United States District Court, C.D. California
PROCEEDINGS (IN CHAMBERS): ORDER GRANTING MOTION TO
S. GUTIERREZ, UNITED STATES DISTRICT JUDGE
the Court is Plaintiff Philip Godfrey’s
(“Godfrey”) motion to remand. Dkt. #23. The Court
finds the matter appropriate for decision without oral
argument. See Fed. R. Civ. P. 78(b); L.R. 7-15.
After considering the moving, opposing, and reply papers, the
Court GRANTS the motion and REMANDS the case to state court.
March 22, 1983 to January 12, 1988, Godfrey was a registered
broker with member firms of the National Association of
Securities Dealers (“NASD”), the predecessor of
Defendant Financial Industry Regulatory Authority, Inc.
(“FINRA”). Compl. ¶¶ 9-10. In
1988, Godfrey purchased securities for members of his family.
Id. ¶ 12. Later that year, Godfrey’s
then-wife claimed that Godfrey had improperly converted the
funds for his own use and benefit. Id. ¶ 13.
NASD filed a complaint against Godfrey on the basis of the
allegations made by Godfrey’s then-spouse. Id.
¶ 16. Although Godfrey alleges that he did nothing
wrong, he entered into a settlement with NASD. Id.
¶¶ 14-18. Godfrey’s complaint and settlement
information is currently included in FINRA’s Central
Registration Depository (“CRD”), and is available
to the public through FINRA’s “BrokerCheck”
feature. Id. ¶¶ 10-11, 16-18. Godfrey
alleges that his record is otherwise clean. Id.
March 25, 2016, Godfrey filed an action for expungement and
declaratory relief in the Superior Court for the County of
Los Angeles. Dkt. #1-1. FINRA timely removed to this Court.
Dkt. #1. On May 23, 2016, Godfrey filed the present motion to
remand. Dkt. #23.
subject matter jurisdiction is based on the presence of a
federal question, see 28 U.S.C. § 1331, or on
complete diversity of citizenship between the parties,
see 28 U.S.C. § 1332. Section 1331 states that
“[t]he district courts shall have original jurisdiction
of all civil actions arising under the Constitution, laws, or
treaties of the United States.” If at any time before
the entry of final judgment it appears that the Court lacks
subject matter jurisdiction over a case removed from state
court, it must remand the action to state court. See
28 U.S.C. § 1447(c); Int’l Primate Prot.
League v. Adm’rs of Tulane Educ. Fund, 500 U.S.
72, 87 (1991). There is a “strong presumption”
against removal jurisdiction, and the party seeking removal
always has the burden of establishing that removal is proper.
Hunter v. Philip Morris USA, 582 F.3d 1039, 1042
(9th Cir. 2009). If there is any ambiguity as to the
propriety of removal, federal jurisdiction must be rejected.
removed “on the grounds that this Court has original
jurisdiction over this action pursuant to 28 U.S.C. §
1331 and that the state court action is preempted by federal
law.” Notice of Removal 1, 4-5. “The
presence or absence of federal-question jurisdiction is
governed by the ‘well-pleaded complaint rule, ’
which provides that federal jurisdiction exists only when a
federal question is presented on the face of the
plaintiff’s properly pleaded complaint.”
Retail Prop. Trust v. United Bhd. of Carpenters &
Joiners of Am., 768 F.3d 938, 947 (9th Cir. 2014)
(quoting Caterpillar Inc. v. Williams, 482 U.S. 386,
392 (1987)). California has a cause of action for expungement
of public records. Lickiss v. Fin. Indus. Regulatory
Auth., 208 Cal.App.4th 1125, 1135 (2012).
Godfrey’s two causes of action are for expungement
under California law and declaratory relief under California
law. Compl. ¶¶ 20-28. Thus, federal
jurisdiction is not presented on the face of Godfrey’s
does not, however, end the inquiry. “The artful
pleading doctrine is a corollary to the well-pleaded
complaint rule, and provides that although the plaintiff is
master of his own pleadings, he may not avoid federal
jurisdiction by omitting from the complaint allegations of
federal law that are essential to the establishment of his
claim.” Lippitt v. Raymond James Fin. Servs.,
Inc., 340 F.3d 1033, 1041 (9th Cir. 2003) (alteration
and internal quotation marks omitted) (quoting Hansen v.
Blue Cross of Cal., 891 F.2d 1384, 1389 (9th Cir.
1989)), as amended (Sept. 22, 2003). Courts have
used the artful pleading doctrine in (1) complete preemption
cases, and (2) substantial federal questions cases. See
Id . (citing Metro. Life Ins. Co. v. Taylor,
481 U.S. 58, 64-65 (1987), and Franchise Tax Bd. of State
of Cal. v. Constr. Laborers Vacation Trust for S. Cal.,
463 U.S. 1, 27-28 (1983)). FINRA argues that federal
jurisdiction is proper under both complete-preempetion and
substantial-federal-question theories. Opp. 7-15.
Statutory Background, FINRA Rules, and Prior Case
“is the primary regulatory body for the broker-dealer
industry.” Sparta Surgical Corp. v. Nat’l
Ass’n of Sec. Dealers, Inc., 159 F.3d 1209, 1210
(9th Cir. 1998), abrogated on other grounds by Merrill
Lynch, Pierce, Fenner & Smith Inc. v. Manning, 136
S.Ct. 1562 (2016). Under the Securities Exchange Act of 1934,
FINRA is required to promulgate rules to protect investors
and the public interest, and enforce these rules through
disciplinary proceedings and sanctions. See Krull v.
