Eleventh Circuit Narrows Grable: State-Law Contract Claims Alleging Unregistered Broker-Dealer Activity Do Not “Substantially” Raise a Federal Question

Introduction

AST & Science LLC (“AST”), a satellite-technology company, engaged Delclaux Partners SA (“Delclaux”), a Swiss corporate consultant, to act as a “finder” of investment opportunities. After the relationship soured, AST sued Delclaux in the Southern District of Florida claiming that Delclaux breached the Finder’s Fee Agreement by acting as an unregistered broker-dealer, thereby violating § 15(a)(1) of the Securities Exchange Act of 1934. Delclaux counter-claimed for unpaid fees. The district court entered summary judgment for AST on the counter-claim, and only after the first appeal was dismissed for lack of finality did the parties (and the court) realize that complete diversity was missing. Undeterred, the district court invoked federal-question jurisdiction, reasoning that AST’s contract claim turned on a federal broker-dealer issue. In its second appeal, Delclaux challenged that ruling.

The Eleventh Circuit—speaking through Judge Newsom, with Judges Rosenbaum and Marcus on the panel—holds that the breach-of-contract claim does not “arise under” federal law and fails the Grable four-factor test, principally because the federal securities issue is not “substantial” in the Gunn v. Minton sense. Accordingly, the court vacates the judgment and remands with instructions to dismiss for want of subject-matter jurisdiction.

Summary of the Judgment

Diversity Jurisdiction: No complete diversity existed because AST, an LLC, had seven alien members and Delclaux is a Spanish corporation.
Federal-Question Jurisdiction (28 U.S.C. § 1331 and 15 U.S.C. § 78aa(a)): The district court’s reliance on federal-question jurisdiction is erroneous; the state-law breach-of-contract claim falls outside the “special and small category” recognized in Grable.
Key Holding: A state-law contract action premised on alleged unregistered broker-dealer activity does not present a “substantial” federal issue, because the inquiry is fact-bound, affects only the parties, and implicates no substantial federal interest.
Disposition: Judgment vacated; case remanded with directions to dismiss for lack of subject-matter jurisdiction.

Analysis

1. Precedents Cited and Their Influence

Grable & Sons Metal Products, Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005): Provides the four-factor test—necessarily raised, actually disputed, substantial, and consistent with the federal-state balance. The Eleventh Circuit centers its analysis on the “substantial” prong.
Gunn v. Minton, 568 U.S. 251 (2013): Clarifies “substantiality”; the federal issue must matter to the federal system as a whole, not merely to the litigants. The court borrows Gunn’s three guideposts: (a) pure question of law, (b) controlling many other cases, (c) strong governmental interest.
Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677 (2006): Distinguished “fact-bound and situation-specific” disputes (no jurisdiction) from the archetypal Grable situation.
Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (1921); City of Chicago v. Int’l College of Surgeons, 522 U.S. 156 (1997); Hopkins v. Walker, 244 U.S. 486 (1917): The four historic exceptions where federal-question jurisdiction existed absent a federal cause of action. The panel underscores how rare such cases are.
MDS (Canada) Inc. v. Rad Source Techs., Inc., 720 F.3d 833 (11th Cir. 2013): Supplies Eleventh Circuit gloss on Gunn’s substantiality factors; heavily fact-bound patent license dispute lacked substantiality. The panel adopts that reasoning.
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 578 U.S. 374 (2016): Confirms that § 78aa(a)’s jurisdictional touchstone “matches” § 1331; precludes AST’s argument that Exchange Act affords broader jurisdiction.
Miscellaneous circuit and district authority on “finder” vs. “broker-dealer” status: SEC v. Kramer, 778 F. Supp. 2d 1320 (M.D. Fla. 2011); Cornhusker Energy Lexington, LLC v. Prospect St. Ventures, 2006 WL 2620985 (D. Neb. 2006). Cited to illustrate the fact-intensive nature of the finder analysis.
Second Circuit decisions (NASDAQ OMX Group v. UBS Securities, 770 F.3d 1010 (2d Cir. 2014); D’Alesio v. NYSE, 258 F.3d 93 (2d Cir. 2001)) distinguished because they involved national exchanges and systemic regulatory issues, unlike a two-party contract dispute.

