On July 24, 2015, the Second Circuit held that “when confronted with a difficult or novel question of subject matter jurisdiction, a court may sometimes dismiss the case on a threshold, non‐merits issue.”
In 2002 Facebook launched an initial public offering (IPO). Several of its shareholders brought putative derivative actions claiming that “Facebook’s directors breached duties owed to the company because its Registration Statement failed to disclose the mid‐quarter impact of mobile usage on the company’s projected growth”.
The case was designated as subject to MDL (Multidistrict Litigation). The MDL Panel transferred all of the actions to the United States District Court for the Southern District of New York.
Facebook sought dismissal of all of the related derivative actions.
The District Court dismissed the Plaintiffs’ actions on threshold grounds, ruling that: (i) plaintiffs were not actual or equitable owners of Facebook stock at the time of the alleged wrongdoing; (ii) plaintiffs failed to adequately plead; (iii) the claims were unripe. The court also concluded that a ruling on subject matter jurisdiction would involve a “possible arduous inquiry”, since the court would have to “delve into complicated issues of state law, and would have had to decide whether any of plaintiffs claims necessarily raise a federal question…”
Plaintiffs appealed on the ground that the court erred in considering these bases for dismissal before adjudicating subject matter jurisdiction.
The Second Circuit affirmed. It highlighted how none of Plaintiffs’ claims satisfied the threshold requirements provided for by F.R.Civ.P. 23.1. Indeed, none of the shareholders adequately pleaded contemporaneous share ownership at the time of the transaction. As a consequence, “the district court’s dismissal of all three actions was not based on any deficiency as to the merits of the allegations pleaded; rather it was based, inter alia, on lack of standing to proceed in a derivative capacity because plaintiffs were not contemporaneous stock owners”.
“[T]he complicated questions of subject matter jurisdiction arise in this case only if plaintiffs may properly proceed in a derivative capacity”. “Absent derivative standing, there is no derivative case, and no need to proceed to a jurisdictional inquiry”.
In addition, “when a determination as to subject matter jurisdiction raises a difficult or novel question, the district court has discretion to decide certain threshold bases for dismissal without deciding whether it has subject matter jurisdiction”.
Consequently, the Court concluded that “it was not error for the district court to decide, as a threshold matter”.
In re Facebook, Inc. IPO Derivative Litig. is available at http://blogs.reuters.com/alison-frankel/files/2015/07/facebookipoderiv-appellopinion.pdf
For more info, Francesca Giannoni-Crystal