Opinion ID: 2747291
Heading Depth: 3
Heading Rank: 1

Heading: Federal Jurisdiction Over State Law Claims

Text: We review a district court’s challenged determination of subject matter jurisdiction de novo. See Cutrone v. Mortg. Elec. Registration Sys., Inc., 749 F.3d 137, 142 (2d Cir. 2014). In doing so, we are mindful of the “‘fundamental precept that federal courts are courts of limited jurisdiction’ and lack the power to disregard such limits as have been imposed by the Constitution or Congress.” Durant, Nichols, Houston, Hodgson, & Cortese‐Costa, P.C. v. Dupont, 565 F.3d 56, 62 (2d Cir. 2009) (quoting Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365, 374 (1978)). Where, as here, there is no diversity of citizenship between the parties, we look to whether the case “aris[es] under the Constitution, laws, or treaties of the United States” to determine whether federal jurisdiction is properly exercised. 28 U.S.C. § 1331; see Fracasse v. People’s United Bank, 747 F.3d 141, 143–44 (2d Cir. 2014). “It is long settled law that a cause of action arises under federal law only when the plaintiff’s well‐pleaded complaint raises issues of federal law.” Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63 (1987). Nevertheless, in a declaratory judgment action such as this one, which seeks a ruling establishing 16 plaintiff’s nonliability on the defendant’s claim (for arbitration), “a complaint . . . is to be tested, for purposes of the well‐pleaded complaint rule, as if the party whose adverse action the declaratory judgment plaintiff apprehends had initiated a lawsuit against the declaratory judgment plaintiff.” Garanti Finansal Kiralama A.S. v. Aqua Marine & Trading Inc., 697 F.3d 59, 68 (2d Cir. 2012) (internal quotation marks omitted). Under this “conceptual[ ] realign[ment],” we analyze the parties’ claims “as they would appear in a coercive suit.” Id. at 67. Accordingly, here, we must look to UBS’s underlying demand for arbitration to determine the nature of the claims at issue. UBS’s demand does not assert any claims created by federal law so as to admit federal jurisdiction most directly on the principle articulated by Justice Holmes in American Well Works Co. v. Layne & Bowler Co., that “[a] suit arises under the law that creates the cause of action.” 241 U.S. 257, 260 (1916); see Gunn v. Minton, 133 S. Ct. 1059, 1064 (2013) (noting that case “[m]ost directly . . . arises under federal law when federal law creates the cause of action asserted,” a “rule of inclusion” that “accounts for the vast bulk of suits that arise under federal law” and “admits of only extremely rare exceptions”). Rather, UBS seeks to arbitrate claims—for breach of contract, indemnification, breach of implied 17 duties of good faith and fair dealing, and gross negligence—created by New York State law. This, however, does not necessarily preclude the exercise of federal jurisdiction. As we have frequently observed, “[t]he artful‐pleading doctrine, [a] corollary to the well‐pleaded complaint rule, prevents a plaintiff from avoiding [federal jurisdiction] by framing in terms of state law a complaint the real nature of [which] is federal, . . . or by omitting to plead necessary federal questions in a complaint.” Marcus v. AT&T Corp., 138 F.3d 46, 55 (2d Cir. 1998) (internal quotation marks omitted); accord Romano v. Kazacos, 609 F.3d 512, 518–19 (2d Cir. 2010). Moreover, even in the absence of artful pleading, federal jurisdiction may properly be exercised over a “special and small” category of actual state claims that present significant, disputed issues of federal law. Gunn v. Minton, 133 S. Ct. at 1064. At issue in this case is whether UBS’s state law claims fall within this special and small category so as to admit federal question jurisdiction. The category, which dates back “nearly 100 years” in Supreme Court precedent, is rooted in “the commonsense notion that a federal court ought to be able to hear claims recognized under state law that nonetheless turn on 18 substantial questions of federal law, and thus justify resort to the experience, solicitude, and hope of uniformity that a federal forum offers on federal issues.” Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 312 (2005) (citing Hopkins v. Walker, 244 U.S. 486, 490–91 (1917), and “classic example” of Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 201 (1921)). Still, the Supreme Court has been sparing in recognizing state law claims fitting this criterion. See R. Fallon, J. Manning, D. Meltzer, & D. Shapiro, Hart and Wechsler’s The Federal Courts and The Federal System (“Hart & Wechsler”) 799 (6th ed. 2009) (observing that Court has explicitly upheld federal jurisdiction in absence of federal cause of action only four times, citing Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. at 314–16, and City of Chicago v. Int’l College of Surgeons, 522 U.S. 156, 164 (1997), in addition to Smith and Hopkins). Indeed, delineating the parameters of federal jurisdiction in such circumstances has presented a constant challenge. See Gunn v. Minton, 133 S. Ct. at 1065 (describing Supreme Court’s efforts to bring order to “this unruly doctrine”); Merrell Dow Pharms. Inc. v. Thompson, 478 U.S. 804, 809–10 (1986) (referencing “‘litigation‐provoking problem’” created by “presence of a federal issue in a state‐created cause of action” (quoting Textile Workers v. Lincoln Mills, 19 353 U.S. 448, 470 (1957) (Frankfurter, J., dissenting)). This, in turn, has engendered persistent skepticism as to the value of the endeavor. See Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. at 320 (Thomas, J., concurring) (signaling openness to reconsideration of whether federal question jurisdiction should be limited to cases in which federal law creates cause of action because “[j]urisdictional rules should be clear” and “[w]hatever the virtues of the Smith standard, it is anything but clear”); Smith v. Kansas City Title & Trust Co., 255 U.S. at 214 (Holmes, J., dissenting) (“[I]t seems to me that a suit cannot be said to arise under any other law than that which creates the cause of action.”); see also Hart and Wechsler 799–800 (observing that “Justice Holmes’ cause of action test is simpler and clearer—and while excluding cases like Smith or Grable, it avoids the need in a much larger number of cases to engage in what can be a refined and uncertain analysis”). This background properly signals caution in identifying the narrow category of state claims over which federal jurisdiction may be exercised. It does not, however, absolve federal courts of the duty to exercise jurisdiction when they identify state claims falling within that limited sphere. To facilitate such identification, the Supreme Court has pronounced a determinative four‐part test: 20 [F]ederal jurisdiction over a state law claim will lie if a federal issue is: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal‐state balance approved by Congress. Where all four of these requirements are met . . . jurisdiction is proper because there is a “serious federal interest in claiming the advantages thought to be inherent in a federal forum,” which can be vindicated without disrupting Congress’s intended division of labor between state and federal courts. Gunn v. Minton, 133 S. Ct. at 1065 (quoting Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. at 313–14); accord Fracasse v. People’s United Bank, 747 F.3d at 144. Applying this Gunn‐Grable test here, we conclude that the district court correctly exercised federal question jurisdiction in this case. Indeed, while that conclusion only requires us to identify federal question jurisdiction over one of UBS’s state law claims, see 28 U.S.C. § 1367 (providing for supplemental jurisdiction over claims related to one giving rise to original jurisdiction); Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 13 (1983) (stating that, if either of two causes of action comes within original jurisdiction of federal courts, removal was proper as to whole case), for reasons discussed in the next section, we conclude that federal question jurisdiction applies to all four of UBS’s state claims. 21