In re Standard & Poor's Rating Agency Litigation
In re Standard & Poor's Rating Agency Litigation
Opinion of the Court
OPINION AND ORDER
This multidistrict litigation (“MDL”) proceeding, comprised of nineteen cases, pits States and the District of Columbia (collectively, the “States”) against a national credit-rating agency, McGraw Hill Financial, Inc. (formerly the McGraw-Hill Companies, Inc.) and its subsidiary, Standard & Poor’s Financial Services LLC (collectively, “S & P”). (As discussed below, one of the States — Mississippi—also names Moody’s Corporation and its subsidiary Moody’s Investor’s Service, Inc. (together, “Moody’s”) as Defendants.) In seventeen of the cases (the “State Cases”), the States brought suit in their own courts to enforce state consumer-protection and deceptive trade practice laws, only to see S & P (and, in Mississippi, Moody’s) remove the cases to federal court. The gra-
At this stage of these cases, the merits of the States’ and S & P’s claims are not at issue. Instead, the question is where the parties’ disputes should be resolved— namely, whether they should be heard in federal court or in the relevant state courts. The States do not — and, in light of the Credit Rating Agency Reform Act of 2006, Pub.L. No. 109-291, 120 Stat. 1327 (2006) (“CRARA”), cannot — dispute that there is a strong federal interest in the regulation of national credit-rating agencies, including S & P and Moody’s (the two largest credit-rating agencies in the country). Instead, relying on the well-established proposition that federal courts are courts of limited jurisdiction, and citing the long history of States seeking to enforce their own consumer-protection and deceptive trade practices laws in their own courts, the States argue that their disputes with S & P and Moody’s should be litigated in the state courts.
By contrast, the rating agencies contend that the disputes should be litigated in federal court. Specifically, S & P contends that all of the State Cases present substantial federal questions giving rise to jurisdiction under Title 28, United States Code, Section 1331. With respect to the Mississippi case, S & P and Moody’s jointly argue in the alternative that jurisdiction is proper pursuant to either the “mass action” provisions of the Class Action Fairness Act of 2005, Pub.L. No. 109-2, 119 Stat. 4 (2005) (“CAFA”), or the general diversity statute, Title 28, United States Code, Section 1332(a). Finally, although the parties do not dispute the existence of federal jurisdiction with respect to the Declaratory Judgment Cases, South Carolina and Tennessee ask the Court to dismiss those cases in deference to their state civil enforcement actions.
Now pending are two joint motions raising these issues, addressed in three sets of briefs. First, all seventeen States involved in the MDL jointly move, pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure, to remand the State Cases back to state court on the ground that, as pleaded, they arise solely under state law, not federal law. Mississippi joins in that motion, and — in light of the fact that S & P and Moody’s removed its ease on alternative grounds — argues in a separate set of briefs that federal jurisdiction is also lacking under both CAFA and the general diversity statute. In addition, Mississippi seeks an order directing S & P and Moody’s to pay the State’s attorney’s fees and costs on the ground that the removal of the case was not objectively reasonable. Finally, Tennessee and South Carolina move to dismiss the Declaratory Judgment Cases brought by S & P, principally on the theory that the Court must refrain from deciding them in light of the States’ parallel civil enforcement actions under the “abstention” doctrine established by the Supreme Court in
For the reasons discussed below, the States’ motions are granted (except insofar as Mississippi seeks attorney’s fees and costs), the State Cases are all remanded back to state court, and the Declaratory Judgment Cases are dismissed altogether. That result is compelled by the fundamental and oft-repeated proposition that, while state courts are courts of general jurisdiction, federal courts “are courts of limited jurisdiction” and “possess only that power authorized by Constitution and statute, which is not to be expanded by judicial decree.” Rasul v. Bush, 542 U.S. 466, 489, 124 S.Ct. 2686, 159 L.Ed.2d 548 (2004) (internal quotation marks omitted). In light of that proposition, the Supreme Court has instructed that a federal court must “presume! ] that a cause lies outside [its] limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994) (citations omitted). The presumption against federal jurisdiction is especially strong in cases of this sort, involving States seeking to vindicate quasi-sovereign interests in enforcing state laws and protecting their own citizens from deceptive trade practices and the like. Put simply, S & P and Moody’s fail in their efforts to rebut that presumption, as the State Cases arise solely under state law and Congress has not authorized federal courts to hear such cases. Further, in light of that conclusion and the fact that S & P can raise any and all defenses it may have under federal law in state court, indulging S & P’s Declaratory Judgment Cases would constitute an unwarranted interference in South Carolina’s and Tennessee’s state court proceedings.
BACKGROUND
The following background is taken from the States’ Complaints and federal regulatory materials, which are either referenced by the parties or are important to the understanding of the jurisdictional issues in question. Because this Court has an independent obligation to establish the existence of subject-matter jurisdiction over these cases, the facts alleged in the Complaints are accepted as true for purposes of these motions, but no inferences are drawn in either party’s favor; the party asserting jurisdiction must show it affirmatively. See, e.g., Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998). Moreover, in determining whether jurisdiction exists, consideration of extrinsic materials and documents of which judicial notice may be taken is permissible. See, e.g., Phifer v. City of New York, 289 F.3d 49, 55 (2d Cir. 2002). For the sake of simplicity- — and following the parties’ lead in their briefing — citations to information common to the Complaints are to the Complaint filed by the State of Tennessee. (Docket No. 1-1, 13 Civ. 4098 (“Tenn. Compl.”)).
A. The Rating Agencies
As noted, S & P and Moody’s are in the business of selling credit ratings. “A credit rating is a rating agency’s assessment with respect to the ability and willingness of an issuer to make timely payments on a debt instrument, such as a bond, over the life of that instrument.” S.Rep. No. 109-326, at 2 (2005), 2006 U.S.C.C.A.N. 865,
A rating of AAA reflects S & P’s judgment that the issuer’s “capacity to meet [its] financial commitment” with respect to the product being rated “is extremely strong.” (Tenn. Compl. ¶ 45). More specifically, the AAA rating is appropriate only if a particular debt offering passes “the most severe stress test” S & P uses. (Tenn. Compl. ¶ 46). Some products, like collateralized debt obligations and residential-mortgage-backed securities, have multiple “tranches,” or tiers, which receive different credit ratings and are sold separately. (Id. ¶¶ 43, 49). In such cases, the expectation is often that the safest, or most “senior,” tier would receive an AAA rating, allowing the issuer to offer a lower interest rate while still attracting customers to buy it. If the senior tier fails to receive such a rating on the first try, however, “S & P is supposed to let the issuer know that [that tier] could only receive a AA or lower rating.” (Id. ¶ 48). In such cases, S & P also informs the issuer of the “credit enhancement” necessary to achieve an AAA rating. (Id. ¶¶ 68-69). The issuer can then choose to issue the security without the AAA rating or alter the product’s structure to obtain the requisite credit enhancement. (Id.).
The supply side of the market for credit ratings is characterized by sharp competition among a small number of firms. Federal law deems only ten firms to be “nationally recognized statistical rating organizations” (“NRSROs”).
The business is also very lucrative to the few firms who control it. S & P’s annual revenues exceed $1 billion, forty percent of which is attributable to rating structured financial products like residential-mortgage-backed securities. (Tenn. Compl. ¶ 51). There are two primary ways for credit-rating agencies to make money: the issuer-pays model and the subscription model. When the NRSRO designation came into use, the dominant model in the industry was the latter. Under that paradigm, “investors pay the rating agency a subscription fee to access its ratings.” Annual Report, at 13. Today, however, NRSROs tend to employ the issuer-pays model, in which the companies seeking ratings from the rating agencies — who tend to be repeat players — pay the fees associated with issuing their own ratings. (Tenn. Compl. ¶¶ 65, 67). For complex instruments like structured financial products, the fee charged is determined based on “the complexity and size of the ... [product] being analyzed.” (Id. ¶ 65).
The combination of those forces, the States complain, yields a market in which S & P is systematically incentivized to “please” its customers. (Id. ¶ 67). Because S & P can influence its ratings by changing the assumptions that underlie its models, the States allege, S & P is motivated to do so. The threat, should S & P refuse to tinker with its analytical models, is that the issuers will engage in “ratings shopping” to find a competitor who is not as scrupulous. (Id. ¶ 69-70). And because issuers get a second bite at the apple if their initial structure does not yield AAA-rated senior-tier debt, the issuers “can inform S & P of the credit enhancement levels proposed by either Moody’s or Fitch in order to influence the outcome of S & P’s analysis.” (Id. ¶ 69).
