Medical device manufacturer Medafor, Inc., sued AGG client CryoLife, Inc., a major shareholder in Medafor, seeking a declaratory judgment that Medafor was not obligated to register its shares with the Securities Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934. The case was filed in the U.S. District Court in Minnesota. CryoLife’s response to the lawsuit focused on whether Medafor had a legal right to bring its claim in federal court.
Federal district courts are courts of limited jurisdiction. They can only hear and resolve cases involving disputes within the scope of jurisdiction authorized by Congress. One of those areas involves cases or controversies that are said to “arise under” the Constitution or laws of the United States. In this case, at least on its face, it appeared that Medafor was asserting a claim under the federal securities laws. Specifically, Medafor was seeking a declaratory judgment, i.e., a ruling establishing that it had no duty to register its stock with the Securities & Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). However, AGG recognized that as a shareholder, CryoLife did not have a right under federal law to sue Medafor under Section 12(g) in order to compel it to register its shares with the SEC. Only the SEC itself could bring such a lawsuit. Thus, AGG argued that if the District Court would not have jurisdiction over a lawsuit brought by CryoLife to force Medafor to register, it also lacked jurisdiction over the “flip side” of the same lawsuit, i.e., a lawsuit brought by Medafor against CryoLife seeking a determination of its registration obligations under the Exchange Act.
The AGG team successfully argued that because there is no private right of action under Section 12(g) to compel registration, there is no federal question jurisdiction over a declaratory judgment action brought by the issuer under the same statute. The District Court agreed and, as a result, the lawsuit against CryoLife was dismissed for lack of subject matter jurisdiction.