Opinion
Case Nos. C-02-1787-VRW, C-02-1788-VRW, C-02-1791-VRW, C-02-1854-VRW, C-02-1899-VRW, C-02-1914-VRW, C-02-2057-VRW, C-02-2061-VRW, C-02-2207-VRW
August 6, 2002
ORDER.
In the nine above-captioned related cases, the Attorney General of California (AG) alleges that Various wholesale electricity sellers Violated California's unfair business practices law, Cal. BP Code § 17200. Seven actions assert only state law claims under § 17200. Defendants in these seven cases removed to federal court; the AG seeks remand to state court. In addition, defendants Mirant and Reliant have moved to dismiss each of the three actions against them. In addition to § 17200 claims, two of the actions also allege federal antitrust claims under § 7 of the Clayton Act, 15 U.S.C. § 18. Plaintiffs Department of Water Resources and the State of California join these two federal antitrust actions. For ease of exposition, the court refers to all plaintiffs as "the AG."
I
These cases are but some of many filed in the wake of California's attempt to restructure the transmission, generation, sale and distribution of electricity in that state and the subsequent electricity crisis in summer 2000. Beginning at least as early as 1992, California embarked on a regulatory restructuring to rely more fully on market forces as opposed to the historic cost of service regulatory regime. The restructuring effort crystalized in passage by the California legislature of Assembly Bill 1890; the vote was unanimous.
California's restructuring scheme involved the creation of two new non-governmental corporations to orchestrate the transmission and sale of electricity, organized under California law but regulated by the Federal Energy Regulatory Commission (FERC): the Independent System Operator (ISO) and the California Power Exchange (PX). In short, until it ceased operating, the PX ran auctions for sale and purchase of electricity on a day ahead and same day basis. The ISO operates the electricity grid and, to that end, runs the spot market for electricity. During the time period in question, if consumer demand were not met by scheduled supplies into the PX or other sources, the ISO was required to procure additional electricity to serve consumers' requirements and maintain the stability of the grid. To facilitate this, the ISO purchases reserve capacity from wholesalers. This reserve capacity is left idle (or "reserved") until the ISO requires additional generation of power. If the ISO requires the additional power, it issues an order to the wholesaler to generate such power out of the reserve capacity; if not, the reserved capacity is left ungenerated.
In restructuring electricity regulation, California sought to separate the utilities' vertically-integrated generation, transmission and distribution functions with the goal of providing consumer access to competitively priced generation. As a part of this process, the state's major investor-owned utilities (IOUs) divested several power generation plants. Reliant bought five of these plants in southern California; Mirant purchased three plants in northern California.
Unfortunately, California's program did not proceed smoothly. Beginning in June 2000, wholesale electricity prices in California soared dramatically, setting off a crisis in the California energy market. Against this backdrop, the AG has initiated a series of lawsuits against wholesale electricity sellers, alleging unfair business practices. The undersigned currently has pending fifteen such cases before him. This order addresses the first nine of those cases. The cases are grouped as follows:
Antitrust cases
People v. Mirant, 02-1787-VRW, and People v. Reliant, 02-1788-VRW, allege violation of § 7 the Clayton Act, 15 U.S.C. § 18, and a corollary state law claim under California's unfair business practices statute, Cal. BP § 17200. These suits allege that Reliant and Mirant's acquisitions of power generation plants in southern and northern California, respectively, lessened competition in violation of § 7 of the Clayton Act. Reliant and Mirant account for 28% and 44% of the generation capacity of the alleged relevant markets, respectively, which the AG defines as "the [s]outhern [or northern] California market for the spot supply of wholesale electricity and reserves during higher demand." Compl. (02-1788: Doc. # 1) at ¶ 24. These actions were originally filed in federal court; as the claims are federal, jurisdiction is proper under 28 U.S.C. § 1331. Currently pending before the court are Reliant and Mirant's motions to dismiss these actions. See, 02-1787: Doc. # 14; 02-1788: Doc. # 14.
