls the corporation

(either through majority stock ownership or other means).

See, e.g., Liddy v. Urbanek, 707 F.2d 1222, 1225 (11th Cir.

1983); Nejmanowski v. Nejmanowski, 841 F. Supp. 864, 868

(C.D. Ill. 1994); Gibson v. BoPar Dock Co., 780 F. Supp.

371, 374 (W.D. Va. 1991); Taylor, 80 F.R.D. at 84. Likewise,

courts have generally not found antagonism where the corporation is structurally incapable of acting to bring suit against

its officers and directors—where the corporation is “deadlocked.” See, e.g., Duffey v. Wheeler, 820 F.2d 1161, 1162-63

(11th Cir. 1987); Kartub v. Optical Fashions, 158 F. Supp.

757, 758-59 (S.D.N.Y. 1958). 

Although Federal Rule of Civil Procedure 23.1’s pleading

requirement does not directly implicate subject matter jurisdiction, several courts have considered the absence of a

demand letter persuasive in finding no antagonism. See, e.g.,

Lewis, 503 F.2d at 447; Nejamanowski, 841 F. Supp. at 867;

Tessari, 207 F. Supp. at 435-37. But cf. Smith, 354 U.S. at 97

(holding that antagonism will exist when the corporation’s

management “so solidly approves [of a business transaction]

that any demand to rescind would be futile”). 

Finally, some courts have refrained from finding antagonism where the corporation, although it has not yet filed suit

against its officers and directors, has “reserved the right to

take control of the action” or otherwise “retain[s] neutrality in

its responses to appellant’s complaints.” Lewis, 503 F.2d at

447. 

[13] Taking these various factors into consideration, and

recognizing this is a close case, we conclude the company

was antagonistic to Diaz’s suit. Digimarc did take steps to

address the shareholders’ complaints. Once the first shareIN RE: DIGIMARC CORP. 16253
holder derivative action was filed in California and Digimarc

received Beasley’s demand letter, the company created the

SLC to investigate the allegations. Although the SLC initially

consisted of two board members named in the California suit,

Digimarc eventually replaced them with new board members,

retained outside counsel, and invited Beasley to participate in

its investigation. 

[14] Notwithstanding the creation of the SLC, however, we

weigh heavily that a majority of the members of the corporation’s board were named as defendants in the derivative

action. Cf. id. at 446-47 (corporation was managed that the

time of the action by bankruptcy trustees who were not named

in the complaint). Additionally, we note that neither of the

plaintiffs was a majority shareholder in Digimarc or had the

means otherwise to control the corporation’s actions. There is

also no indication in the record that Digimarc was structurally

incapable of bringing suit against its officers and directors—

in fact, the corporation specifically delegated the power to file

such an action to the SLC. Finally, although neither Diaz nor

Sheehan sent Digimarc a formal demand letter requesting that

it bring suit upon the officers and directors, Beasley’s separate

demand letter of November 8, 2004 gave the corporation

ample opportunity to respond to shareholder demand for a

lawsuit long before Diaz filed his derivative action in August

2005. In the end, Digimarc’s creation of the SLC was not

enough to offset the remaining evidence that “management—

for good reasons or for bad—[was] definitely and distinctly

opposed to the institution of this litigation.” Swanson, 354

U.S. at 116. 

E

Finally, the individual defendants argue that Digimarc’s

grant of power to the SLC makes jurisdiction premature—i.e.,

that the district court must await the findings of the committee

before exercising its power over the derivative action.

Although the formation of the SLC is one indication that

16254 IN RE: DIGIMARC CORP.
Digimarc’s management may not be averse to the derivative

suit since it has “reserved the right to take control of the

action,” Lewis, 503 F.2d at 447, we cannot accord this factor

dispositive weight without undermining Smith’s distinction

between issues of jurisdiction and issues for trial, 354 U.S. at

97 (“[A trial] may show a dispute that lies within the penumbra of business judgment, unaffected by fraud. But that issue

goes to the merits, not to jurisdiction.”). Otherwise, to determine whether it had jurisdiction, a court would have to evaluate whether an SLC were independent, whether it had been

formed in good faith, and whether it instituted a reasonable

investigation to determine liability before the committee had

completed its investigation and recommended a course of

action—an inquiry contrary to our instructions that “all challenges to subject-matter jurisdiction premised upon diversity

[must be measured] against the state of facts that existed at

the time of filing.” Grupo Dataflux, 541 U.S. at 571. 

IV

Accordingly, we hold that there is no private right of action

under section 304 of the Sarbanes-Oxley Act and that Digimarc’s managers and directors were antagonistic to Diaz’s

derivative suit at the time of filing for the purposes of establishing diversity jurisdiction. We remand to the district court

for proceedings consistent with this decision. 

AFFIRMED in part, REVERSED in part, and

REMANDED. The parties are to bear their own costs on

appeal. 

IN RE: DIGIMARC CORP. 16255