S.E.C., 248 F.3d 907, 910 (9th Cir. 2001). The Exchange
Act establishes a review process for disciplinary proceedings
that encompasses both administrative and judicial review.
See Id . at 909-12; Swirsky v. Nat’l
Ass’n of Sec. Dealers, 124 F.3d 59, 61-62 (1st
Cir. 1997). Administrative appeals proceed directly to the
applicable circuit. See Swirsky, 124 F.3d at 62
(“The third tier of the process provides for review of
final SEC orders by the United States Courts of
duties also “include the duty to ‘establish and
maintain a system for collecting and retaining registration
information’ about registered broker-dealers.”
Doe v. Fin. Indus. Regulatory Auth., Inc., No. CV
13-06436 DDP ASX, 2013 WL 6092790, at *1 (C.D. Cal. Nov. 19,
2013) (quoting 15 U.S.C. § 78o-3(i)(1)(A)).
“‘[R]egistration information’ means the
information reported in connection with the registration or
licensing of brokers and dealers and their associated
persons, including disciplinary actions, regulatory,
judicial, and arbitration proceedings . . . .”
Id. § 78o-3(i)(3)(5). FINRA fulfills
this duty via the CRD database and BrokerCheck. See
Doe, 2013 WL 6092790, at *1; Compl.
¶¶ 10-11; Opp. 6. Under FINRA Rule 8312,
FINRA shall release information for a “person who was
formerly associated with a BrokerCheck Firm, but who has not
been associated with a BrokerCheck Firm within the preceding
ten years, and was ever the subject of a final regulatory
action . . . .” FINRA Rule 8312(c)(1)(A).
least four courts have addressed remand in similar
FINRA-expungement actions, and all have found that remand was
proper. In In re Lickiss, the plaintiff sought
expungement of “references to certain customer claims
and settlements” under California law. No. C-11-1986
EMC, 2011 WL 2471022, at *1 (N.D. Cal. June 22, 2011). FINRA
moved to remand, arguing that federal courts had exclusive
jurisdiction under 15 U.S.C. § 78aa. Id. at *2.
Section 78aa states that the “district courts . . .
shall have exclusive jurisdiction of . . . all suits in
equity and actions at law brought to enforce any liability or
duty created by this chapter or the rules and regulations
thereunder.” 15 U.S.C. § 78aa(a). The
Lickiss court explained that although FINRA has a
duty to collect and retain registration information, it has
no corresponding duty to expunge. Id. at *3. The
Court also noted that FINRA Rule 2080, which states in
relevant part that “[m]embers or associated persons
seeking to expunge information from the CRD system arising
from disputes with customers must obtain an order from a
court of competent jurisdiction directing such expungement or
confirming an arbitration award containing expungement
relief, ” “sets forth procedures, not a
substantive duty, ” and seems to contemplate an action
in state court due to the use of the phrase “court of
competent jurisdiction.” Id. at *4. The Court
thus found that there was no exclusive jurisdiction for
expungement actions under state law, and remanded the case
for lack of subject matter jurisdiction. Id.
plaintiff in Spalding v. Financial Industry Regulatory
Authority, Inc. sought expungement of customer-dispute
information under Georgia law. No. 1:12-CV-1181-RWS, 2013 WL
1129396, at *1-2 (N.D.Ga. Mar. 19, 2013). FINRA offered two
theories of federal jurisdiction this time-that federal
courts had exclusive jurisdiction under § 78aa because
expungement implicated a duty, and that the suit would
require the state court to interpret federal law (which was
identified as Rule 2080). Id. at *2-3. Citing
Lickiss, the Spalding court found that
there was no exclusive jurisdiction because there was no duty
to expunge under the Exchange Act or Rule 2080. Id.
at *3-5. The court also rejected FINRA’s argument that
substantial federal issues were implicated because
expungement would require “a reading and interpretation
of Rule 2080” and involved a “comprehensive
federal regulatory scheme in which FINRA plays an integral
role in enforcing the 1934 Act and regulating participants in
the securities industry.” Id. at *5. The court
explained that nothing in the expungement action would
require interpretation of Rule 2080, and that the existence
of a compressive federal regulatory scheme was insufficient
on its own to establish federal jurisdiction. Id. at
*5-6. The Court thus remanded the case for lack of subject
matter jurisdiction. Id. at *6.
like Lickiss, addressed the expungement of
customer-dispute information under California law. 2013 WL
6092790, at *1. FINRA again argued that federal courts have
exclusive jurisdiction over expungement of customer-dispute
information, and that the case involved substantial issues of
federal law. Id. at *2-3. Citing Lickiss,
the Doe court held that there was no duty to expunge
that would trigger exclusive jurisdiction. Id.
Citing Spalding, the court also held that there was
no substantial issue of federal law implicated because the
plaintiff “d[id] not claim that FINRA failed to fulfill
any particular duty or that FINRA’s rules are facially
invalid, ” and “no determination [would need to]
be made by the [state court] as to whether ...