Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning
The Supreme Court ruled that a federal law letting people sue over violations of a specific SEC rule sends a case to federal court only when it uses the same test courts already use to decide whether a state-law claim 'arises under' federal law generally.
Because the shareholder's lawsuit against Merrill Lynch relied entirely on state law and did not require proving a violation of the SEC's short-selling rule to win, the case belongs in state court, not federal court, even though the complaint mentioned the federal rule.
“So §27 confers federal jurisdiction when an action is commenced in order to give effect to an Exchange Act requirement.”
The majority's core reading of what it means for a suit to be 'brought to enforce' the Exchange Act.
How it got here: A federal trial court kept the case in federal court; the Third Circuit reversed and ordered it sent back to state court; Merrill Lynch asked the Supreme Court to review that ruling.
The Case in Depth
What happened
Greg Manning lost most of his investment in Escala Group after its stock price collapsed, which he blamed on Merrill Lynch and other financial firms engaging in 'naked short sales' — selling stock without ever borrowing or delivering it, a practice regulated by the SEC's Regulation SHO. Manning and other shareholders sued Merrill Lynch in New Jersey state court under state law, though their complaint referenced Regulation SHO and past accusations against Merrill Lynch for violating it.
The question before the Court
When a state-law lawsuit against a brokerage also mentions a federal securities rule, does that automatically send the case to federal court?
Why it matters
Investors and companies who sue over securities-related misconduct under state law can keep their cases in state court even if the complaint references federal securities rules, as long as winning doesn't require proving a federal-law violation. This gives plaintiffs more control over where mixed state/federal securities disputes are litigated and limits companies' ability to force cases into federal court just by pointing to incidental references to federal rules.
What changes now
This is a final merits decision resolving the jurisdictional question, and the Court's ruling affirms sending Manning's case back to New Jersey state court, where it will proceed on the state-law claims already pleaded. The decision also clarifies, for future cases, that nine similarly worded federal jurisdictional statutes should be read using the same 'arising under' test rather than a separate standard for each.
What this does not decide
The Court did not decide whether Manning's claims would succeed on the merits, nor did it address a separate 'violations' clause in Section 27 that the parties agreed was not at issue. It also did not disturb the Third Circuit's separate ruling that the general federal-question statute did not cover this suit.
Concurrences and dissents
Concurrence — Justice Thomas
Justice Thomas agreed the case belongs in state court but rejected borrowing the 'arising under' test from Section 1331. He argued Section 27's plain text creates a simpler test: federal jurisdiction exists only when a complaint's claims necessarily depend on proving a breach of an Exchange Act duty. He found Manning's claims did not meet even that narrower text-based standard, so no separate 'arising under' analysis was needed.
How the Court got there
The legal reasoning, step by step
- The Court had to interpret Section 27 of the Securities Exchange Act, which sends federal courts exclusive control over suits 'brought to enforce' a duty created by the Act, and decide what that phrase actually requires.
- The Court rejected Merrill Lynch's broad reading, under which any complaint that even mentions a possible Exchange Act violation would count as 'brought to enforce' that law, reasoning that the text focuses on what the suit needs to accomplish, not on stray references.
- The Court also rejected Manning's narrower reading, that only suits directly created by the Exchange Act qualify, because the Court's precedents recognize a small category of state-law claims that still belong in federal court when the claim's success necessarily depends on proving a violation of federal law.
- The Court held that Section 27's 'brought to enforce' standard is identical to the established test for deciding whether a case 'arises under' federal law generally under 28 U.S.C. §1331 — including the rule that a state-law claim can support federal jurisdiction only if it necessarily raises a substantial, actually disputed federal issue that a federal court can decide without upsetting the usual balance between state and federal courts.
- Applying that standard, the Court found that Manning's claims were built entirely on state law and did not require proving that Merrill Lynch actually violated Regulation SHO, so the suit did not meet the 'arising under' test and Section 27 did not require it to be heard in federal court.
Doctrinal impact
Cases affected by this decision
Reaffirms Pan American (366 U.S. 656)
The Court relied on this case as already treating 'brought to enforce' as equivalent to 'arising under' jurisdiction.
Reaffirms Matsushita (516 U.S. 367)
The Court relied on this case's repeated description of Section 27 as covering suits 'arising under' the Exchange Act.