Court Opinion

ID: 3053820
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:50:30.203137+00
Date Added: 2024-06-11T08:53:26.948964
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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;
DANN V. ANGELOFF; MARVIN M.                    D.C. No.
                                            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
14398                 POTTER v. HUGHES

                        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, Cal-
ifornia, 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.
                       POTTER v. HUGHES                   14399
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 Pub-
lic Storage, Inc.

                          OPINION

GOULD, Circuit Judge:

   In this shareholder’s derivative action, Plaintiff-Appellant
Katherine Potter (“Potter”) alleges that the Defendants-
Appellees (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
14400                      POTTER v. HUGHES
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 com-
plaint, concluding that Krieger failed the contemporaneous
ownership requirement and that Potter failed to make an ade-
quate demand on the Board.

    Krieger does not appeal his dismissal, so this appeal con-
cerns 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 trans-
action 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 mem-
bers of the committee that he was representing Potter and that
he had her power of attorney. In a series of later letters, dated
  1
    Rule 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).
                       POTTER v. HUGHES                   14401
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 infor-
mation 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 dis-
missed 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 nec-
essarily 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 compet-
ing threshold issues go to the court’s power under the Consti-
tution.

   [2] However, there are non-constitutional grounds on which
we may dismiss a suit before considering the existence of fed-
eral subject matter jurisdiction. These include jurisdictional
14402                   POTTER v. HUGHES
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 juris-
diction 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 ante-
cedent” 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 ade-
quate 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 ade-
quacy 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”).
                             POTTER v. HUGHES                           14403
   Accordingly, we address whether Rule 23.1 was satisfied
both because compliance with Rule 23.1 is ‘logically anteced-
ent’ 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 dis-
missed, 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 deter-
mination that Potter did not comply with Rule 23.1 or Califor-
nia 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 Green-
spun 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 dis-
cretion in reaching this conclusion.”).
  2
    The 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 non-
jurisdictional threshold issues without first satisfying itself of its jurisdic-
tion, if “the resolution of the [other] issue is clear while the jurisdictional
issue is difficult.” Dissent at 14413. Nothing in Sinochem, however, abro-
gates 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.
14404                 POTTER v. HUGHES
                              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 corpo-
ration at the time of the disputed transaction (the “contempo-
rary 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 fac-
tors).

   Defendants argue that although these elements were gener-
ally 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 men-
tion 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
                       POTTER v. HUGHES                   14405
the time of the January 6, 2003 meeting, which Potter’s attor-
ney, 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 Defen-
dants 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 approxi-
mately 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 share-
holder 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 Raid-
ers, 93 Cal. App. at 586 & 586 n.5 (noting reliance on Dela-
ware 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 iden-
tify any potential plaintiffs, while the November 21, 2002 let-
ter identified Krieger, because Krieger’s known presence does
not relieve Potter of the obligation to make a valid demand.
14406                 POTTER v. HUGHES
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 con-
temporaneous 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 practi-
cal 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 speci-
ficity the identity of the person making the demand. See gen-
erally 5 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE
§ 23.1.08 (“The demand requirement permits the board to cor-
rect the alleged wrong, encourages intra-corporate dispute res-
olution, 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 compli-
ance with Rule 23.1 and the applicable substantive law is nec-
                       POTTER v. HUGHES                    14407
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 Jan-
uary 6, 2003 meeting with members of PS’s special commit-
tee 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 futil-
ity of a demand for relief is whether the facts show a reason-
able 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
14408                    POTTER v. HUGHES
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 signifi-
cantly, 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 plain-
tiff.” 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 trans-
actions 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 ‘wrongdo-
ing’ 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 com-
mittee 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
  3
  Potter has also not shown that demand should be excused because the
Canadian transaction was not the result of valid business judgment. The
                            POTTER v. HUGHES                          14409
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 Stor-
age, Inc. The district court dismissed her suit on the ground
that her failure to name herself in the written demand pre-
sented by the plaintiffs to the corporation deprived her of
standing to maintain this action under Rule 23.1 of the Fed-
eral 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 deci-
sion 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).
   1
     Rule 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.”
14410                  POTTER v. HUGHES
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 juris-
diction. In bypassing this jurisdictional question, the majority
strays from the Supreme Court’s direction in Steel Co. v. Citi-
zens 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 mer-
its.’ ” 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 con-
veniens 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
                             POTTER v. HUGHES                         14411
against the government arising out of covert espionage agree-
ments. 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. Fibre-
board 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 pro-
posed class of plaintiffs included persons whom the defen-
dants alleged lacked Article III standing to sue because they
had not sustained a cognizable injury or because their injury
  2
    National Railroad Passenger Corp. v. National Ass’n of Railroad Pas-
sengers, 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 stand-
      ing. 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).
14412                         POTTER v. HUGHES
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 sub-
ject matter jurisdiction] first”). In Sinochem, the court was
faced with “a textbook case for immediate forum non conve-
niens 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.
  3
   Fed. R. Civ. Proc. 23(a) provides:
      (a)   Prerequisites.
      One or more members of a class may sue or be sued as represen-
      tative 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 pro-
            tect the interests of the class.
                        POTTER v. HUGHES                     14413
Requiring the court to address jurisdictional issues in such cir-
cumstances would disserve judicial economy. Id. As the Court
clarified:

