Federal Judge Sends Scottrade Case Back

By Nevin Adams • August 21, 2018 • 0 Comments
Scottrade’s attempt to make a federal case of an administrative proceeding filed by Massachusetts alleging violations of internal policies adopted in anticipation of the Labor Department’s fiduciary rule has been rebuffed by a federal judge.

Here the plaintiff (the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth) had alleged that the defendant (Scottrade, Inc.) violated its own internal policy by hosting incentivized sales contests – and thus violated state law. For its part, Scottrade claims that the plaintiffs are “merely attempting to enforce federal standards that were set forth in the now-vacated Fiduciary Rule.”

Federal ‘Case’

In petitioning for a move to federal court, Scottrade claims that the plaintiff was “attempting, through the Administrative Action, to enforce the requirements of the Employee Retirement Income Security Act (ERISA)” and the Labor Department’s fiduciary rule, “…even though ERISA completely preempts such state enforcement actions and despite the fact that the United States Department of Labor, the federal agency charged with enforcing the Rule, has suspended enforcement thereof until July 2019.”

Moreover, the defendants noted that while the Massachusetts action “purports to allege violations of Section 204 of the Massachusetts Securities Act, it is clear on its face that the gravamen of these state law claims is that Scottrade allegedly failed to comply with the Fiduciary Rule and failed to make good faith efforts to implement the Rule” – going on to state that “Scottrade would not have adopted these internal policies, which repeat verbatim the Rule’s requirements, were it not for the Rule’s issuance.” Scottrade also noted that in filing the original complaint, the defendants sent a clear signal that there were doing so to fill a gap left by the Labor Department’s failure to enforce the fiduciary rule (since dismissed by an action by the U.S. Court of the Appeals for the 5th Circuit.

Bay State Rebuttal


In response, the plaintiffs filed a 23-page brief in the U.S. District Court in the District of Massachusetts basically making two fundamental legal arguments with regard to the motion by Scottrade to have the case moved to federal court: that an action by a state agency to enforce the Massachusetts Securities Act is not one “of which the district courts of the United States would have original jurisdiction,” and that the action was also not initially “‘brought in a State court,’ id., but instead was filed within a State administrative agency,” and that accordingly, “this Court should remand the matter.”

Ruling on those motions (in a 26-page opinion), Judge Nathaniel Gorton, the U.S. District Judge for the U.S. District Court for the District of Massachusetts, noted that Scottrade proceeds under the assumption that the decision of the 5th Circuit vacating the fiduciary rule “binds this Court.” However, Judge Gorton, in a statement that will likely raise some eyebrows, writes: “There is no explicit statement that the Court expected its judgment to apply nationwide and therefore defendant’s contention that the Fifth Circuit decision binds this Court is tenuous at best.”

Moving ‘Mien’

As for the motion to remove the case to federal court, Judge Gorton noted that “a cause of action arises under federal law only when the plaintiff’s well-pleaded complaint raises an issue of federal law,” and that “the plaintiff is master of his complaint and that a case cannot be removed if the allegations in the complaint are premised only on local law.” He noted there were two exceptions: if a state law cause of action “requires resolution of a substantial question of federal law” in dispute between the parties; or if a court concludes that a plaintiff has attempted to defeat removal by omitting necessary federal questions, “it may uphold removal even though no federal question appears on the face of the complaint.”

And while Scottrade had argued that this case is of “central concern” to ERISA, Judge Gorton goes on to state that “no federal issue is necessarily raised from the face of plaintiff’s administrative complaint,” specifically that under Massachusetts state law: (1) Scottrade “engaged in [] unethical or dishonest conduct or practices” in violation of M.G.L. c. 110A, § 204(a)(2)(G); and (2) Scottrade “failed reasonably to supervise agents, investment adviser representative or other employees in violation of M.G.L. c. 110A, § 204(a)(2)(J)” – going on to note that “a court could resolve both claims without any analysis of the DOL Fiduciary Rule.” While acknowledging that Scottrade adopted its impartial conduct policy in response to the fiduciary rule, Judge Gorton wrote that “…this Court need not interpret the Fiduciary Rule nor rule on its validity to determine whether Scottrade violated that policy.”

Preempt ‘Shuns’

The plaintiffs had argued that the case was not removable because ERISA’s preemption provisions do not apply to IRAs – a contention that Judge Gorton said was “unavailing” because “many IRAs are subject to Title 1 of ERISA because they fall within the definition of employee benefit plans and are subject to ERISA preemption” – a point Gorton said the “‘plaintiff equivocated on’ in its reply brief and conceded at the hearing on this motion.”

Beyond the notion that the plaintiffs here were not an individual who could have brought an ERISA claim in federal court – a position with which Scottrade concurred, while still arguing that the federal court had jurisdiction due to the subject matter – Judge Gorton said that was putting the cart before the horse, “given that no federal ingredient jurisdiction exists, this Court possesses subject matter jurisdiction only if one of plaintiff’s claims is completely preempted.” And, because “complete preemption under ERISA requires that the plaintiff is the type of party that can bring a claim, this Court has subject matter jurisdiction only if the Enforcement Section can bring a claim under ERISA” – and since it could not, “jurisdiction is lacking.”

In what Judge Gorton described as a “last gasp,” he noted that Scottrade “suggests that the issue in this case is of such central importance to ERISA that this Court should re-characterize the complaint as a federal common law action.” However, “the Court declines that invitation,” since Judge Gorton explained that courts have been cautioned to be “careful not to allow federal common law to rewrite ERISA’s carefully crafted statutory scheme.”

Judge Gorton noted that “Scottrade insists that the administrative complaint is an ERISA action in ‘state law clothing’ and that the federal courts are the proper forum for ERISA claims,” but noted that “as this Court has already observed, the claims in this action can be resolved without reference to federal law.” Moreover, he acknowledged that states have a “significant interest in applying a statute in the forum it has established for that purpose, in this case the Securities Division (by leave of the Legislature) to administer and enforce the Massachusetts Securities Act.”

And allowed the plaintiffs’ motion to remand the suit to state court.