Failed to File/Overcharge cases
People v. Mirant, 02-2207-VRW, People v. Reliant, 02-2061-VRW, and People v. Williams Energy Marketing Trading Co., 02-2057-VRW, allege two separate violations of California's unfair business practices law, Cal. BP § 17200. First, the AG alleges that these companies failed to file rate schedules as required by the Federal Power Act, 16 U.S.C. § 791a et seq (FPA). Second, the AG alleges that the companies charged unjust and unreasonable rates, as determined by the FERC, which has plenary regulatory authority over wholesale electricity sales. These cases were originally brought in California state court. Defendants removed, asserting federal question jurisdiction over these state law claims for two related reasons: first, the claims are necessarily federal in nature and second, the claims involve significant and disputed questions of federal law. In all three cases, the AG has moved to remand. See 02-2057: Doc. # 27, 02-2061: Doc. # 16, 02-2207: Docs ## 19, 20. In addition, Mirant and Reliant move to dismiss the actions against them. See, Mirant Br. (02-2207: Doc. # 14); Reliant Br. (02-2061: Doc #9.
Ancillary Services cases
People v. Mirant, 02-1914-VRW, People v. Reliant, 02-1791-25 VRW, People v. Dynegy, Inc., 02-1854-VRW and People v. Williams Energy Marketing Co., 02-1899-VRW, also allege violation of California's unfair business practices law, Cal. BP Code § 17200. In these cases, the AG asserts one cause of action under § 17200, alleging that defendants engaged in various unfair business practices with respect to the ancillary services they contracted to provide the ISO. For example, the AG alleges that defendants resold energy that they had contracted to keep in reserve. The AG seeks restitution, disgorgement of profits, statutory fines and injunctive relief. These cases were originally filed in state court; again, defendants removed, asserting essentially the same bases for removal as above. The AG has moved to remand in all of these cases. See, 02-1791: Docs ## 19, 25; 02-1854: Doc. # 13; 02-1899: Doc. # 16; 02-1914: Doc. # 13. In addition, Reliant and Mirant move to dismiss the actions against them. See, Reliant Br. (02-1791: 12 Doc. # 22); Mirant Br. (02-1914: Doc. # 10).
In total, there are seven motions to remand and six motions to dismiss before the court. Within each group of cases, these motions are substantially identical, making five groups of motions (two sets of remand motions and three sets of motions to dismiss). In this order, the court deals only with the remand motions. Some of the defendants have stipulated to await the court's ruling on the remand motions before pleading to or otherwise responding to the complaints. Furthermore, not all cases involving the issues at bar are now before the court. While there is, of course, no question that this court has jurisdiction over the Clayton Act cases, those cases require further briefing before a decision on the motions to dismiss is appropriate. Orderly case management, therefore, suggests that at this time, the court confine itself to the remand question — whether this court has jurisdiction over the non-Clayton Act cases.
II
Removal to federal court is governed by 28 U.S.C. § 1441. Suits filed in state court may be removed to federal court if the federal court would have had original jurisdiction over the suit. 28 U.S.C. § 1441(a). An action may be remanded to state court because the federal court lacks subject matter jurisdiction or because of a defect in the removal procedure. 28 U.S.C. § 1447(c). The removal statute is strictly construed against removal jurisdiction and any doubt must be resolved in favor of remand. See, Plute v. Roadway Package System, Inc., 141 F. Supp.2d 1005, 1007 (N.D. Cal. 2001), citing Boggs v. Lewis, 863 F.2d 662, 663 (9th Cir 1988). As the party invoking federal court jurisdiction, defendants have the burden of proving that removal was proper. See, Emrich v. Touch Ross Co., 846 F.2d 1190, 1195 (9th Cir 1988).