Significantly, however, the States explicitly do not challenge the issuer-pays model itself, let alone any individual ratings. (Id. ¶ 12). Instead, the States allege that S & P’s public statements about the integrity, independence, and objectivity of its ratings (and in Mississippi’s case, Moody’s as well) violated their respective consumer-protection laws. (Id. ¶ 260). The States point, for example, to various assertions S & P made that were either contained in, or regarded its adherence to, its Code of Professional Conduct (the “Code of Conduct”). (See, e.g., id. ¶¶ 7, 13, 61, 73, 78, 90-91, 99-105, 260). S & P adopted its Code of Conduct in October 2005, and it explicitly stated that the adoption of the Code of Conduct “represented further alignment of [S & P’s] policies and procedures with the [International Organization of Securities
B. CRARA
In 2006, Congress enacted CRARA to reform the regulatory scheme applicable to credit-rating agencies “by fostering accountability, transparency, and competition.” S.Rep. No. 109-326, at 2, 2006 U.S.C.C.A.N. at 866. Among other things, CRARA requires NRSROs to “establish, maintain, and enforce written policies and procedures reasonably designed ... to address and manage any conflicts of interest that can arise from such business.” 15 U.S.C. § 78o-7(h). The statute further authorizes the Securities and Exchange Commission (“SEC”) to
issue final rules ... to prohibit, or require the management and disclosure of, any conflicts of interest relating to the issuance of credit ratings by a [NRSRO], including, without limitation, conflicts of interest relating to ... the manner in which a [NRSRO] is compensated by the obligor ... for issuing credit ratings.
Id. Although this exclusively delegated power unambiguously includes the authority to “prohibit” conflicts of interest arising from the issuer-pays model, the SEC has chosen a more measured course. Through notice-and-comment rulemaking, the SEC issued regulations permitting, albeit closely regulating, use of the issuer-pays model. See, e.g., 17 C.F.R. § 240.17g-5 (2014) (deeming the issuer-pays model to represent a “conflict of interest” for purposes of federal regulations and regulating such conflicts).
Importantly, CRARA does not purport to preempt all state laws as applied to NRSROs. Indeed, CRARA’s preemption is explicitly limited to “the substance of credit ratings or the procedures and methodologies by which any [NRSRO] determines credit ratings.” 15 U.S.C. § 78o-7(c)(2). Underscoring the limited nature of CRARA’s preemptive effect, the statute
As part of this scheme, CRARA and the regulations promulgated thereunder incorporate — and make binding on NRSROs in the United States — many of the provisions of the IOSCO Code of Conduct. (See Def.’s Mem. Law Opp. Pis.’ Mot. Remand (Docket No. 88) 17-18 (comparing IOSCO Code and CRARA provisions)).
C. Procedural History
The seventeen State Cases consolidated before this Court are part of a wave of state civil enforcement actions brought against S & P and Moody’s. Ml of the suits are brought under state consumer-protection and deceptive trade practices statutes; they seek various remedies, including injunctive relief, civil penalties, and disgorgement. (Tenn. Compl. 64-65). Of the cases in the MDL, Mississippi’s suit— against both S & P and Moody’s — was filed first, on May 10, 2011. (Docket No. 1-1, 13 Civ. 4049). S & P and Moody’s removed that case to the United States District Court for the Southern District of Mississippi on June 7, 2011, invoking federal jurisdiction under both the general diversity statute, Title 28, United States Code, Section 1332(a), and CAFA. (Docket No. 1, 13 Civ. 4049). In February 2013, another thirteen States and the District of Columbia filed similar suits, albeit only against S & P. On March 6, 2013, S & P
As noted, the last two suits that form this MDL are declaratory judgment actions brought by S & P against the States of South Carolina and Tennessee. S & P filed the suits in federal court after receiving statutory notice letters from the States advising S & P that they were contemplating bringing civil enforcement proceedings in state court. (Mem. Law Opp’n Defs.’ Mots. To Dismiss (Docket No. 34) 3). S & P filed the suits on February 4, 2013, after receiving assurances from at least one of the state attorneys general that the State would not file its own suit until at least the following day. (Decl. Olha N.M. Rybakoff Pursuant 28 U.S.C. § 1746 (Docket No. 21, 13 Civ. 4100) ¶ 5; Decl. Jennifer E. Peacock Pursuant 28 U.S.C. § 1746 (Docket No. 23,13 Civ. 4100) ¶ 10). On that following day, Tennessee did in fact file its state civil enforcement action, which was subsequently removed to federal court and transferred here as part of the MDL. (Notice of Removal (Docket No. 1, 13 Civ. 4098); id., Ex. A). Just over one week later, South Carolina filed an analogous civil enforcement action; it too was later removed to federal court and made part of this MDL. (Notice of Removal (Docket No. 1, 13 Civ. 4051); id., Ex. A). In its declaratory judgment action Complaints, as amended, S & P seeks (1) declarations that the relief requested by South Carolina and Tennessee in their civil enforcement actions would be unconstitutional; and (2) injunctions against the state civil enforcement actions, as well as attorneys’ fees and costs. (Am. Compl. (Docket No. 15, 13 Civ. 4052) 7-8; Am. Compl. (Docket No. 12, 13 Civ. 4100) 6; Mem. Law Opp’n Defs.’ Mots. To Dismiss 4-5). Notably, S & P concedes that it filed the actions to preempt the States’ civil enforcement actions and secure a federal forum. (Oct. 4, 2013 Conference Tr. (Docket No. 54) (“Oral Arg. Tr.”) 60; Deck Jennifer E. Peacock (Docket No. 29), Am. Ex. A, at 26-27).
On June 6, 2013, with motions to dismiss pending in the two Declaratory Judgment Cases and motions to remand pending in most of the State Cases, the Judicial Panel
As a result of the foregoing, there are now three sets of briefs regarding the motions pending before the Court. The first concerns the joint motion to remand filed by the States of Arizona, Arkansas, Colorado, Delaware, Idaho, Indiana, Iowa, Maine, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, and Washington. (Pis.’ Consolidated Br. Supp. PL States Mot. Remand (Docket No. 31) 1; Docket No. 57 (permitting New Jersey to move for remand and join the States’ previously filed consolidated remand briefs)).
DISCUSSION
A. The Motions To Remand
It is axiomatic that “federal courts are courts of limited jurisdiction and, as such, lack the power to disregard such limits as have been imposed by the Constitution or Congress.” Purdue Pharma L.P. v. Kentucky, 704 F.3d 208, 213 (2d Cir. 2013) (internal quotation marks omitted). As a general matter, Congress has granted federal district courts original jurisdiction over cases in which there is a federal question, see 28 U.S.C. § 1331, and certain cases between citizens of different States, see 28 U.S.C. § 1332. See generally Ortiz v. City of New York, 13 Civ. 136(JMF), 2013 WL 2413724, at *1 (S.D.N.Y. June 4, 2013). Where a plaintiff files such a case in state court, Title 28, United States Code, Section 1441(a) allows a defendant — with some exceptions not relevant here — to “remove[ ]” the case to federal district court. In other words, an action may be removed “only if the case could have been originally filed in federal court.” Hernandez v. Conriv Realty Assocs., 116 F.3d 35, 38 (2d Cir. 1997). “Judicial scrutiny is especially important in the context of removal, where considerations of comity play an important role.” Veneruso v. Mount Vernon Neighborhood Health Ctr., 933 F.Supp.2d 613, 618 (S.D.N.Y. 2013) (internal quotation marks omitted). And the importance of such scrutiny is at its zenith where, as here, the suit was brought by a State itself, as “the claim of sovereign protection from removal” in such circumstances “arises in its most powerful form.” Nevada v. Bank of Am. Corp., 672 F.3d 661, 676 (9th Cir. 2012) (internal quotation marks omitted).
In fact, “ ‘[i]n light of the congressional intent to restrict federal court jurisdiction, as well as the importance of preserving the independence of state governments, federal courts construe the removal statute narrowly, resolving any doubts against removability.’ ” Purdue Pharma, 704 F.3d at 213 (quoting Lupo v. Human Affairs Int'l, Inc., 28 F.3d 269, 274 (2d Cir. 1994)); accord Veneruso, 933 F.Supp.2d at 618. Such “strict construction of the right of removal” also “makes good sense,” as “[a]n order denying a motion to remand a case to state court is ordinarily not appealable until after a final judgment or order is filed in the case.” 16 James Wm. Moore et al., Moore’s Federal Practice § 107.05 (3d ed. 2012). “If the court of appeals determines that the case should have been remanded on the ground that there was no federal jurisdiction, the judgment on the merits must also be vacated because of the lack of jurisdiction. If the case was improperly remanded, at least the state court judgment will not be invalidated because of a lack of subject matter jurisdiction.” Id.; cf. New York v. Shinnecock Indian Nation, 686 F.3d 133, 136 (2d Cir. 2012) (vacating a judgment, after nine years of litigation and trial, for lack of
In considering a motion to remand, courts generally look at the original complaint. See, e.g., In re Rezulin Prods. Liab. Litig., 133 F.Supp.2d 272, 284-85 & 284 n. 35 (S.D.N.Y. 2001). The removing party — here, the rating agencies — bears the burden of establishing the existence of jurisdiction. See, e.g., Blockbuster, Inc. v. Galeno, 472 F.3d 53, 57-58 (2d Cir. 2006).
