In any given year there tends to be 7 – 10 core Foreign Corrupt Practices Act enforcement actions, the vast majority of which are not actually litigated.
While courts have concluded that the FCPA does not contain a private right of action, often times FCPA-related issues are litigated in connection with other substantive causes of action.
For more on this dynamics, see the article “Foreign Corrupt Practices Act Ripples.”
Many of these cases tend to be derivative actions in which a shareholder claims that officers and directors breached fiduciary duties by allegedly allowing the company to operate without sufficient FCPA compliance policies or procedures and/or not properly monitoring and supervising those policies and procedures in place. Such breach of fiduciary duties claims are state law claims arising under the corporation’s state of incorporation.
In connection with its FCPA scrutiny that was resolved in 2014 (see here for the prior post), Avon was hit derivative claims filed in state court, the typical venue for derivative claims.
However, Avon was also hit with a derivative claim filed in federal court and that is the focus of this post.
In Pritika v. Moore, 2015 WL 1190157 (S.D.N.Y., March 16, 2015), an Avon shareholder alleged the typical breach of fiduciary claims against current and former Avon officers and directors and asserted that the federal court had subject matter jurisdiction of the claims because they were “dependent on the resolution of substantial questions of federal law.” The defendants filed a motion to dismiss for lack of subject matter jurisdiction and the court (Judge Paul Gardephe) granted the motion.
After noting that federal courts are courts of limited jurisdiction, the court did acknowledge that “even where a claim finds its origins in state rather than federal law” there may exist a “special and small category of cases in which arising under jurisdiction still lies”
In short, the court concluded that the Avon shareholder’s claims were not within the category.
The analysis section of the opinion states as follows (certain internal citations omitted).
“Here, it is undisputed that Plaintiff’s state law claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment are predicated on the allegation that Defendants caused or permitted Avon to violate the FCPA. Accordingly, this Court will assume, for purposes of resolving Defendants’ motion to dismiss … that the state law claims (1) raise a federal issue that (2) is actually disputed.
Plaintiff’s jurisdiction argument falters, however … [because they] do not raise a substantial federal issue, because any issue related to the FCPA that is presented by this case lacks the requisite “importance … to the federal system as a whole.” As noted above, “it is not enough that the federal issue be significant to the particular parties in the immediate suit,” and here the significance of the federal issue does not extend beyond the parties to this particular dispute.
Although Avon’s compliance with the FCPA will be one of the critical issues in this litigation, this case does not implicate the validity of the FCPA or the requirements that the Act imposes. Moreover, this case does not involve the application of a “complex federal regulatory scheme,” such as the “complex reimbursement schemes created by Medicare law, or the web of rate-making laws and regulations applicable to cable television providers. The FCPA-as Plaintiff describes it-only “prescribes a ‘reasonableness’ or prudent person standard for assessing [the] adequacy of issuers’ practices.” Finally, this case involves, at best, the application of a federal legal standard to private litigants’ state law claims. It will not have broad consequences to the federal system or the nation as a whole.
The critical issues in this case are primarily factual: whether Avon’s employees committed acts that violate the FCPA and, if so, whether Defendants caused or permitted these violations. While “[t]here is no doubt that resolution of [these questions under the FCPA’s legal standard] is important to the particular parties in the case[,] … something more, demonstrating that the question is significant to the federal system as a whole, is needed.” That “something more” is lacking here.
It is not sufficient-as Plaintiff suggests-that in determining whether Defendants’ conduct meets FCPA standards, a court may be required to interpret certain provisions of the Act, and may thereby affect the development of the law. The same could be said for every case that involves state law claims invoking a federal standard. Whenever a court applies a given legal standard, that court’s opinion could theoretically affect other courts’ interpretation of that legal standard. If this were a sufficient basis for “arising under” jurisdiction, the “extremely rare exception[ ]” discussed in Gunn, 133 S.Ct. at 1064, would swallow up the general rule. “Arising under” jurisdiction would be available in any case premised on state law claims, so long as parties cited a federal statute as providing the legal standard. Such a result is particularly problematic in cases such as this, where Congress has declined to grant a private right of action under the federal statute. See Lamb , 915 F.2d at 1024 (“[N]o private right of action is available under the FCPA.”).“[I]f the federal … standard [under the FCPAJ without a federal cause of action could get a state claim into federal court, so could any other federal standard without a federal cause of action.”
Plaintiff argues, however, that “the body of federal case law interpreting the FCPA is quite small,” and that “[u]nder these circumstances … the federal interest in affording federal courts every opportunity to issue the first authoritative statements about this important federal law is even more substantial.” There is no evidence, of course, that any significant novel issue under the FCPA will be raised in this litigation. But even if such a question could be anticipated, “whether a particular claim arises under federal law” does not turn “on the novelty of the federal issue.”
Accordingly, assuming arguendo that the FCPA is not commonly the subject of litigation, that fact does not create a substantial federal interest in this case.
Finally, this Court could not exercise subject matter jurisdiction here “without disturbing [the] congressionally approved balance of federal and state judicial responsibilities.” While “the absence of a federal private right of action [i]s … not dispositive of the ‘sensitive judgments about congressional intent’ that [arising under jurisdiction requires] Congress’s decision not to grant a private right of action is nonetheless “relevant to” this Court’s inquiry.
Here, exercising subject matter jurisdiction over Plaintiff’s state law claims would be tantamount to recognizing a private right of action under the FCPA. Such an approach would “open the floodgates” to federal court litigation of private disputes raising issues under the FCPA, an outcome directly contrary to Congress’s apparent intent. Whenever a company disclosed an FCPA investigation, it could expect a federal court lawsuit founded on state law claims. Congress intended that federal court litigation under the FCPA would proceed by way of SEC and DOJ enforcement actions, however, and not via private suit. Accordingly, exercising subject matter jurisdiction over Plaintiff’s state law claims would violate the “congressionally approved balance of federal and state judicial responsibilities.”
In short, shareholder derivative actions in the FCPA context belong in state court, not federal court.
As to those claims filed in state court, shareholders rarely proceed past the motion to dismiss stage. However, this has not prevented opportunistic plaintiffs’ counsel (who often take such cases on a contingency fee basis) from filing such actions in connection with numerous instances of FCPA scrutiny.
