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Robert Haith, Derivatively On Behalf of Accretive Health v. Edgar M. Bronfman Jr.

March 1, 2013

ROBERT HAITH, DERIVATIVELY ON BEHALF OF ACCRETIVE HEALTH, INC., PLAINTIFF,
v.
EDGAR M. BRONFMAN JR., J. MICHAEL CLINE, STEVEN N. KAPLAN, STANLEY N. LOGAN, DENIS J. NAYDEN, ARTHUR H. SPIEGEL III, MARY A. TOLAN, JOHN T. STATON, AND MARK A. WOLFSON, AND ACCRETIVE HEALTH, INC., NOMINAL DEFENDANT, DEFENDANTS. JEFFREY GOODWIN, DERIVATIVELY ON BEHALF OF ACCRETIVE HEALTH, INC.,
PLAINTIFF,
v.
EDGAR M. BRONFMAN JR., J. MICHAEL CLINE, STEVEN N. KAPLAN, STANLEY N. LOGAN, DENIS J. NAYDEN, GEORGE P. SHULTZ, ARTHUR H. SPIEGEL III, MARY A. TOLAN, MARK A. WOLFSON, AND JOHN T. STATON, AND ACCRETIVE HEALTH, INC., NOMINAL DEFENDANT, DEFENDANTS.



The opinion of the court was delivered by: Judge Feinerman

Judge Feinerman

MEMORANDUM OPINION AND ORDER

Plaintiffs Robert Haith and Jeffrey Goodwin brought these state law shareholder derivative actions on behalf of Accretive Health, Inc., a Delaware corporation, in the Circuit Court of Cook County, Illinois. Doc. 1-1 (12 C 6781); Doc. 1-1 (12 C 6798). Although the suits have not been consolidated, they are materially identical for purposes of this opinion. The individual defendants, who are directors and officers of Accretive Health, removed the suits to federal court under 28 U.S.C. §§ 1441. Doc. 1 (12 C 6781); Doc. 1 (12 C 6798). Defendants do not assert that the case falls within the federal courts' diversity jurisdiction, see 28 U.S.C. § 1332, or that Plaintiffs' claims were created by federal law. Rather, they contend that the claims, although created by state law, fall within the federal courts' "arising under" jurisdiction, 28 U.S.C. § 1331, under the standard set forth in Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308, 314 (2005). Plaintiffs disagree, and each has moved to remand his case to state court under 28 U.S.C. § 1447(c). Doc. 17 (12 C 6781); Doc. 14 (12 C 6798). The motions are granted, but Plaintiffs' request for an award of attorney fees and costs is denied.

Background

Haith's and Goodwin's complaints make substantially similar factual allegations and legal claims. Plaintiffs are Accretive Health shareholders and were shareholders at all relevant times. Doc. 1-1 (12 C 6781) at ¶ 13; Doc. 1-1 (12 C 6798) at ¶ 11. Plaintiffs allege that Defendants made numerous public statements, in press releases and SEC filings, that made false or misleading statements and omissions about Accretive Health's operations and financial prospects. Doc. 1-1 (12 C 6781) at ¶¶ 3, 8, 38, 40, 42, 49, 54; Doc. 1-1 (12 C 6798) at ¶¶ 3, 28-31, 33-34, 36-37, 43. In particular, Plaintiffs allege that Defendants concealed their knowledge that Accretive Health was violating consumer privacy standards imposed by the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), 42 U.S.C. § 1320d et seq., the Health Information Technology for Economic and Clinical Health Act ("HITECH Act"), 42 U.S.C. § 17921 et seq., state consumer protection laws, and its contract with a large client. Doc. 1-1 (12 C 6781) at ¶ 54; Doc. 1-1 (12 C 6798) at ¶ 43. Plaintiffs allege that Defendants' alleged misstatements and omissions had the effect of artificially inflating the price of Accretive Health's stock and then, when the truth came out, of causing that price to fall substantially, to the detriment of shareholders. Doc. 1-1 (12 C 6781) at ¶¶ 5, 7, 9, 50; Doc. 1-1 (12 C 6798) at ¶¶ 4, 6, 32, 38-39, 42. Plaintiffs further allege that Accretive Health's violations led the Attorney General of Minnesota to file a lawsuit against it and to release a report detailing its unsavory debt collection practices; led the New York Times to publish an article that put the company's debt collection practices in bad odor, see Jessica Silver-Greenberg, "Debt Collector Is Faulted for Tough Tactics in Hospitals," New York Times (April 24, 2012); led the Minnesota Department of Commerce to temporarily suspend the company's Minnesota debt collection license; and led a group of plaintiffs to sue the company for violating federal securities law. Doc. 1-1 (12 C 6781) at ¶¶ 4, 6, 9, 44-46, 51-52; Doc. 1-1 (12 C 6798) at ¶¶ 35, 40-41.