1. The Joint Motion To Remand for Lack of a Federal Question
S & P removed each State Case on the ground that it presents a federal question.
The well-pleaded complaint rule, however, has a “corollary ... — the ‘artful pleading’ rule — pursuant to which plaintiff cannot avoid removal by declining to plead ‘necessary federal questions.’ ” Romano v. Kazacos, 609 F.3d 512, 518-19 (2d Cir. 2010) (quoting Rivet v. Regions Bank, 522 U.S. 470, 475, 118 S.Ct. 921, 139 L.Ed.2d 912 (1998)); see Sullivan v. Am. Airlines, Inc., 424 F.3d 267, 271 (2d Cir. 2005) (“[A] plaintiff may not defeat federal subject-matter jurisdiction by ‘artfully pleading’ his complaint as if it arises under state law where the plaintiffs suit is, in essence, based on federal law.”). One application of that rule is the “substantial federal question doctrine,” which recognizes that “in certain cases federal-question jurisdiction will lie over state-law claims that implicate significant federal issues.” Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 312, 125 S.Ct. 2363,162 L.Ed.2d 257 (2005); see also Veneruso, 933 F.Supp.2d at 619, 622-23; Sung ex rel. Lazard Ltd. v. Wasserstein, 415 F.Supp.2d 393, 402 (S.D.N.Y. 2006).
Grable, the leading modern case on the substantial federal-question doctrine, involved a suit to quiet title to property that the Internal Revenue Service (“IRS”) had seized from the plaintiff to satisfy a federal tax delinquency, which the IRS then sold to the defendant. The plaintiff alleged that the defendant’s record title was invalid because, in providing notice of the seizure by mail rather than by personal service, the IRS had failed to comply with the notice requirements of federal law. See id. at 311, 125 S.Ct. 2363. The defendant removed the case to federal court, and that removal was upheld by the lower courts. In reviewing the case, the Supreme Court held that “federal 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.” Gunn v. Minton, — U.S. —, 133 S.Ct. 1059, 1065, 185 L.Ed.2d 72 (2013) (discussing Grable). “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.” Id. (quoting Grable, 545 U.S. at 313-14, 125 S.Ct. 2363).
Applying that test, the Grable Court held that removal of the plaintiffs suit to quiet title was proper. First, the plaintiff had “premised its superior title claim on a failure by the IRS to give it adequate notice, as defined by federal law.” 545 U.S. at 314-15, 125 S.Ct. 2363. Thus, whether the plaintiff had received notice adequate within the meaning of federal law was “an essential element of its quiet title claim.” Id. at 315, 125 S.Ct. 2363. Second, “the meaning of the federal statute [was] actually in dispute”; in fact, it appeared “to be the only legal or factual issue contested in the case.” Id. Third, the Court concluded that “[t]he meaning of the federal tax provision [was] an important issue of federal law that sensibly belonged] in a federal court” given the IRS’s “strong interest in the prompt and certain collection of delinquent taxes,” and the interest of “buyers (as well as tax delinquents)” in having “judges used to federal tax matters” resolve whether the IRS “has touched the bases necessary for good title.” Id. (internal quotation marks omitted). Finally, the Court held that federal jurisdiction would not disrupt the federal-state balance “because it will be the rare state title case that raises a contested matter of federal law.” Id. Thus, “federal jurisdiction to resolve genuine disagreement over federal tax title provisions will portend only a microscopic effect on the federal-state division of labor.” Id.
Significantly, the Supreme Court has made clear that Grable calls for federal jurisdiction over only a “special and small category” of cases. Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 699, 126 S.Ct. 2121, 165 L.Ed.2d 131 (2006); See id. at 701, 126 S.Ct. 2121
Applying the foregoing standards, S & P’s arguments for federal-question jurisdiction fail. As an initial matter, there is no dispute that the States’ Complaints exclusively assert state-law causes of action — for fraud, deceptive business practices, violations of state consumer protection statutes, and the like. (Tenn. Compl. ¶¶ 258-61; accord Mem. Law Opp’n Pis.’ Mots. Remand 13, 20). The crux of those claims is that S & P made false representations, in its Code of Conduct and otherwise, and that those representations harmed the citizens of the relevant State. Tennessee’s statute, by way of example, gives the attorney general authority to bring suit against a business that “[e]ngag[es] in any ... act or practice which is deceptive to the consumer or to any other person.” Tenn.Code Ann. § 47-18-104(b)(27). To establish a violation of that statute, he must show “(1) that the defendant engaged in an unfair or deceptive act or practice declared unlawful by the [Tennessee Consumer Protection Act] and (2) that the defendant’s conduct caused an ‘ascertainable loss of money or property, real, personal, or mixed, or any other article, commodity, or „ thing of value wherever situated....’” Hanson v. J.C. Hobbs Co., Inc., No. W2001-02523-COA-R3-CV, 2012 WL 5873582, at *9 (Tenn.Ct.App. Nov. 21, 2012) (quoting Tenn.Code Ann. § 47-18-109(a)(l)). To prevail, therefore, the Tennessee attorney general need not show that S & P violated CRARA or any other federal provision. That is, the right that he seeks to vindicate “is the right not to be lied to in a fashion that causes reliance and results in financial injury, a right possessed by all [Tennessee] residents,” not a right created by federal law. Fin. & Trading Ltd. v. Rhodia S.A., No. 04 Civ. 6083(MBM), 2004 WL 2754862, at *6 (S.D.N.Y. Nov. 30, 2004) (Mukasey, J.). Notwithstanding the fact that S & P is an NRSRO, and thus subject to federal regulation, Tennessee’s
The contrast with Grable and its progeny is telling — and dispositive. In Grable, the plaintiff would “necessarily” have had to show a violation of federal law even if the defendant had never removed the case to federal court and even if the defendant had never invoked federal law as a defense. See 545 U.S. at 314-15, 125 S.Ct. 2363; see also Gunn, 133 S.Ct. at 1065 (holding that the first Grable requirement was met where the plaintiff, in order to prevail on his legal malpractice claim, had to show that he would have prevailed on his claim under federal patent law); Broder v. Cablevision Sys. Corp., 418 F.3d 187, 195 (2d Cir. 2005) (holding the same where the plaintiff alleged breach of a contract provision that incorporated federal law by reference and breach of a New York statute by failing to provide uniform rates allegedly required by federal law). By contrast, if S & P had never invoked federal law in these cases, the States would not have had to prove a violation of CRARA or any other federal law (and may still not need to) in order to prevail on their claims. In that sense, proving the States’ claims does not necessarily depend on an interpretation of CRARA or any regulations enacted pursuant to CRARA. See, e.g., Bank of Am., 672 F.3d at 674-75 (rejecting removal of claims alleging violations of Nevada’s Deceptive Trade Practices Act even where they alleged that misrepresentations violated the federal Fair Debt Collection Practices Act); Glazer Capital Mgmt., LP v. Elec. Clearing House, Inc., 672 F.Supp.2d 371, 377 (S.D.N.Y. 2009) (“That plaintiffs could have brought federal ... claims based on the factual allegations contained in the complaint is not sufficient to convert the state law claims [of fraud and negligent misrepresentation] into federal questions.”); Baker v. BDO Seidman, L.L.P., 390 F.Supp.2d 919, 925 (N.D.Cal. 2005) (holding that plaintiffs’ “claims of fraud and deceit and all the other cognate claims derived therefrom are capable of being resolved on state law bases without the interpretation of federal law”).
In arguing otherwise, S & P contends that, in order to determine whether its statements were false, a court will necessarily have to consult CRARA to determine the content of concepts such as “independence” and “objectivity” as applied to NRSROs. (See Mem. Law Opp’n Pis.’ Mots. To Remand 19, 22-23). S & P acknowledges that the States allege violations of S & P’s own internal Code of Conduct (that is, that S & P’s representations in its Code of Conduct and elsewhere were false or fraudulent), but argues that because CRARA requires it to maintain such a Code of Conduct, the implication of the States’ Complaints is that S & P has violated federal law. (Id. at 14). Noting that S & P’s Code of Conduct is referenced at least 234 times by the States’ Complaints, S & P argues that the States’ suits “turn on whether S & P was in compliance with CRARA’s provisions requiring it to maintain and enforce written policies and procedures reasonably designed to manage conflicts of interest.” (Id. at 15). According to S & P, therefore, the decisive factor conferring jurisdiction in this case is the fact that CRARA affirmatively requires S & P to maintain and make publicly available its Code of Conduct, and further that CRARA provides globally applicable definitions of concepts like “objectivity” and “independence.” Moreover, S & P asserts that the Complaints’ frequent references to the IOSCO Code of Conduct are just a way to artfully plead around the federal issues upon which their claims rest. (Id. at 16-19).
