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Lessons From Shoehorned Federal Court Jurisdiction

by | Insights

Sometimes it’s best not to make a federal case out of it.  This is the lesson from the recent decision in Nanobeak Biotech Inc. v. Barbera, 2021 WL 1393457 (S.D.N.Y. Apr. 13, 2021), involving a plaintiff corporation that tried but failed to get its lawsuit into federal court. Presumably, the plaintiff believed it would obtain a better result in federal court and therefore, it alleged that the defendant violated federal law. The court rejected that claim. Instead, the plaintiff was forced to start over at the state level resulting in lost time and money.

Nanobeak is important because the case was clearly a state law matter with no valid reason to be in federal court. The plaintiff corporation alleged that the defendant, a former CEO, CSO and board member of the plaintiff, had committed a vast array of misconduct against the corporation, including use of corporate funds for personal expenses, false statements to the board, divesting investor funds to other entities, and establishing competitor entities.

Such actions are grounds for various state law claims including breach of fiduciary duty, conversion, accounting, and forfeiture under the faithless servant doctrine. Notwithstanding the fact that the plaintiff could sue and get relief in state court, plaintiff tried to shoehorn the case into federal court by claiming the defendant violated the Computer Fraud and Abuse Act (the “CFAA)The plaintiff corporation accused the defendant of refusing to return company computer and IT equipment and using the information and access for his own gain and to frustrate the ongoing company investigation against him. 

The federal district court dismissed the CFAA claim based on the fact that such a claim requires proof of losses from actual damage to a computer. The court declined to extend the CFAA’s reach to losses stemming from a plaintiff’s lack of access to seemingly fully functional systems and unimpaired information (which have not been actually harmed by the defendant).  In rejecting the plaintiff’s argument, the court noted that the plaintiff may claim compensation for those losses through general common law causes of action (e.g., conversion), but not through the CFAA.  The court further set forth that the CFAA’s purpose was not to remedy claims founded in breach of fiduciary duty and fraud and that the CFAA does not apply to a faithless or disloyal employee who misuses access to the employer’s computer.  As a result, the plaintiff’s claim was dismissed.

With the loss of its federal court jurisdiction, the Nanobeak plaintiff was left with the only option of beginning again in state court. That means added legal fees and losing momentum and quick discovery in state court which could ostensibly solidify state court claims. The lesson to be learned is for parties to be cautious about shoehorning federal jurisdiction over state law claims, especially when the state law relief is clear, the federal relief has tenuous foundation, and the federal court claim doesn’t add much to the plaintiff’s arsenal. 

While there are legitimate reasons to attempt to get a case into federal court, the parties should take care to evaluate the strength of their argument to avoid a result like the one in Nanobeak.


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