In the
United States Court of Appeals
For the Seventh Circuit
No. 09-1144
R OBERT M. A NDERSON,
Plaintiff-Appellant,
v.
A ON C ORPORATION, et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 06 C 6241—Blanche M. Manning, Judge.
A RGUED S EPTEMBER 18, 2009—D ECIDED JULY 26, 2010
Before E ASTERBROOK, Chief Judge, and W ILLIAMS and
T INDER, Circuit Judges.
E ASTERBROOK, Chief Judge. Investors injured by fraud
may recover under federal securities law only if the
deceit caused them to purchase or sell securities. Blue
Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). This
purchaser-seller rule limits implied private rights of
action but not the substantive requirements of federal
law. Fraud is unlawful, see §10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. §78j(b), and the SEC’s
2 No. 09-1144
Rule 10b–5, 17 C.F.R. §240.10b–5, whether or not it in-
duces a particular investor to buy or sell shares. See
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S.
71 (2006) (a suit by investors who did not trade is within
the scope of §10(b) even though the holder lacks a
private action for damages). The Justices observed in
Blue Chip Stamps that states may supply a remedy when
federal law does not. 421 U.S. at 738–39 n.9. California
has done this. It authorizes “holder actions”—that is, suits
by investors who contend that deceit caused them to
hold their shares, when they would have sold had they
known the truth. See Small v. Fritz Companies, Inc., 30 Cal.
4th 167, 65 P.3d 1255 (2003).
In 2003 Robert Anderson, who lives in California, sued
Aon Corporation in state court there. Aon, whose shares
trade on the New York Stock Exchange (and around the
globe), is incorporated in Delaware and has its head-
quarters in Illinois. Anderson sold his business (a Califor-
nia insurance brokerage) to Aon in 1997, receiving about
95,000 shares of its stock, which then traded for about
$69 a share. By 2002 Aon was selling for about $14 a
share, and Anderson attributed the decline to misman-
agement that began in 1996 and was not fully revealed
until 2002. He contends that, but for Aon’s fraud, he
would have discovered the problems earlier and sold
the stock before its price dropped. Anderson relied on
California law and disclaimed any remedy under fed-
eral securities law. Aon removed this suit to federal court
under the diversity jurisdiction. The federal judge indi-
cated an inclination to transfer the suit to Illinois under
28 U.S.C. §1404(a), but before this could be accomplished
Anderson dismissed the suit without prejudice.
No. 09-1144 3
Anderson filed a second suit in 2005, again in state
court. This time he added two California citizens as
additional defendants, hoping to prevent removal. The
defendants removed anyway, because Anderson had
framed one claim under federal law: he contended that
Aon had violated the Racketeer Influenced and Corrupt
Organizations Act (RICO), 18 U.S.C. §§ 1961–68. Defen-
dants argued, for good measure, that the two California
citizens had been joined fraudulently (in the sense that
Anderson lacked any plausible claim against them and
had thrown them in only to defeat diversity jurisdic-
tion). About a month after the suit’s removal, Anderson
dismissed the RICO claim, asserting that it had been
added to the complaint inadvertently. He moved for
remand. Instead, the district court transferred the pro-
ceeding to Illinois under §1404(a).
The district judge in Illinois concluded that Illinois
law supplies the rule of decision. Securities law in
Illinois tracks federal law when the statutes use the
same language, see Tirapelli v. Advanced Equities, Inc., 351
Ill. App. 3d 450, 455, 813 N.E.2d 1138, 1142 (2004), which
means that Illinois may follow the purchaser-seller rule
of Blue Chip Stamps. The district judge concluded that
Anderson does not have a viable claim under Illinois
law. The court dismissed the complaint under Fed. R. Civ.
P. 12(b)(6). 2008 U.S. Dist. L EXIS 94169 (N.D. Ill. June 16,
2008). Anderson then filed an amended complaint
invoking federal securities law. The district court con-
cluded that the new theory is untimely, which led to
entry of final judgment in Aon’s favor. 2008 U.S. Dist.
L EXIS 103010 (N.D. Ill. Dec. 22, 2008).