For similar reasons, S & P’s heavy reliance on D’Alessio v. New York Stock Exchange, Inc., 258 F.3d 93 (2d Cir. 2001), is misplaced. D’Alessio involved a floor broker who was suspended by the New York Stock Exchange (“NYSE”) after a Government investigation into his compliance with Section 11(a) of the Securities Exchange Act of 1934. Thereafter, D’Alessio sued the NYSE in state court, “alleging that the NYSE and various senior officials employed by the NYSE conspired to violate applicable statutory and regulatory prohibitions governing unlawful trading,” including Section 11(a) and regulations thereunder. Id. at 97. On appeal, the Second Circuit held that the case was properly removed to federal court because adjudication of the plaintiffs claims “necessarily require[d] an inquiry” into the meaning of Section 11(a) and other provisions of federal law. Id. at 103; see also id. at 101 (noting that “the gravamen of D’AIessio’s state law claims is that the NYSE and its officers conspired to violate the federal securities laws and various rules promulgated by the NYSE and failed to perform its statutory duty, created under federal law, to enforce its members’ compliance with those laws”). In other words, D’AIessio’s claim “involved an act that could be interpreted only in relation to federal securities laws. As the facts were alleged in that complaint, D’Alessio would have had no state law cause of action if no federal law had been violated, thus his case rested substantially upon federal law and was justifiably removed.” Fin. & Trading Ltd., 2004 WL 2754862 at *7.
In these cases, by contrast, the States’ claims do not necessarily rest on violation
S & P’s final argument — that the States’ cases “arise under” federal law because many of the state statutes at issue contain statutory exemptions or carve-outs for conduct that complies with a federal regulatory regime (Mem. Law Opp’n Pls.’ Mot. To Remand (Docket No. 33) 23-24)— also falls short. First, only some of the state statutes even contain such a carve-out. See, e.g., Ariz.Rev.Stat. Ann. § 44-1523 (providing a carve-out for, among others, newspaper publishers, but not for general compliance with federal law). Second, of those that do, some of the statutes have been construed to provide only a defense rather than to impose an additional element of the cause of action, see, e.g., Bostick Oil Co. v. Michelin Tire Corp., 702 F.2d 1207, 1219 & n. 23 (4th Cir. 1983) (interpreting S.C.Code Ann. § 39-5-40 to provide an affirmative defense), which is plainly insufficient to support federal-question jurisdiction, see, e.g., Shinnecock Indian Nation, 686 F.3d at 138-40. Third, even where the statutes at issue have not been so read, it is likely that courts in their respective States would read them in that way. At a minimum, there is no basis to conclude that the relevant State would have to prove a negative — S & P’s noncompliance with federal law — as an “essential element” of its affirmative case. See, e.g., McGraw-Hill Cos., 2013 WL 1874279, at *5 (rejecting S & P’s argument based on the carve-out provisions of Illinois law, which are not expressly identified as de
In any event, even if S & P were right that a court would “necessarily” have to grapple with federal law in some States because of the statutory exemptions for compliance with federal standards, federal jurisdiction would fail the Grable test for two other reasons. First, whether the exemptions apply in a particular case requires an individualized assessment of both the scope of the exemption at issue and the particular conduct alleged to fall within (or without) that exemption. See, e.g., Vogt v. Seattle-First Nat’l Bank, 117 Wash.2d 541, 817 P.2d 1364, 1370 (1991) (noting that the Washington Consumer Protection Act is to be liberally construed and “does not exempt actions or transactions merely because they are regulated generally,” but “only if the particular practice found to be unfair or deceptive is specifically permitted, prohibited!,] or regulated” (emphasis added)); see also, e.g., Skinner v. Steele, 730 S.W.2d 335, 337 (Tenn.Ct.App. 1987) (similar). As a result, the applicability vel non of the exemptions at issue is the type of “fact-bound and situation-specific” issue that does not generally warrant federal jurisdiction. Empire Healthchoice, 547 U.S. at 701, 126 S.Ct. 2121. Second, if the exemption provisions were sufficient to support federal jurisdiction, it would follow that any action brought under a state consumer-protection statute with such a provision would be subject to removal. Such a result would plainly disturb the “con-gressionally approved balance of federal and state judicial responsibilities,” Grable, 545 U.S. at 314, 125 S.Ct. 2363, as “the long history of state common-law and statutory remedies against ... unfair business practices” makes “plain that this is an area traditionally regulated by the States,” California v. ARC Am. Corp., 490 U.S. 93, 101, 109 S.Ct. 1661, 104 L.Ed.2d 86 (1989); cf. Gunn, 133 S.Ct. at 1068 (holding that federal jurisdiction would run afoul of Grable’s fourth requirement where the issue implicated an area traditionally addressed by the States). In fact, CRARA itself honors that “long history” by expressly preserving the right of States to investigate and bring an enforcement action against an NRSRO “with respect to fraud or deceit.” 15 U.S.C. § 78o-7(o )(2).
In the final analysis, the States assert in these cases that S & P failed to adhere to its own promises, not that S & P violated CRARA or any other provision of federal law. To separate merits and defenses from jurisdiction: Whether or not S & P deceived consumers, and whether or not S & P had license from the federal government to do so, the States’ claims are de
2. Mississippi’s Motion To Remand • for Lack of CAFA Jurisdiction
The foregoing analysis disposes of all the State Cases but one: the Mississipal action, which S & P and Moody’s independently removed under CAFA’s “mass action” provisions and on diversity grounds.
Complicating matters, there is disagreement with respect to how a court should analyze whether a State or rather some subset of its citizens is the real party in interest in cases of this sort. The Fifth Circuit and some district courts, including some within this Circuit, have applied a “claim-by-claim” analysis, under which a court must dissect the complaint and de-cidé whether the State or a group of its citizens is the beneficiary for each type of relief. See Louisiana ex rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418, 430 (5th Cir. 2008); see also, e.g., Connecticut v. Chubb Grp. of Ins. Cos., No. 3:11-cv-997 (AWT), 2012 WL 1110488, at *3 (D.Conn. Mar. 31, 2012); West Virginia ex rel. McGraw v. Comcast Corp., 705 F.Supp.2d 441, 447-49 (E.D.Pa. 2010); Butler v. Cadbury Beverages, Inc., No. 3:97-cv-2241 (EBB), 1998 WL 422863, at *2 (D.Conn. July 1, 1998); Connecticut v. Levi Strauss & Co., 471 F.Supp. 363, 370-71 (D.Conn. 1979). By contrast, the Fourth, Seventh, and Ninth Circuits, and district courts within this Circuit and beyond have applied a holistic approach, which requires a court to consider the complaint in its entirety to determine what interest, if any, the State possesses in the lawsuit as a whole. See, e.g., AU Optronics Corp. v. South Carolina, 699 F.3d 385, 392-94 (4th Cir. 2012), cert. denied, — U.S. —, 134 S.Ct. 999, 187 L.Ed.2d 850 (2014); LG Display Co., Ltd. v. Madigan, 665 F.3d 768, 773 (7th Cir. 2011); Bank of Am., 672 F.3d at 671; see also, e.g., MyInfoGuard v. Sorrell, Nos. 2:12-cv074, 2:12-cv-102, 2012 WL 5469913, at *4-5 (D.Vt. Nov. 9, 2012); Connecticut v. Moody’s Corp., No. 3:10cv546 (JBA), 2011 WL 63905, at *3-4 (D.Conn. Jan. 5, 2011); New York ex rel. Cuomo v. Charles Schwab & Co., Inc., No.
This Court adopts the whole-complaint approach, for several reasons. First, the majority of courts adopting the claim-by-claim approach in recent years have done so largely in the CAFA context and for reasons specific to CAFA. See, e.g., Caldwell, 536 F.3d at 424 (noting, in the course of adopting the claim-by-claim approach, that CAFA’s definition of “class action” was adopted “to prevent ‘jurisdictional gamesmanship’ ”); Comcast, 705 F.Supp.2d at 447-49 (adopting the claim-by-claim approach in principal part because “CAFA was intended to expand federal jurisdiction over class actions, which suggests that courts should carefully examine actions removed under CAFA to ensure that legitimate removal requests are not thwarted by jurisdictional gamesmanship”); cf. Purdue Pharma, 704 F.3d at 218 (declining to follow Caldwell even with respect to CAFA’s class action provisions on the ground that “Caldwell’s holding addresses only CAFA’s ‘mass action’ provisions”). Putting aside the fact that those cases are no longer good law after the Supreme Court’s decision in Hood, their reasoning never applied to the general diversity statute. (Moreover, even before Hood, courts raised doubts about the reasoning on its own terms. See, e.g., LG Display Co., 665 F.3d at 773; In re TFT-LCD (Flat Panel) Antitrust Litig., No. C 07-1827 SI, 2011 WL 560593, at *3 (N.D.Cal. Feb. 15, 2011).) Subtracting those cases from the mix, the overwhelming weight of authority supports the whole-complaint approach to determining who the real party in interest is for general diversity purposes. See, e.g., West Virginia ex rel. McGraw v. Bristol Myers Squibb Co., Civil Action No. 13-1603(FLW), 2014 WL 793569, at *4 (D.N.J. Feb. 26, 2014) (citing cases).
