Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—S.D.N.Y.: Federal judge kicks S&P lawsuits back to state courts, (Jun 4, 2014)

By Anne Sherry, J.D.

The judge charged with the multidistrict litigation (MDL) comprising state actions against Standard & Poor’s (and, in one state action, Moody’s) remanded the cases back to the respective state courts for lack of federal subject matter jurisdiction. The court did not reach this conclusion lightly, it wrote, recognizing that the MDL process offers consistency and efficiencies. However, S&P and Moody’s failed to rebut the presumption against federal jurisdiction, which is especially strong where states are seeking to enforce state laws and protect their own citizens (In re Standard & Poor’s Rating Agency Litigation, June 3, 2014, Furman, J.).

Procedural background. In 17 of the 19 cases consolidated into the MDL, states brought suit in their own courts to enforce state consumer-protection and deceptive trade practices laws; S&P and Moody’s removed those cases to federal court. S&P was the plaintiff in the other two cases, having sued South Carolina and Tennessee seeking declaratory and injunctive relief against those states’ then-imminent civil enforcement actions in state court. All 17 states joined in a motion to remand the state cases back to state court on the basis of Federal Rule of Civil Procedure 12(b)(1), with South Carolina and Tennessee additionally moving to dismiss the declaratory judgment actions on the basis of federal abstention.

Allegations. The states do not challenge the issuer-pays model of obtaining credit ratings, nor any individual ratings. Rather, the lawsuits challenge the agencies’ public statements about the integrity, independence, and objectivity of their ratings, such as various assertions S&P made either in its Code of Professional Conduct or regarding that code.

Federal question. While, under the Supreme Court’s 2005 Grable decision, federal jurisdiction may lie over state-law claims that implicate significant federal issues, the court held that the actions against S&P did not fall within the four prongs enunciated by the Supreme Court: that the federal issue is necessarily raised, actually disputed, substantial, and capable of resolution in federal court without disrupting the federal-state balance approved by Congress.

Although the federal Credit Rating Agency Reform Act of 2006 required S&P to promulgate a code of conduct, assessing whether S&P’s statements in that code of conduct and elsewhere were false and misleading does not depend on an examination of federal standards; the states could prevail by showing a gap between S&P’s representations, whether or not required by law, and its conduct. Significantly, the states need not show that the code of conduct violated CRARA or any other federal law. Having foregone that argument, the states “cannot now be forced to litigate in a forum they did not choose,” the court concluded.

Mississippi action. With respect to the Mississippi action, which was removed under the general diversity statute of 28 U.S.C. 1332(a), the court held that Mississippi was the real party in interest. As a state is not a citizen for purposes of the general diversity statute, complete diversity was lacking, and the federal court lacked diversity jurisdiction over the case. The court would not award Mississippi attorney’s fees and costs relating to the removal action, however, because S&P had had a colorable argument that removal was proper and thus an “objectively reasonable” basis for seeking removal.

Tennessee and South Carolina declaratory judgment action. Finally, Tennessee and South Carolina requested that the court abstain from the declaratory judgment proceedings against them under Younger v. Harris. Abstention was required, the court concluded, because there was a pending state proceeding in each state, the proceedings implicate an important state interest, and the state proceeding affords S&P an adequate opportunity for judicial review of its federal constitutional claims.

The case is No. 13-MD-2446.

Attorneys: Dustin McDaniel, Arkansas Attorney General’s Office, for James DePriest. Sean Alan Smith, Missouri Attorney General’s Office, for The Commissioner of Securities. John M. Abel, PA Office of Attorney General, for Commonwealth of Pennsylvania. Brian Francis McDonough, New Jersey Division of Law, for John J. Hoffman. Adam Nelson Zurofsky (Cahill Gordon & Reindel LLP) and Kevin A. Crass (Friday, Eldredge & Clark, LLP) for McGraw-Hill Companies Inc. and Standard & Poor’s Financial Services LLC.

Companies: The McGraw-Hill Companies, Inc.; Standard and Poor's Financial Services LLC; Moody's Corp.; Moody's Investors Service, Inc.

Cases: StateUnfairTradePractices NewYorkNews