A
As an initial matter, the AG asserts that removal jurisdiction is improper because the state did not waive sovereign immunity under the Eleventh Amendment with respect to suit in federal court. Because the Eleventh Amendment serves to "avoid the indignity of subjecting a State to the coercive process of judicial tribunals at the instance of private parties," Puerto Rico Aqueduct and Sewer v. Metcalf Eddy, 506 U.S. 139, 146 (1993), it does not bar suits in which the state is a plaintiff. It is well settled that "where a state is suing parties who are not in other States, the jurisdiction of this Court is not exclusive and that those suits "may now be brought in or removed to the Circuit Courts (now the District Courts)' * * * ." Illinois v. Milwaukee, 406 U.S. 91, 101, (1972) (quoting Ames v. Kansas, 111 U.S. 449, 470 (1884)). The AG asserts that more recent Supreme Court precedent suggests a more expansive view of the Eleventh Amendment and this court should not limit its application in this case. The court disagrees. Illinois is binding. The Eleventh Amendment does not bar removal jurisdiction.
B
Defendants assert that original jurisdiction over these actions would have been proper under 28 U.S.C. § 1331 governing federal question jurisdiction. Federal question jurisdiction is proper if an action arising under the Constitution, laws or treaties of the United States. See, 28 U.S.C. § 1331. In interpreting § 1331, courts follow the "well-pled complaint" rule, which holds that the federal claim upon which jurisdiction is based must be evident from the plaintiff's well-pled complaint; federal defenses are insufficient to confer jurisdiction. See, Franchise Tax Bd v. Construction Laborers Vacation Trust, 463 U.S. 1, 2 (1983). As the master of his complaint, a plaintiff may "by eschewing claims based on federal law, choose to have the cause heard in state court." Caterpillar, Inc. v. Williams, 482 U.S. 386, 399 (1987). The AG's complaints in these actions allege only state law claims and therefore do not, on their face, allege federal claims. But the AG's complaints predicate violation of state law on violation of the FPA, a federal law. Defendants claim that the complaints therefore fall within the exceptions to the well-pled complaint rule. There are three exceptions to that rule:
(1) federal law completely preempts state law
(2) the claim is necessarily federal in character; or
(3) the right to relief depends on the resolution of a substantial, disputed federal question.
Arco Environmental Remediation, LLC v. Dep't of Health and Environmental Quality of the State of Montana, 213 F.3d 1108, 114 (9th Cir 2000). The parties agree that complete preemption, the first exception, does not apply in these cases. Defendants assert that the second and third exceptions do apply.
A claim is necessarily federal "when it falls within the express terms of a statute granting federal courts exclusive jurisdiction over the subject matter of the claim." Hendricks v. Dynegy Power Marketing, Inc. 160 F. Supp.2d 1155, 1161 (S.D. Cal 2001). Thus, in Brennan v. Southwest Airlines Co., the Ninth Circuit held that an action alleging unfair business practices under § 17200 was inherently federal because it sought refund of money collected by airlines as an allegedly unauthorized federal tax. 134 F.3d 1405, 1409 (9th Cir 1998). As the Internal Revenue Code provided the exclusive remedy for a tax refund, the claim was necessarily federal in character. See, id. The court relied upon the definition of a tax refund in the IRC, holding that plaintiffs' requested relief fell within that definition. In contrast, in Arco, the Ninth Circuit held that a suit seeking disclosure of information relating to a CERCLA cleanup was not necessarily federal because disclosure of information did not challenge a CERCLA cleanup as required under the statute at issue. Thus, in determining whether a claim is necessarily federal, courts focus on whether the federal issue falls within the statutory grant of exclusive jurisdiction.
The third exception, whether a claim raises a substantial, disputed federal question, overlaps somewhat with the second. To fall within this exception, a claim must require resolution of a substantial, disputed federal question. Thus, in Hendricks, the court found that remand was required because plaintiffs' Cartwright Act and § 17200 claims could succeed without reference to the FPA. 160 F. Supp.2d at 1163. While the Hendricks plaintiffs' complaints alleged violation of the FPA as one possible theory that defendants violated the Cartwright Act and § 17200, this was not the only theory upon which plaintiffs' claims were based. See, id. On that basis, the Hendricks court decided that the right to relief did not require resolution of a federal question. See, id.