Second, although the Second Circuit did not formally reach the question in Purdue Pharma, it is difficult to view that decision as anything but a thumb firmly on the whole-complaint side of the scale. The Court declined to follow Caldwell, limiting it to the “mass action” context of CAFA and noting that, even in that context, its approach had “been roundly criticized” and rejected by a majority of courts. 704 F.3d at 219; see also id. at 217 n. 8 (“tak[ing] issue with” the defendant’s argument that the state was not the real party in interest “for restitution claims allegedly brought on behalf, and for the benefit, of a circumscribed group of consumers,” explaining that it was based on a “narrow characterization” of the State’s allegations and ignored the fact that “the overall thrust of the complaint [was] to bring a single action by the sovereign to protect the health and welfare of its residents in general”). More broadly, the Court of Appeals reaffirmed the proposition that “[i]n determining whether a State is a real party in interest, ... ‘inquiry must be made as to the “essential nature and effect of the proceeding,” ’ ” id. at 218 (quoting Finkielstain v. Seidel, 857 F.2d 893, 895 (2d Cir. 1988) (quoting Ford Motor Co. v. Dep’t of Treasury, 323 U.S. 459, 464, 65 S.Ct. 347, 89 L.Ed. 389 (1945))),. and “‘by a consideration of the nature of the case as presented by the whole record,’ ” id. (quoting Ferguson v. Ross, 38 F. 161, 162-63 (C.C.E.D.N.Y. 1889) (emphasis added in
Finally, the claim-by-claim approach leads courts to rewrite or carve up complaints in ways that the Federal Rules of Civil Procedure do not readily accommodate. That is because, “despite its name,” the claim-by-claim approach calls upon courts to look not at the particular claims a plaintiff brings, but rather at the particular types of relief a plaintiff seeks. MyInfoGuard, 2012 WL 5469913, at *4; see also Illinois v. SDS W. Corp., 640 F.Supp.2d 1047, 1052 (C.D.Ill. 2009). In the leading case of Levi Strauss, for example, Connecticut brought claims under state antitrust law. See 471 F.Supp. at 365. In evaluating whether Connecticut was the real party in interest, however, the Court not only pierced the-veil of the complaint, but also pierced the veil of individual claims within the complaint, breaking down Connecticut’s “money claim” into four “elements” and analyzing each of those elements separately. Id. at 370-71; see also Butler, 1998 WL 422863, at *2 (“To determine whether the State had an interest in the controversy for purposes of diversity, [the Levi Strauss Court] did not look to the nature of the suit as a whole; rather, [it] analyzed separately each type, of award sought by the State.”). Upon finding that different types of relief are brought on behalf of different real parties in interest, courts taking the minority approach have indicated that the types of relief can then be severed, with only a subset remanded to state court. See, e.g., Caldwell, 536 F.3d at 430; Ohio v. GMAC Mortg., LLC, 760 F.Supp.2d 741, 746 (N.D.Ohio 2011). Such a result, however, would be a strange creature indeed: a single claim brought by one named plaintiff proceeding on parallel tracks in two different court systems, based solely on the type of relief being sought. Although the Federal Rules license severance of claims under certain circumstances, see Fed.R.Civ.P. 21; see also, e.g., Spencer, White & Prentis Inc. of Conn. v. Pfizer Inc., 498 F.2d 358, 361 (2d Cir. 1974), they do not appear to contemplate that level of judicial dissection or interference with a plaintiffs choice of forum. In fact, “[t]o hold otherwise would be to prevent the plaintiff from acting as the master of the complaint and choosing its forum.” Illinois v. AU Optronics Corp., 794 F.Supp.2d 845, 853 (N.D.Ill. 2011).
Second, a review of the allegations in the Complaint reveals that Mississippi has a quasi-sovereign interest in the case. It is well established that, for a State to have parens patriae standing, it “must articulate a ‘quasi-sovereign interest’ distinct ‘from the interests of particular private parties,’ such as an ‘interest in the health and well-being — both physical and economic — of its residents in general.’ The State may show such an interest by alleging ‘injury to a sufficiently substantial segment of its population.’ ” Purdue Pharma, 704 F.3d at 215 (citation omitted) (quoting Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592, 607, 102 S.Ct. 3260, 73 L.Ed.2d 995 (1982)). Here, Mississippi has done so. Exemplary allegations of harms to particular consumers aside, the State asserts that the rating agencies’ deceptive practices had a widespread impact on banks, insurance companies, government regulators, mutual funds, pension funds, and consumers throughout Mississippi — indeed, on the Mississippi economy as a whole. (See, e.g., Notice of Removal (Docket No. 1, 13 Civ. 4049), Ex. A (“Miss.Compl”) ¶ 1 (alleging harm to broad swaths of the Mississippi economy, including state regulators), ¶ 8 (explaining that Defendants “were key enablers of the financial meltdown”), ¶ 14 (describing the rating agencies’ impact on government regulators, “the overall economy of the State of Mississippi,” the many Mississippi consumers “whose retirement funds are invested in these securities,” institutional investors, lenders, businesses, banks, broker-dealers, and insurance companies),
Third, that Mississippi “seeks civil penalties and a statewide injunction against [unfair and deceptive acts and practices] — remedies unavailable to consumers — leaves no doubt that the State has concrete interests in the litigation; put simply, the benefits of those remedies flow to the State as a whole.” MyInfoGuard, 2012 WL 5469913, at *5; accord Moody’s, 2011 WL 63905 at *3-4; see also Comcast, 705 F.Supp.2d at 447 (stating that “[c]ourts have universally accepted the notion that a state is the real party in interest when it brings a claim for injunctive relief’ and that it is “also well accepted that a state is the real party in interest when it brings a claim for civil penalties because such awards add only to the state’s coffers rather than any individual’s bank account”). Indeed, the fact that the State is seeking injunctive relief, by itself, “supports the position that the State is the only real party in interest.” Bristol Myers Squibb, 2014 WL 793569, at *5-6. That “type of prospective relief goes beyond addressing the claims of previously injured organizations or individuals. It is aimed at securing an honest marketplace, promoting proper business practices, protecting Mississippi consumers, and advancing Mississippi’s interest in the economic well-being of its residents.” Microsoft, 428 F.Supp.2d at 546; see also, e.g., SDS West, 640 F.Supp.2d at 1051 (noting that “the indirect benefits of barring unscrupulous companies from soliciting further business accrues to the population at large”); Gen. Motors, 547 F.Supp. at 705 (“The purpose of seeking this wide-ranging relief is not merely to vindicate the interests of a few private parties. Rather, it is to take a step toward eliminating fraudulent and deceptive business practices in the marketplace.”).
In arguing that Mississippi is not a real party in interest, S & P and Moody’s rely principally on the fact that the Complaint seeks disgorgement and other forms of “equitable relief’ under Miss.Code Ann. § 75-24-11, pursuant to. which a court “may” order restitution. (Defs.’ Remand Mem. 8). In light of those requests, the rating agencies argue, it is “clear that the State is seeking restorative relief on behalf of individual citizens, even if the State chooses not to style this relief as ‘restitution.’ ” (Id.).
Regardless, as the overwhelming weight of authority makes clear, the fact that individual Mississippi consumers could ultimately benefit financially from a favorable resolution of this case “does not minimize or negate the State’s substantial interest.” Hood v. AstraZeneca Pharmas., LP, 744 F.Supp.2d 590, 596 (N.D.Miss. 2010); accord AU Optronics, 699 F.3d at 394; Bank of Am., 672 F.3d at 671; Bristol Myers Squibb, 2014 WL 793569, at *5;
That does not end the matter, however, as Mississippi also seeks attorney’s fees and costs. (Miss. Mem. 28-30). A federal court remanding an action to state court “may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of removal.” 28 U.S.C. § 1447(c). Such an award, however, is appropriate “only where the removing party lacked an objectively reasonable basis for seeking removal.” Martin v. Franklin Capital Corp., 546 U.S. 132, 141, 126 S.Ct. 704, 163 L.Ed.2d 547 (2005). A basis for removal is “objectively reasonable” if the removing party had a colorable argument that removal was proper. See In re Methyl Tertiary Butyl Ether (“MTBE”) Prods. Liab. Litig., No. 1:00-1898, MDL 1358(SAS), M 21-88, 2006 WL 1004725; Fin. & Trading, Ltd., 2004 WL 2754862, at *8. Applying those standards to the present removal, no award of fees and costs is appropriate. Given (1) the split of authority on whether to apply the claim-by-claim or whole-complaint theory; (2) the conflicting nature of the caselaw interpreting CAFA prior to the Supreme Court’s decision in Hood] (3) the fact that Defendants removed the case in the Fifth Circuit, where the legal basis for removal was strongest prior to (and perhaps even after) Hood] and (4) the fact that CAFA is a recently enacted and complex statute that presents “novel issues of law,” see Anwar v. Fairfield Greenwich Ltd., 676 F.Supp.2d 285, 301 (S.D.N.Y. 2009), it is clear that Defendants had a colorable argument for removing the case from state court. Accordingly, Mississippi’s motion for fees and costs must be and is denied. Cf. Ortiz, 2013 WL 2413724, at *5 (denying an application for fees and costs, citing “the unusual circumstances” of the case and “the lack of any precedent directly on point”).