    If . . . a court can readily determine that it lacks juris-
    diction 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 ardu-
    ous inquiry and both judicial economy and the con-
    sideration 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 jurisdic-
tional 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 with-
out 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 jurisdic-
tional question.

   The majority starts down the wrong path by characterizing
the threshold question in this case as being “whether Potter
14414                  POTTER v. HUGHES
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. Kem-
per 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 require-
    ment 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 pro-
    cedure 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 Pot-
ter 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 identi-
fied her merely as a plaintiff, she was identified by name at
a subsequent meeting with a Public Storage Special Commit-
tee formulated to investigate the plaintiffs’ demand for suit.

   Neither the district court nor the majority disputes that Pot-
ter 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
                       POTTER v. HUGHES                   14415
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 con-
sidered 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 diver-
sity and exclusive federal jurisdiction for claims alleging vio-
lations 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 two-
week 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
14416                   POTTER v. HUGHES
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. Con-
sidering 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 sug-
gests 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 sub-
stantive ‘law-declaring power.’ ”). Sinochem provides no sup-
                       POTTER v. HUGHES                    14417
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 anteced-
ent 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 ade-
quate 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 adjudicat-
ing 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
14418                     POTTER v. HUGHES
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 juris-
diction 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 & Ease-
ment 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
  4
    Count 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 (pro-
hibiting insider trading under California law) against the Hughes Family
Defendants.
   Count IV asserts a claim for breach of fiduciary duty and seeks a con-
structive 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.
                            POTTER v. HUGHES                          14419
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 Sarbanes-
Oxley 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 defen-
dants “breached their fiduciary duties of care, candor, loyalty and full dis-
closure,” and exposed Public Storage “to liability for violations of federal
law, including the Sarbanes-Oxley Act.”
   Count VIII alleges that certain management defendants “executed certi-
fications 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, dili-
gence and candor in the management and administration” of Public Stor-
age.
  Count XI asserts a claim of constructive fraud against all individual
defendants.
  Count XII asserts a claim of unjust enrichment against all individual
defendants.
14420                      POTTER v. HUGHES
intent to create not just a private right but also a private reme-
dy,” and noting that statutes focusing “on the person regulated
rather than the individuals protected” fail to indicate the req-
uisite 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 Sarbanes-
Oxley 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 mean-
ing 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, nei-
ther 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 defen-
dants 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 Health-
choice Assurance, Inc. v. McVeigh, 547 U.S. 677, 681 (2006).5
   5
     Potter 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.
                       POTTER v. HUGHES                   14421
   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 chap-
    ter [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 chap-
    ter 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 con-
duct 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 com-
mitted 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).
14422                  POTTER v. HUGHES
   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 jurisdic-
tion. 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.