2. Legal Reasoning

No Diversity. Corporate alienage defeats § 1332 jurisdiction where aliens appear on both sides. Because AST is an LLC whose members include foreign nationals, complete diversity is absent under Caron v. NCL and Mallory & Evans.
§ 1331 / § 78aa(a) Analysis. Federal law does not create AST’s cause of action (purely state contract). Therefore the only path is the Grable “embedded issue” doctrine.
Applying Grable:
- Necessarily Raised & Actually Disputed: Whether Delclaux acted as an unregistered broker-dealer is indeed in dispute and must be resolved.
- Substantial: Fails for three cumulative reasons:
  1. Issue is fact-intensive—no statute or regulation’s validity is under attack; instead, the finder/broker dichotomy requires granular factual analysis.
  2. Decision will not govern numerous future cases; it binds only the parties.
  3. The United States government is not a party and has no direct interest comparable to the IRS in Grable.
- Federal-State Balance: Allowing state courts to resolve incidental securities questions in contract disputes will not upset congressional design; federal courts retain exclusive jurisdiction over actual Exchange Act enforcement suits.
Rule 60(b)(4) Motion. Because subject-matter jurisdiction was absent, the original judgment is void; the proper remedy is vacatur and dismissal, not merits adjudication.

3. Potential Impact

The decision fortifies two important jurisdictional boundaries:

Reining in Grable. Parties often attempt to “federalize” ordinary commercial disputes by pointing to embedded securities or regulatory issues. AST v. Delclaux confirms that substantiality is a demanding hurdle, particularly when the federal question is fact-specific and of limited systemic import.
LLC Citizenship Scrutiny. The case is also a cautionary tale about pleading diversity when LLCs are involved. Even sophisticated litigants overlooked non-citizen members, resulting in years of wasted litigation.
Forum Strategy for Securities-Adjunct Claims. Plaintiffs drafting state-law claims that mention Exchange Act violations must prepare to litigate in state court unless they can show a pure legal issue of universal importance or another independent basis for jurisdiction.
Broker-Dealer “Finder” Litigation. By signaling that federal court is often closed to such disputes, the decision may channel future finder-broker controversies into state contract law fora, absent SEC enforcement or a private right of action under the securities laws themselves.

Complex Concepts Simplified

Subject-Matter Jurisdiction: A court’s legal power to hear a case. Without it, any judgment is void.
Diversity vs. Alienage: “Complete diversity” means no plaintiff shares citizenship with any defendant. “Alienage diversity” extends to disputes between U.S. citizens and foreign nationals, but still requires one side to be exclusively domestic or foreign.
LLC Citizenship: Unlike corporations, an LLC is a citizen of every state or country where any member is a citizen.
Broker-Dealer Registration (Exchange Act § 15(a)(1)): Generally requires anyone “engaged in the business” of effecting securities transactions for others to register with the SEC. A narrow “finder exception” may apply when the intermediary merely introduces parties but does not negotiate or advise.
Grable Doctrine: Allows federal jurisdiction over a state claim when a substantial, actually disputed federal issue is necessarily raised and its resolution in federal court will not disturb the federal-state balance.
Rule 60(b)(4): Permits relief from a final judgment if the judgment is void, typically because the court lacked jurisdiction.

Conclusion

The Eleventh Circuit’s decision in AST & Science LLC v. Delclaux Partners SA delivers a clear message: Invoking a federal statute as an element of proof in a state-law contract claim does not, without more, open the federal courthouse doors. By tightening the “substantiality” requirement, the court safeguards the “carefully drafted congressional balance” between federal and state judicial responsibilities and prevents routine commercial litigation from migrating to federal court under the guise of embedded federal issues. Practitioners must now take even greater care to:

Scrutinize the citizenship of all LLC members before pleading diversity;
Recognize that the Grable pathway is narrow, especially where the federal issue is fact-bound;
Appreciate that “finder” versus “broker-dealer” disputes—absent SEC enforcement—will ordinarily be resolved by state contract law;
File timely jurisdictional challenges, lest years of litigation unravel on appeal.

In the broader landscape, AST v. Delclaux stands as a modern exemplar of the Supreme Court’s admonition in Gunn: federal courts are not troubleshooting forums for every case that touches on federal law; they are courts of limited jurisdiction whose gates remain closed unless Congress, and the Constitution, clearly say otherwise.