B. The Motion To Dismiss S & P’s Declaratory Judgment Cases
Having disposed of all the State Cases, the Court turns finally to S & P’s Declaratory Judgment Cases against the States of South Carolina and Tennessee. In its Complaints, as amended, S & P seeks (1) a declaration that the relief requested by South Carolina and Tennessee would be unconstitutional; and (2) an injunction against the state civil enforcement actions, as well as attorneys’ fees and costs. (Am. Compl. (Docket No. 15, 13 Civ. 4052) 7-8; Am. Compl. (Docket No. 12, 13 Civ. 4100) 6; Mem. Law Opp’n Defs.’ Mots. To Dismiss 4-5). S & P filed the suits in federal court after receiving
As noted, South Carolina and Tennessee move to dismiss the Declaratory Judgment Cases under the abstention doctrine of Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971).
The Second Circuit has held that Younger abstention is “mandatory” when three conditions are met: “(1) there is a pending state proceeding, (2) that implicates an important state interest, and (3) the state proceeding affords the federal plaintiff an adequate opportunity for judicial review of his or her federal constitutional claims.” Spargo, 351 F.3d at 75.
Applying those standards here, the Court concludes that abstention is required.
The dispositive question, therefore, is whether the States’ interests are sufficiently “important” to require Younger abstention. The Second Circuit has held that “[a] state interest is ‘important’ for purposes of the second Younger abstention factor where ‘exercise of the federal judicial power would disregard the comity between the States and the National Government.’ ” Grieve v. Tamerin, 269 F.3d 149, 152 (2d Cir. 2001) (quoting Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 13, 107 S.Ct. 1519, 95 L.Ed.2d 1 (1987)); accord Philip Morris, Inc. v. Blumenthal, 123 F.3d 103,105-06 (2d Cir. 1997). Resolution of that question “turns on whether ‘the state action concerns the central sovereign functions of state government.’ ” Grieve, 269 F.3d at 152 (quoting Philip Morris, 123 F.3d at 106). Significantly, however, the Court of Appeals has cautioned that a
In light of those standards, courts have repeatedly held that state actions to enforce consumer-protection statutes and laws against deceptive business practices are sufficiently important for Younger purposes. See, e.g., Cedar Rapids Cellular Tel., L.P. v. Miller, 280 F.3d 874, 880 (8th Cir. 2002); Williams v. State of Washington, 554 F.2d 369, 370 (9th Cir. 1977); Merck Sharp & Dohme Corp. v. Conway, 909 F.Supp.2d 781, 785 (E.D.Ky. 2012); MyInfoGuard, 2012 WL 5469913, at *8; Marathon Petroleum Co. v. Stumbo, 528 F.Supp.2d 639, 645 (E.D.Ky. 2007); Arbitron Inc. v. Cuomo, No. 08 Civ. 8497(DLC), 2008 WL 4735227, at *5-6 (S.D.N.Y. Oct. 27, 2008); Williams v. Lubin, 516 F.Supp.2d 535, 539-40 (D.Md. 2007); Goleta Nat. Bank v. Lingerfelt, 211 F.Supp.2d 711, 716 (E.D.N.C. 2002); Bologna v. Allstate Ins. Co., 138 F.Supp.2d 310, 327 (E.D.N.Y. 2001); State Farm Mut. Auto. Ins. Co. v. Metcalf, 902 F.Supp. 1216, 1218 (D.Haw. 1995); Bays v. Edgar, No. 87 C5045, 1988 WL 13639, at *3 (N.D.Ill. Feb. 17, 1988). Additionally, in other contexts, the Supreme Court itself has recognized that States have an important interest in protecting the public from deceptive business practices. See, e.g., Ohralik v. Ohio State Bar Ass’n, 436 U.S. 447, 460, 98 S.Ct. 1912, 56 L.Ed.2d 444 (1978) (citing the “general interest in protecting consumers and regulating commercial transactions” in stating that “[t]he state interests implicated in this case are particularly strong”); see also, e.g., ARC Am. Corp., 490 U.S. at 101, 109 S.Ct. 1661 (stating that “the long history of state common-law and statutory remedies against ... unfair business practices” makes “plain that this is an area traditionally regulated by the States”); Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, 471 U.S. 626, 651, 105 S.Ct. 2265, 85 L.Ed.2d 652 (1985) (recognizing “the State’s interest in preventing deception of consumers”).
Those principles and precedents compel the conclusion that South Carolina’s and Tennessee’s civil enforcement actions are important enough to warrant Younger abstention. Like Mississippi’s civil enforcement action discussed above (using the “essential nature and- effect” standard, which is effectively the same as the “underlying nature of the state proceeding” standard applicable here), South Carolina’s and Tennessee’s suits were brought to vin
In arguing otherwise, S & P seeks first to frame the relevant question narrowly as whether the States’ have a sufficiently strong interest in “regulating the market for credit rating services.” (Mem. Law Opp’n Defs.’ Mots. To Dismiss 19). But taking such a myopic view of the relevant question runs contrary to the Second Circuit’s mandate “to ascertain the ‘generic proceeding’ ” by “considering] the underlying nature of the state proceeding.” Philip Morris, 123 F.3d at 106. It also ignores the gravamen of the States’ claims in these cases. As noted above, the States do not challenge the credit ratings themselves or the methodology that S & P uses to produce its ratings; they do not, in other words, seek to regulate the market for credit-rating services. Instead, the States seek to hold S & P accountable for its alleged misrepresentations about its ratings and to enjoin future such misrepresentations. The nature of the business in which S & P engages does not define the States’ interests — the States’ interests are in enforcing their statutory prohibitions against deception and ensuring the integrity of the marketplace.
In addition, citing the Second Circuit’s decision in Grieve and a handful of other cases, S & P contends that “Younger abstention would bec unjustified” because “federal/state comity is unnecessary in areas of law where the federal government has already intruded into state prerogatives.” (Mem. Law Opp’n Defs.’ Mots. To Dismiss 19-20; see also Docket No. 47 (citing additional cases)). Admittedly, the proposition that the weight of the federal interest, if any, should be considered in the mix does find some support in Grieve, where the Second Circuit cited the “paramount federal interest in foreign relations and the enforcement of United States treaty obligations” in concluding that the State’s interest did not “appear to raise the sort of substantial comity concerns that require Younger abstention.” 269 F.3d at 153; see also, e.g., Harper, 396 F.3d at 356 (“When there is an overwhelming federal interest ... no state interest, for abstention purposes, can be nearly as strong at the same time.”); New York v. Trans World Airlines, Inc., 728 F.Supp. 162, 174-75 (S.D.N.Y. 1989) (questioning whether the state interest in enforcing
But S & P’s argument is ultimately unpersuasive. As an initial matter, loose language in Grieve aside, it is far from clear that the weight of the federal interest, if any, should factor into the Younger analysis. ■ The Second Circuit has repeatedly enumerated the three conditions necessary for Younger abstention, see, e.g., Spargo, 351 F.3d at 75, but it has never included the weight of the federal interest, if any, in its list of such conditions. Nor has the Supreme Court, which initially identified the three factors, see Middlesex Cnty. Ethics Comm., 457 U.S. at 432, 102 S.Ct. 2515, and recently reaffirmed them, see Sprint, 134 S.Ct. at 593. More fundamentally, S & P’s argument is difficult to reconcile with the analysis and conclusion of New Orleans Public Service, Inc. v. Council of City of New Orleans, 491 U.S. 350, 364-66, 109 S.Ct. 2506, 105 L.Ed.2d 298 (1989), in which the Supreme Court held that the mere assertion of a federal preemption claim — even a “substantial” one — is not enough to defeat Younger abstention. See, e.g., J. & W. Seligman & Co. Inc. v. Spitzer, No. 05 Civ. 7781(KMW), 2007 WL 2822208, at *6 (S.D.N.Y. Sept. 27, 2007). And finally, refraining from abstention in light of a federal interest (at least in the absence of a “facially conclusive” preemption claim, see, e.g., id. at *4) would “entail an unseemly failure to give effect to the principle that state courts have the solemn responsibility, equally with the federal courts to guard, enforce, and protect every right granted or secured by the [Constitution of the United States.” Steffel v. Thompson, 415 U.S. 452, 460-61, 94 S.Ct. 1209, 39 L.Ed.2d 505 (1974) (internal quotation marks omitted); see also Temple of Lost Sheep Inc. v. Abrams, 930 F.2d 178, 183 (2d Cir. 1991) (noting that “Younger abstention derives from the recognition that a pending state proceeding, in all but unusual cases, would provide the federal plaintiff with the necessary vehicle for vindicating his constitutional rights” (internal quotation marks omitted)); Cuomo v. Dreamland Amusements, Inc., Nos. 08 Civ. 7100(JGK), 08 Civ. 6321(JGK), 2008 WL 4369270, at *10 (S.D.N.Y. Sept. 22, 2008) (rejecting an argument that the State did not have a “valid interest” in light of federal regulation of the same area and noting that the issue of preemption could be raised as a defense in the state proceeding).