With these principles in mind, the court turns to the particular facts of these cases.
In the failed to file/overcharge cases, the AG predicates both of his § 17200 directly on violation of the FPA:
[D]efendants have engaged in acts of unfair competition as defined in Business and Professions Code section 17200, as follows: Each and every sale or purchase of wholesale electricity by defendants for which defendants failed to file the charge, rate, price or contract reflecting the terms of the sale or purchase, as required by the Federal Power Act, FPA regulations, and FERC orders setting forth filling requirements.
[D]efendants have engaged in acts of unfair competition as defined in Business and Professions Code section 17200, as follows: Each and every rate, charge, or price charged by defendants in violation of the Federal Power Act, 16 U.S.C. § 824d(a), as unfair, unreasonable, and therefore unlawful.
Compl. (Doc. # 02-2061:1, Exh A) at ¶¶ 49, 52; Compl. (Doc. # 02-28 2207:1, Exh A) at ¶¶ 48, 51; Compl. (Doc. # 02-2057:1, Exh A) at ¶¶ 41, 45. These are the only allegations upon which the AG bases claims for relief. In his memorandum in support of remand, the argues that his § 17200 claims do not require resolution of a substantial, disputed federal question because a § 17200 claim may be based upon unfair or unjust practices under state law, rather than unlawful practices under federal law. Thus, the AG asserts, his § 17200 claim need not prove a violation of the FPA. This belies what the claims actually allege. The claims allege violation of the FPA as the only business practice challenged. Such claims necessarily involve resolution of a federal question: whether defendants violated the FPA.
The FPA has a very broad exclusive jurisdiction provision:
[Federal courts] shall have exclusive jurisdiction of violations of this Act or the rules, regulations, and orders thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by, or to enjoin any violation of, this Act or any rule, regulation, or order thereunder.16 U.S.C. § 825(p). The AG's claims are solely based on violation of the FPA and seek to enforce the duties created by the FPA. While the AG is not seeking a remedy available under the FPA, the AG still seeks to enforce defendants' duties under the FPA to file tariffs and charge just and reasonable rates. Federal jurisdiction over such claims is, therefore, proper. Cf Sparta Surgical Corp v. National Assoc of Sec Dealers, Inc., 159 F.3d 1209, 1212 (9th Cir 1998) (asserting federal question jurisdiction over state law claims based on exclusive jurisdiction provision of securities laws). The court therefore DENIES the AG's motions to remand in these cases (02-2057: Doc. # 27, 02-2061: Doc. # 16, 02-2207: Docs ## 19, 20).
D
The remand question in the ancillary services cases is less straightforward. The AG in these cases alleges violation of § 17200 based on conversion of reserved capacity that the ISO rightfully owned, either by generating electricity from that capacity instead of holding it in reserve or by failing to provide electricity from that capacity when requested by the ISO. The complaints also allege that defendants submitted bids for reserve capacity that they did not intend to honor, collected payments for reserve capacity that defendants did not provide and violated contracts with the ISO. See, Compl. (02-1791: Doc. # 1, Exh A) at ¶¶ 65-66; Compl. (02-1854: Doc. # 1, Exh 1) at ¶¶ 64-65; Compl. (02-1899: Doc. # 1, Exh 1) at ¶¶ 58-59; Compl. (02-1914: Doc. # 1, Exh A) at ¶¶ 61-62.