4 No. 09-1144
Anderson’s lead argument on appeal is that, once he
withdrew the RICO claim, federal jurisdiction vanished
and 28 U.S.C. §1447(c) obliged the court to remand. Section
1447(c) says, among other things, that “[i]f at any time
before final judgment it appears that the district court
lacks subject matter jurisdiction, the case shall be re-
manded.” Anderson believes that the RICO claim was
the only foundation for subject-matter jurisdiction. True,
it was the only basis of original federal jurisdiction.
But if there is federal jurisdiction on the date a suit
is removed—as there was in this suit—the final resolu-
tion of the claim that supported the suit’s presence
in federal court does not necessitate remand. The dis-
trict court may retain jurisdiction under 28 U.S.C.
§1367(a), which says that federal courts “have supple-
mental jurisdiction over all other claims that are so
related to claims [within the original jurisdiction]
that they form part of the same case or controversy”.
Anderson’s holder claims under California law arise
from the same transactions that underlay his RICO
claim, so the district court had supplemental jurisdic-
tion. See Carlsbad Technology, Inc. v. HIF Bio, Inc., 129 S. Ct.
1862, 1867 (2009).
The district judge in California reached this conclu-
sion when declining to remand. The district judge in
Illinois agreed. The fact that the conclusion was
reached first by a judge outside the seventh circuit
does not disable us from addressing the subject. We
review the judgment of the district judge in Illinois, and
the reasons for that judgment (if only reliance on the law
of the case) are open to consideration in this circuit. Jones
No. 09-1144 5
v. InfoCure Corp., 310 F.3d 529, 534 (7th Cir. 2002). Some
circuits have taken a different approach and held that
review is split between the transferor district’s circuit
and the transferee district’s circuit, see TechnoSteel, LLC
v. Beers Construction Co., 271 F.3d 151, 154–56 (4th Cir.
2001) (collecting cases), but that understanding over-
looks the vital point, which we stressed in Hill v. Potter,
352 F.3d 1142, 1144 (7th Cir. 2003), that the decision
to transfer a suit under §1404(a) is not separately
appealable. The only final decision is the one entered
by the transferee district, and an appeal from a final
decision brings up all interlocutory rulings for appel-
late resolution. We do not review any decision made by
the transferor district, but our review of the final deci-
sion includes all issues that affected the judgment. Our
jurisdiction is secure, so we must decide whether the
district court erred in invoking the supplemental juris-
diction.
Anderson insists that §1367 applies only when the
district judge dismisses the federal claim; because he
dismissed his own federal claim, Anderson maintains,
§1367 is irrelevant. That’s not what §1367(a) says, how-
ever. It asks whether the state-law claims are part of the
same controversy as the federal claims. That relation
is what creates supplemental jurisdiction. Anderson
observes that §1367(c)(3) provides that a federal court
may decline to exercise this supplemental jurisdiction
if “the district court has dismissed all claims over which
it has original jurisdiction”. He reads this as if it said
that supplemental jurisdiction exists only if the district
judge (as opposed to the plaintiff) dismisses the claims
6 No. 09-1144
within original federal jurisdiction. But the supple-
mental jurisdiction depends on subsection (a), not sub-
section (c), which covers when the jurisdiction should
be exercised rather than whether it exists in the first
place. (What’s more, Anderson misses the point that the
district court dismissed the RICO claim, even though the
judge did not; a voluntary dismissal under Fed. R. Civ. P.
41(a) has the effect of a judgment with prejudice when,
as here, it is the second suit based on the same trans-
action. See Rule 41(a)(1)(B) and, e.g., Sullivan v. Conway,
157 F.3d 1092, 1095 (7th Cir. 1998).)
Instead of remanding mechanically under §1447(c), a
district court must decide whether the state-law claims
should be resolved in federal court after the federal
claims have been dismissed. The district court did not
abuse its discretion by concluding that it should tackle
the state-law theories in this suit. Anderson has been
playing games. He filed suit in 2003 and dismissed it on
the verge of a transfer to Illinois. He filed suit again in
2005, adding as defendants two citizens of California
whose presence he hoped would prevent removal—and
on learning that the RICO claim foiled this plan,
Anderson dismissed it with the specious assertion that
its inclusion had been “inadvertent.” Ill-considered,
perhaps, and counterproductive from his perspective,
but how a claim prominently pleaded at the outset of a
lawsuit could be “inadvertent” is beyond our grasp.