Ultimately, however, the Court need not resolve the question of whether the weight of the federal interest, if any, factors into the Younger analysis, because even if it does, abstention would be warranted here. To be sure, CRARA makes clear that the market for credit ratings is a national concern. See CRARA, § 2 pmbl, 120 Stat. at 1327 (stating that “credit rating agencies are of national importance”). But CRARA itself provides that it does not prohibit state agencies “from investigating and bringing an enforcement action with respect to fraud or deceit against any nationally recognized statistical rating organization or person associated with a nationally recognized statistical rating organization.” 15 U.S.C. § 78o-7(o )(2). That provision makes clear that the state interests in enforcing consumer-protection laws and combatting deceptive business practices — the interests South Carolina and Tennessee seek to vindicate in their cases — do not tread on the federal interest in regulating the market for credit ratings. Moreover, that provision is, in itself, a recognition and
In sum, S & P’s Declaratory Judgment Cases present the “exceptional” circumstances that call for application of the Younger doctrine. Sprint, 134 S.Ct. at 588. Accordingly, the Court is compelled to grant the States’ motion and to dismiss S & P’s cases. See, e.g., Gibson v. Berryhill, 411 U.S. 564, 577, 93 S.Ct. 1689, 36 L.Ed.2d 488 (1973) (“Younger v. Harris contemplates the outright dismissal of the federal suit, and the presentation of all claims, both state and federal, to the state courts.”); Diamond “D” Const. Corp., 282 F.3d at 197 (“[W]hen Younger applies, abstention is mandatory and its application deprives the federal court of jurisdiction in the matter.”).
CONCLUSION
For the foregoing reasons, the Court concludes that subject-matter jurisdiction is lacking with respect to the State Cases and that those cases must be remanded to the state courts from which they were removed. Additionally, in light of that result, and the important state interests implicated by the State Cases, the Court is compelled to dismiss the Declaratory Judgment Cases on the grounds of Younger abstention.
The Court does not reach those conclusions lightly. Putting aside the natural “tempt[ation] to find federal jurisdiction every time a multi-billion dollar case with national implications arrives at the doorstep of a federal court,” Greenwich Fin. Servs. Distressed Mortg. v. Countrywide Fin. Corp., 654 F.Supp.2d 192, 204 (S.D.N.Y. 2009), the federal courts undoubtedly have advantages over their state counterparts when it comes to managing a set of substantial cases filed in jurisdictions throughout the country. Through the MDL process, federal cases can be consolidated for pretrial purposes or more, promoting efficiency and minimizing the risks of inconsistent rulings and unnecessary duplication of efforts. Nevertheless, the state courts have devised creative means to coordinate among themselves when appropriate. See, e.g., Paula L. Hannaford-Agor, Comment: Federal MCL Fourth and Suggestions for State Court Management of Mass Litigation (National Center for State Courts 2006), available at http://cdml6501.contentdm.oclc.org/cdm/ ref/collection/civil/id/58 (last visited June 3, 2014). And in any event, as any student of the' Constitution knows, efficiency is not the only interest served by this country’s federalist system of state and federal courts.
In the final analysis, this Court is not free to disregard or evade “[t]he limits upon federal jurisdiction, whether imposed by the Constitution or by Congress.” Owen Equip. & Erection Co. v. Kroger,
The Clerk of Court is directed to (1) terminate all open motions in 13 MD 2446 and all its member cases; (2) dismiss the Declaratory Judgment Cases, 13 Civ. 4100 and 13 Civ. 4052; and (3) remand all other member cases to the state courts from which they were removed in the first instance. As that disposes of all cases pending before this Court, there is no reason for the MDL to remain open. Accordingly, the Clerk of Court is also directed to close 13 MD 2446 and all its member cases, and to notify the Judicial Panel on Multidistrict Litigation of that closure.
SO ORDERED.
. Relatedly, the following facts focus more on S & P than Moody’s, which is a party to only one of the cases before the Court. In any event, to the extent there are differences between the two rating agencies, those differences are irrelevant to the issues discussed in this Opinion.
. John Moody, who gave his name to Moody’s, was the first person to publish credit ratings publicly. See S.Rep. No. 109-326, at 3 (2005) (Conf.Rep.); see generally John Moody, Moody’s Analyses of Railroad Investments (1909). Moody sought to provide “analytical commentary on the railroads of America from the standpoint of the owners of the securities,’’ and his ratings purported to be “worked out on thoroughly sound and scientific lines.” Id. at 14.
. The NRSRO designation was introduced in 1975 as part of the administrative scheme implementing the Net Capital Rule, which governs the amount of capital broker-dealers are required to maintain on their balance sheets. See S.Rep. No. 109-326, at 4; see also Net Capital Rule, 17 C.F.R. § 240.15c3-l (2008); Adoption of Uniform Net Capital Rule and an Alternative Net Capital Requirement for Certain Brokers and Dealers, 40 Fed.Reg. 29795 (July 16, 1975). Under that scheme, broker-dealers are required to hold less capital against assets that have been rated investment-grade by one of the NRSROs than against those that have not. See S.Rep. No. 109-326, at 4. In other words, the NRSRO designation was originally intended to ensure the reliability of credit ratings for the largely
. Elsewhere, the regulations prohibit certain conflicts of interest altogether. See, e.g., 17 C.F.R. § 240.17g-5(c). Additionally, the SEC has authority to revoke NRSRO status or to impose civil penalties. See 15 U.S.C. § 78o-7(d); 15 U.S.C. § 78u-2(a)(l)(C).
. Unless indicated otherwise, citations to docket entries refer to docket entries in the MDL, 13 MD 2446.
. In addition to those seventeen actions, S & P and Moody’s are currently facing civil enforcement actions brought by the federal government, California, Connecticut, and Illinois. The federal suit against S & P is currently pending in the United States District Court for the Central District of California. See United States v. McGraw-Hill Cos., No. CV 13-0779 DOC (JCGx) (C.D.Cak). The suits brought by California, Connecticut, and Illinois are pending in their respective state courts, as S & P elected not to remove the California action and the other two, which S & P did remove, were remanded to state court prior to the MDL’s creation. See Illinois v. McGraw-Hill Cos., No. 13 C 1725, 2013 WL 1874279 (N.D.Ill. May 2, 2013); Connecticut v. McGraw Hill Cos., No. 3:13-cv-311 (SRU), 2013 WL 1759864 (D.Conn. Apr. 24, 2013); Connecticut v. Moody’s Corp., No. 3:10cv546 (JBA), 2011 WL 63905 (D.Conn. Jan. 5, 2011); see also, e.g., Connecticut v. Moody's Corp., 664 F.Supp.2d 196 (D.Conn. 2009) (remanding to state court an earlier civil enforcement action brought against Moody's); Flynn ex rel. Moody's Corp. v. McDaniel, 689 F.Supp.2d 686, 687 (S.D.N.Y. 2010) (remanding to state court a derivative suit alleging that Moody’s committed fraud and breached its fiduciary duties in connection with its use of the issuer-pays model).
. The JPML granted S & P’s motion to transfer the cases to a single court, over the objections of the States and Moody’s, in part to allow one court to address all of the motions to remand and motions to dismiss, thereby eliminating the risk of inconsistent rulings. (Transfer Order 2-3).
. Although the District of Columbia has not moved for remand (see Docket, 13 Civ. 4012), there is no dispute that, if the Court lacks subject-matter jurisdiction with respect to the States’ civil enforcement actions, its case would need to remanded as well. See, e.g., 28 U.S.C. § 1447(c) ("If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded.”).
. When an action is transferred pursuant to Title 28, United States Code, Section 1407, as all of the instant cases were, the transferee court applies "its interpretations of federal law, not the constructions of federal law of the transferor circuit.” Menowitz v. Brown, 991 F.2d 36, 40 (2d Cir. 1993). Accordingly, as the parties agree, Second Circuit law applies to these motions.
. As noted, S & P and Moody's did not invoke federal-question jurisdiction in the initial notice of removal that they filed in the Mississippi case; S & P did so in the supplemental notice of removal filed in 2013. Moody’s did not join in that supplemental notice of removal (Notice of Supplemental Authority (Docket No. 34, 13 Civ. 4049)), and therefore does not join S & P’s arguments with respect to the propriety of federal-question jurisdiction.