The AG contends that such claims do not necessarily require determination that defendants violated the FPA, analogizing to Pan American Petroleum Corp v. Superior Court of Delaware, 366 U.S. 656, 662 (1960), a case decided under the Natural Gas Act, 15 U.S.C. § 717 et seq. In Pan American, the Supreme Court determined that breach of contract claims based on natural gas contracts did not create federal jurisdiction because "the rights asserted by [plaintiffs] are traditional common-law claims. They do not lose their character because it is common knowledge that there exists a scheme of federal regulation of interstate transmission of natural gas." Id at 663.
The claims at issue in Pan American were breach of contract claims that did not arise under the Natural Gas Act. As the claims simply demanded recovery on the contracts to refund overpayment, they arose solely out of the contracts between the parties. In contrast, here the AG asserts liability based on defendants' violation of the ISO tariff. Because it is adopted by FERC as a federal regulation, the ISO tariff is more than a contract between private parties; it is federal law. As the AG's claims are based on violation of the ISO tariff, they are based on violation of federal law. Pan American is simply inapplicable.
The AG also relies on the recent district court decision in Hendricks which, as noted previously, involved claims under California's "little antitrust" statute, the Cartwright Act, Cal BP Code § 16600 et seq. Defendants in Hendricks contended that the FPA completely preempted plaintiffs' claims, a contention defendants here do not advance. The Hendricks court properly rejected that contention because the exclusive jurisdiction provision of the FPA only means that federal preemption is a defense to any FPA claims brought in state court. To conclude otherwise, the court said, would improperly base federal jurisdiction upon the concept of preemption itself; preemption does not itself supply the ground for federal jurisdiction.
Remand in Hendricks was granted because the court concluded that plaintiffs there could establish a violation of the Cartwright Act without reference to the standards established in the FPA. A conspiracy and illegal acts done pursuant thereto with the purpose of restraining trade and damage furnish the gravamen of a Cartwright Act violation. In Hendricks, some of the illegal acts upon which the Cartwright Act and § 17200 claims were predicated did not require proof of a federal violation. There was, therefore, an independent state law basis for the § 17200 claims alleged in that case and these claims did not necessarily entail application of the FPA or other federal law.
This is not the case with the violation of § 17200 alleged here. The conduct the AG would here condemn is expressly governed by the ISO tariffs that are within the exclusive purview of the FERC and subject to exclusive federal jurisdiction. The unfair, unlawful and fraudulent conduct alleged in the complaints describes conduct governed by the FERC regulations and federal law: bidding to provide emergency capacity with no intention of providing the services; generating electricity from reserve capacity committed to the ISO; failing to generate electricity from reserve capacity committed to the ISO when requested; and collecting payment for services not rendered. There is no independent state law claim. The AG's claims are necessarily federal in scope. Federal jurisdiction over such claims is, therefore, proper.
As the court finds that federal jurisdiction is proper, the court DENIES the AG's motions to remand (02-1791: Docs ## 19, 25, 02-1854: Doc. # 13, 02-1899: Doc. # 16, 02-1914: Doc. # 13).
III
In summary, the court DENIES the motions to remand in the ancillary services cases (02-1791: Docs ## 19, 25, 02-1854: Doc. # 13, 02-1899: Doc. # 16, 02-1914: Doc. # 13) and the failed to file/overcharge cases (02-2057: Doc. # 27, 02-2061: Doc. # 16, 02-2207: Docs ## 19, 20).
As mentioned above, the court declines to rule on the pending motions to dismiss at this time. In the cases involving Williams Energy and Dynegy, 02-1854-VRW, 02-1899-VRW and 02-2057-VRW, defendants have indicated that they will file motions to dismiss within 15 days of this order. To facilitate orderly management of these cases, the court finds it appropriate to schedule a hearing date for these motions to dismiss. In addition, the court shall hear any further argument the parties wish to make on the motions to dismiss currently pending before the court. Accordingly, the court hereby schedules a motions hearing date of September 26, 2002, at 2pm. All further pleadings relating to these motions must be served and filed in accordance with Civil LR 7. A further case management conference shall follow the hearing.