Anderson evidently wants to try yet again in state court.
Defendants should not be hectored in this fashion. Aon
is entitled to a decision. By resolving the state-law claims,
No. 09-1144 7
the district court sensibly prevented Anderson from
needlessly multiplying and prolonging the proceedings.
A transfer under §1404(a) does not affect the applicable
law. See Ferens v. John Deere Co., 494 U.S. 516 (1990). This
means that California’s choice-of-law rules, which gov-
erned both in state court and in the federal district court
in California, also govern now that the proceeding is
before a federal court in Illinois. (The procedures of the
transferee district govern, however; that’s why we
used seventh circuit law when considering the supple-
mental jurisdiction. See Eckstein v. Balcor Film Investors,
8 F.3d 1121, 1126–27 (7th Cir. 1993).) California applies
what it calls a “governmental interest analysis,” which
the Supreme Court of California recently recapitulated:
In brief outline, the governmental interest ap-
proach generally involves three steps. First, the
court determines whether the relevant law of
each of the potentially affected jurisdictions with
regard to the particular issue in question is the
same or different. Second, if there is a difference,
the court examines each jurisdiction’s interest in
the application of its own law under the circum-
stances of the particular case to determine whether
a true conflict exists. Third, if the court finds that
there is a true conflict, it carefully evaluates and
compares the nature and strength of the interest
of each jurisdiction in the application of its own
law “to determine which state’s interest would be
more impaired if its policy were subordinated
to the policy of the other state” . . . and then ulti-
8 No. 09-1144
mately applies “the law of the state whose
interest would be the more impaired if its law
were not applied.”
Kearney v. Salomon Smith Barney, Inc., 39 Cal. 4th 95, 107–08,
137 P.3d 914, 922 (2006) (citation omitted). The third step
of this interest-balancing approach invites home-town
favoritism, which Anderson hopes will work to his ad-
vantage as a California citizen who sued in California.
But we think that California law applies without any
need for a home-town preference.
California law permits holder suits; Illinois law may not.
That’s a potential difference, though not one based on
any difference in substantive rules. Fraud is unlawful in
all 50 states. Aon does not contend that Illinois and Cali-
fornia define the forbidden conduct differently. The
difference lies only in enforcement: California enforces
the rule by (1) criminal prosecutions, (2) civil litiga-
tion by state officials, (3) administrative proceedings,
(4) private suits by investors who bought or sold stock
while the price was affected by fraud, and (5) private
suits by investors whose decision to hold stock, rather
than buy or sell it, was influenced by the fraud. Illinois
enforces the rule by methods (1) to (4); its judiciary
has not decided whether to add method (5). That choice
may depend on the tradeoff between the benefit of
extra enforcement and the risk of baseless suits. As the
Supreme Court observed in Blue Chip Stamps, there
are many possible reasons for in-action, and it may be
inordinately hard to distinguish between them in
private litigation. Investors may hold stock hoping that
No. 09-1144 9
it will rise, then sue if it falls, using the litigation to
obtain a cost-free put option. A jurisdiction that is not
confident that it can ascertain causation in ambiguous
situations will follow Blue Chip Stamps. But that’s a far
cry from saying that the defendant has done nothing
wrong or is entitled to be free of liability.
California nonetheless includes among true conflicts
any difference, based on divergent state policies, in the
categories of persons allowed to recover damages.
McCann v. Foster Wheeler LLC, 48 Cal. 4th 68, 90–96, 225
P.3d 516, 529–33 (2010), holds that a difference in the
length of the states’ statutes of repose creates a true
conflict. See also Offshore Rental Co. v. Continental Oil Co.,
22 Cal. 3d 157, 583 P.2d 721 (1978) (true conflict exists
when one state allows the employer of a tortiously
injured person to bring a separate suit for derivative
injuries, and the other state does not).