. Another application of the "artful pleading rule” is the complete preemption doctrine, pursuant to which removal is proper when Congress has "so completely preempted, or entirely substituted, a federal law cause of action for a state one.” Romano, 609 F.3d at 519; see also Caterpillar Inc. v. Williams, 482 U.S. 386, 393, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). S & P concedes that the complete preemption doctrine does not apply here (see Defs.' Mem. Opp’n Pl.'s Mot. Remand and Costs (Docket No. 30, 13 Civ. 4098) 3) and relies solely on the substantial federal ques
. This conclusion is underscored by the fact that S & P's Code of Conduct predates CRARA. See supra Background, Section B.
. Notably, the language of Illinois's statute, which the McGraw-Hill Cos. Court construed to provide only a defense, is virtually identical to the language of statutes from other States in this MDL. Compare 815 Ill. Comp. Stat. 505/10b(l) (“Nothing in this Act shall apply to ... [ajctions or transactions specifically authorized by laws administered by any regulatory body or officer acting under statutory authority of ... the United States.”), with, e.g., Ark.Code Ann. § 4-88-101(3) (“This chapter does not apply to ... [ajctions or transactions permitted under laws administered by ... [a] regulatory body or officer acting under statutory authority of this state or the United States....”); Idaho Code Ann. § 48-605(1) ("Nothing in this act shall apply to ... [ajctions or transactions permitted under laws administered by ... [a] regulatory body or officer acting under statutory authority of ... the United States.”); S.C.Code Ann. § 39-5-40(a) (“Nothing in this article shall apply to ... [ajctions or transactions permitted under laws administered by any regulatory body or officer acting under statutory authority of ... the United States....”).
. Despite some ambiguity in their Notice of Removal, S & P and Moody’s have abandoned any argument that they removed the case as a "class action” rather than as a "mass action.” (See Mem. Law Opp'n Mississippi’s Mots. To Remand and Costs and Fees (Docket No. 35) ("Defs.' Remand Mem.”) 17-19). That is for good reason, as CAFA defines a "class action” as a civil action "filed under” a state-law equivalent to Rule 23, 28 U.S.C. § 1332(d)(1)(B) (emphasis added), and Mississippi has no class action procedure whatsoever, see Am. Bankers Ins. Co. v. Booth, 830 So.2d 1205, 1212-14 (Miss. 2002). See generally Mississippi ex rel. Hood v. AU Optronics Corp., 701 F.3d 796, 799 (5th Cir. 2012), rev’d and remanded on other grounds by Hood, 134 S.Ct. 736 (2014).
. In light of that conclusion, the Court need not reach Mississippi’s argument that the 2011 notice of removal was defective. (Mem. Law Supp. State Mississippi's Mots. To Re- • mand and Costs and Fees (Docket No. 27) ("Miss.Mem. ”) 7-9). In light of the Court's conclusion with respect to federal-question jurisdiction, there is also no need to address Mississippi's argument that S & P’s supple
. Some courts have concluded that the whole-complaint approach is warranted in part because of "the Supreme Court’s caution that restraint is particularly important in the removal context in light of the longstanding policy of strictly construing the statutory procedures for removal, as well as the sovereignty concerns raised by asserting federal jurisdiction over cases brought by states in their own courts.” Bristol Myers Squibb, 2014 WL 793569, at *4 (citation omitted); accord LG Display, 665 F.3d at 774; MyInfoGuard, 2012 WL 5469913, at *5; Charles Schwab, 2010 WL 286629, at *5. In the Court’s view, however, while deference to the state’s choice of forum should be a factor in applying the proper test to a particular set of facts — with all doubts resolved in the state’s favor, see,
. S & P and Moody’s also cite the original Complaint's requests for punitive damages and "damages” in the disgorgement count. (Defs.’ Remand Mem. 9 n. 5). The State • argues that those requests should be disregarded as a scrivener’s error and notes that both requests were removed from the Amended Complaint filed after the case was removed. (Miss. Mem. 13 n. 9; Reply Mem. Law Supp. State of Mississippi's Mots. Remand and Costs and Fees (Docket No. 38) 6). See Connecticut v. Moody's Corp., 664 F.Supp.2d 196, 198 (D.Conn. 2009) (disregarding a request for punitive damages in similar circumstances as a scrivener's error). In either case, however, the Complaint did not seek punitive damages on behalf of consumers. And the request for damages referred expressly to damages "for the harms intentionally and wrongfully done to the State.” (Miss. Compl. ¶ 87 (emphasis added)).
. The Northern District of Mississippi’s decision in Bristol-Myers Squibb, 2013 WL 3280267, upon which S & P and Moody's rely (Defs.’ Remand Mem. 11), does not call for a different result. The Court in that case did find that Mississippi consumers were the real parties in interest for purposes of the State’s disgorgement claim, but that was based in part on language in the complaint indicating that "the injury complained of was suffered by the user or purchaser consumer” and that the purpose of the relief was to make those consumers (and the State) "whole.” 2013 WL 3280267, at *6 (quoting from the complaint). The Complaint in this case does not include the same (or similar) language. Moreover, there is another reason not to follow Bristol-Myers Squibb: Although it did not address the issue expressly, the Court applied the claim-by-claim approach rather than the whole-complaint approach.
. In light of the foregoing, a strong argument could be made that, even under the claim-by-claim approach, Mississippi would be the sole real party in interest. See, e.g., South Carolina v. LG Display Co., Ltd., No. 3:1l-cv-00729-JFA, 2011 WL 4344074, at *6 (D.S.C. Sept. 14, 2011) (stating that the state would be a real party in interest to its restitution claim even under a claim-by-claim approach because the state has a "a quasi-sovereign interest ... in bringing an action to enforce its laws, disgorge the proceeds of ill-gotten gains, and refund them to its citizens”); South Carolina v. AU Optronics Corp., No. 3:1 l-cv-00731-JFA, 2011 WL 4344079, at *6 (D.S.C. Sept. 14, 2011) (same); Illinois v. AU Optronics Corp., 794 F.Supp.2d 845, 855 (N.D.Ill. 2011) (holding that the state would be the real party in interest with respect to its claim for restitution even under the claim-by-claim approach because it "has a quasi-sovereign interest” in "seek[ing] recovery on behalf of a wide range of consumers and aim[ing] to deter future antitrust conduct by corporations in [the state]”). The Court, however, need not reach that question.
. As a threshold matter, there is some reason to question whether the Court has subject — matter jurisdiction over S & P’s Declaratory Judgment Cases insofar as they allege claims that, if S & P had been sued in federal court, could be raised only as defenses. See, e.g., Fleet Bank, Nat’l Ass'n v. Burke, 160 F.3d 883, 887-88 (2d Cir. 1998); Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 107-08 (2d Cir. 1997). However, in light of the Supreme Court’s decision in Verizon Maryland Inc. v. Public Service Commission, 535 U.S. 635, 122 S.Ct. 1753, 152 L.Ed.2d 871 (2002), which held that declaratory-judgment actions premised on the Supremacy Clause and seeking injunctive relief are properly within the subject-matter jurisdiction of federal courts, the Court concludes that it has federal-question jurisdiction to consider these cases. See also, e.g., Sprint Commc’ns, Inc. v. Jacobs, — U.S. —, 134 S.Ct. 584, 590, 187 L.Ed.2d 505 (2013).
. Even if these three conditions are met, "a federal court may still intervene in state proceedings if the plaintiff demonstrates bad faith, harassment or any other unusual circumstance that would call for equitable relief.” Spargo, 351 F.3d at 75 n. 11 (internal quotation marks omitted). S & P does not allege that any of those exceptions apply here.
. In light of that conclusion, the Court need not reach the States’ alternative argument that the Declaratory Judgment Cases should be dismissed as "improper anticipatory filings undertaken as a race to the courthouse.” (Defs.’ Joint Br. Supp. Mots. To Dismiss 6).
. In the face of these cases, S & P relies heavily on Harper v. Public Service Commission, 396 F.3d 348 (4th Cir. 2005), in which the Fourth Circuit opined that Younger abstention is appropriate only where the pending state proceeding implicates "[¡Interests like education, land use law, family law, and criminal law [that] lie at the heart of state sovereignty.” Id. at 354; see also id. at 352-53. As S & P concedes, however, Harper is not controlling here. (Mem. Law Opp’n Defs.’ Mots. To Dismiss 17 n. 12). Moreover, the Fourth Circuit's list was illustrative, not exhaustive, and the cases cited above stand for the proposition that the interest in enforcing state laws prohibiting deceptive business practices also lies at the heart of state sovereignty.
Reference
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- In re STANDARD & POOR'S RATING AGENCY LITIGATION. This Document Relates to All Actions
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- 42 cases
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