Because Accretive Health is a Delaware corporation, the internal affairs doctrine provides that Delaware law governs Plaintiffs' claims. See Nagy v. Riblet Prods. Corp., 79 F.3d 572, 576 (7th Cir. 1996). Haith asserts three counts of breach of fiduciary duty, one count of unjust enrichment, one count of abuse of control, one count of gross mismanagement, and one count of waste of corporate assets. Doc. 1-1 (12 C 6781) at ¶¶ 94-123. Goodwin asserts a single count of breach of fiduciary duty. Doc. 1-1 (12 C 6798) at ¶¶ 83-88. Neither Haith nor Goodwin made a demand on Accretive Health's Board of Directors to bring this action against Defendants; both allege that demand would be futile and thus is excused. Doc. 1-1 (12 C 6781) at ¶¶ 59-93; Doc. 1-1 (12 C 6798) at ¶¶ 64-82; see Braddock v. Zimmerman, 906 A.2d 776, 784-85 (Del. 2006) (describing the demand futility doctrine); In re Abbott Labs. Derivative Shareholders Litig., 325 F.3d 795, 803-04 (7th Cir. 2003). One other derivative suit alleging essentially the same misconduct by the same group of defendants, and also alleging demand futility, is pending before the undersigned judge. Marvin H. Maurras Revocable Trust v. Bronfman, 12 C 3395 (N.D. Ill. filed May 3, 2012). Unlike Haith's and Goodwin's suits, the Maurras Trust suit falls within the court's diversity jurisdiction. Defendants in Maurras Trust there have moved to dismiss on the ground, among others, that the plaintiffs there did not adequately allege demand futility under Federal Rule of Civil Procedure 23.1. Id., Doc. 93.

Discussion

I. Whether Plaintiffs' Claims "Arise Under" Federal Law

As mentioned, Defendants contend that Haith's and Goodwin's suits fall within the federal courts' "arising under" jurisdiction, 28 U.S.C. § 1331. Grable held that "arising under" jurisdiction extends to state law claims that "necessarily raise a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities." 545 U.S. at 314. Defendants assert that Plaintiffs' claims necessarily raise the following issues of federal law: (1) whether Accretive Health violated two federal privacy statutes, the HIPAA and the HITECH Act; (2) whether Accretive Health violated the federal Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq., as incorporated into Minnesota law; and (3) whether Defendants made or caused to be made misleading statements and omissions in SEC filings, in violation of federal securities law. Grable jurisdiction does not apply for at least two reasons: none of the federal issues ostensibly raised by Plaintiffs' state law claims is "substantial," and entertaining this case in federal court would disrupt the congressionally approved balance of federal and state judicial responsibilities.

The Supreme Court clarified Grable's "substantial issue" requirement in Gunn v. Minton, No. 11-1118, 568 U.S. ___ (U.S. Feb. 20, 2013). Gunn reaffirmed the principle, articulated in Grable, 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, slip op. at 6. With respect to the third element, there is no doubt that the federal issues noted above are substantial to the parties in these cases, in the sense that they could decide the outcome of this litigation. As Gunn notes, however, "that will always be true when the state claim 'necessarily raise[s]' a disputed federal issue." Id. at 8. Accordingly, instead of considering whether an issue is substantial to the parties, "[t]he substantiality inquiry under Grable looks instead to the importance of the issue to the federal system as a whole." Ibid. Gunn provides two examples of state law claims that did raise "substantial" federal issues:

In Grable itself, for example, the Internal Revenue Service had seized property from the plaintiff and sold it to satisfy the plaintiff's federal tax delinquency. Five years later, the plaintiff filed a state law quiet title action against the third party that had purchased the property, alleging that the IRS had failed to comply with certain federally imposed notice requirements, so that the seizure and sale were invalid. In holding that the case arose under federal law, we primarily focused not on the interests of the litigants themselves, but rather on the broader significance of the notice question for the Federal Government. We emphasized the Government's strong interest in being able to recover delinquent taxes through seizure and sale of property, which in turn required clear terms of notice to allow buyers to satisfy themselves that the Service has touched the bases necessary for good title. The Government's direct interest in the availability of a federal forum to vindicate its own administrative action made the question an important issue of federal law that sensibly belonged in a federal court.

A second illustration of the sort of substantiality we require comes from Smith v. Kansas City Title & Trust Co., 255 U. S. 180 (1921), which Grable described as the classic example of a state claim arising under federal law. In Smith, the plaintiff argued that the defendant bank could not purchase certain bonds issued by the Federal Government because the Government had acted unconstitutionally in issuing them. We held that the case arose under federal law, because the decision depends upon the determination of the constitutional validity of an act of Congress which is directly drawn in question. Again, the relevant point was not the importance of the question to the parties alone but rather the importance more generally of a determination that the Government securities were issued under an unconstitutional law, and hence of no validity.

Gunn, slip op. at 8-9 (citations, brackets, and internal quotation marks omitted).

Gunn itself provides a contrasting case. The plaintiff, Vernon Minton, was an inventor who had hired the defendants to represent him in a federal court patent suit. Id. at 1-2. The federal court ruled that Minton's patent was invalid and then, when Minton's attorneys sought reconsideration based on a new argument regarding validity, the court held that Minton had forfeited the argument by raising it too late. Id. at 2. Minton then brought a state law attorney malpractice suit against his patent attorneys, alleging that their untimely submission of the new argument had cost him his patent. Ibid. A dispositive question presented by Minton's malpractice suit was whether the forfeited argument would have succeeded on the merits; if it would not have succeeded, then the defendants' forfeiture of the argument did not cost Minton his patent and thus caused him no harm. Id. at 2-3. This question necessarily raised a disputed issue of federal law, ...


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