California therefore would reach the third factor in its
governmental-interest analysis, and we think that it
would find its interest more impaired by a decision to
use the other state’s law—for although California has
decided that holder actions are in the public interest,
Illinois has not decided that they disserve the public
interest. Indeed, though the district judge was confident
that Illinois would not allow holder actions by its own
citizens, the state judiciary has yet to make up its mind.
The only appellate decision where the question has
come up is Dloogatch v. Brincat, 396 Ill. App. 3d 842, 920
N.E.2d 1161 (2009). The majority thought it unneces-
sary to decide the point, and a concurring judge con-
cluded that holder actions are proper under Illinois law.
10 No. 09-1144
How could that be, when Illinois reads its securities
statutes the same way federal courts read the federal
securities laws? Because Blue Chip Stamps is about
implied private rights of action; it does not hold that the
statutes themselves either allow fraud against holders
or limit the set of plaintiffs. This is why the Supreme
Court decided in Dabit that holder class actions are
within the scope of §10(b) and affected by the Securities
Litigation Uniform Standards Act of 1998. A fraud suit
in Illinois would not require the judicial creation of a
right of action to enforce a statute that is silent about
who may sue; the claim would rest on established com-
mon law. It is tortious in Illinois to fraudulently induce
someone to refrain from acting. See Schmidt v. Henehan,
140 Ill. App. 3d 798, 804, 489 N.E.2d 415, 419 (1986). That’s
why the only judge who reached the question in
Dloogatch thought that suits by holders are proper—
and this is the same tort that the Supreme Court of Cali-
fornia held, in Small, supports holder actions in securities
litigation.
If Illinois is on the fence about holder actions, while
California thinks them beneficial, then the third stage
of the California choice-of-law approach is straightfor-
ward. California can vindicate its own interests without
impairing any interest of Illinois. We therefore conclude
that California would elect to use its own law (recall
that Anderson is a citizen of California, sold his busi-
ness in California to Aon, received Aon’s stock there,
and sued in a California court) and would entertain
Anderson’s holder action.
No. 09-1144 11
Anderson has a difficult road ahead. He traces the
decline of Aon’s stock price to mismanagement, not
fraud: the (alleged) fraud just deferred the time when the
stock’s price accurately reflected the value of Aon’s
business. Yet Anderson can’t recover on account of mis-
management. That would require a shareholders’ deriva-
tive suit, which this is not, and Delaware would
supply the rule of decision in such an action. (Aon is
incorporated in Delaware, and the internal-affairs
doctrine applies to derivative suits the law of the incorpo-
rating state. See Grosset v. Wenaas, 42 Cal. 4th 1100, 175
P.3d 1184 (2008).)
Aon contends that the complaint does not identify, with
the required particularity, see Fed. R. Civ. P. 9(b), the
fraud in which it supposedly engaged. The district court
should take up that subject (we decline Aon’s request
to make the initial decision ourselves), along with ques-
tions such as whether the statements to which Anderson
points concern facts rather than opinions (as Aon con-
tends).
There’s also likely to be a problem showing causation.
See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336
(2005). Suppose Aon had revealed the truth as soon as
its managers knew about business problems. Then the
stock’s price would have fallen to reflect the bad news,
because Aon is a substantial firm trading in an efficient
stock market. See Basic Inc. v. Levinson, 485 U.S. 224
(1988). (Our point is not that the market price neces-
sarily reflects all public information correctly, but
that Anderson’s own claim depends on market prices.
12 No. 09-1144
Investors cannot reliably beat the market without
knowing something that other investors don’t.) Anderson
can show injury only if he would have sold his shares
ahead of the decline. Yet public announcement of the truth
would have made it impossible for Anderson to avoid
the loss. Although a private revelation to Anderson
could have enabled him to sell before the decline,
trading on the basis of material nonpublic information
revealed in confidence by the issuer violates federal
securities laws. See generally United States v. O’Hagan,
521 U.S. 642 (1997). Anderson can’t use hypothetical
inside trading as the basis of his recovery. Whether he
has any other basis remains to be seen.
R EVERSED AND R EMANDED
7-26-10