Wright v. Charles Schwab & Co., Inc.

Background

This putative class action concerned an alleged defect in Charles Schwab’s online trading platform. The plaintiff attempted to close a short position involving 6,300 shares of Royal Caribbean stock on April 20, 2020. According to the complaint, Schwab’s system purchased replacement shares but did not close the short position. The plaintiff clicked the “close” link five times, allegedly resulting in purchases of 31,500 shares, a $1.1 million margin balance, and an eventual loss exceeding $10,000. The plaintiff alleged a similar problem on April 22, 2020, and alleged that a Schwab representative said Schwab knew about the issue and had been working on it for several months.

The plaintiff sued Schwab for negligence based on the allegedly defective trading system, unjust enrichment based on compensation Schwab received for processing the trades, and violations of the unlawful and unfair prongs of California’s Unfair Competition Law, California Business and Professions Code section 17200. Schwab moved to dismiss all claims.

The court considered the parties’ brokerage agreement. The agreement required customers to notify Schwab immediately about certain order or execution problems, warned that electronic trading could result in duplicate orders, and stated that customers were responsible for duplicate orders resulting from attempts to cancel, replace, or change market orders through the electronic services. It also limited Schwab’s liability for events outside its direct control, including certain software bugs, errors, and compatibility problems.

Standard of Review

On a motion to dismiss, the court accepts well-pleaded factual allegations as true but does not accept legal conclusions or formulaic recitations of a claim’s elements. The complaint must contain enough factual matter to make relief plausible, rather than merely possible. When dismissing a complaint, the court generally gives leave to amend unless additional facts could not cure the problem.

Analysis

Negligence

The court applied California’s economic-loss rule. That rule generally requires a plaintiff to pursue purely economic losses caused by disappointed contractual expectations through contract law, unless the defendant violated a duty independent of the contract or caused additional harm beyond the contractual loss.

The court held that the plaintiff alleged only economic loss and that Schwab had no duty independent of the brokerage agreement that would support a negligence claim. The court rejected the plaintiff’s argument that Schwab owed an independent special or fiduciary duty as his broker-agent. The court distinguished authority involving alleged misrepresentations that induced customers to enter a contract, explaining that the alleged trading-platform glitch occurred months after the brokerage agreement was formed and was governed by that agreement.

The court dismissed the negligence claim with leave to amend a contract claim.

Unjust Enrichment

The court dismissed the unjust-enrichment claim because the parties had an enforceable contract defining their rights. It noted that courts sometimes allow restitution under an unjust-enrichment theory when a contract is unenforceable or ineffective, or when a defendant obtained a benefit through fraud, duress, conversion, or similar conduct. But the court found no such circumstance here. It dismissed the unjust-enrichment claim with prejudice.

California Unfair Competition Law

The plaintiff asserted claims under both the unlawful and unfair prongs of California’s Unfair Competition Law. The court held that the unlawful-prong claim failed because the negligence and unjust-enrichment claims did not provide predicate violations after those claims were dismissed.

The court also held that the complaint did not plausibly plead an unfair-prong claim. The allegations that Schwab’s conduct was injurious, unethical, oppressive, contrary to public policy, and avoidable were conclusory. The court found that the allegations did not satisfy any of the three tests used by courts to evaluate unfairness: a specific constitutional, statutory, or regulatory public policy must be identified; the conduct must qualify as immoral, unethical, oppressive, unscrupulous, or substantially injurious; or the consumer injury must be substantial, not outweighed by benefits, and not reasonably avoidable.

The court dismissed the Unfair Competition Law claim. It did not reach Schwab’s argument that the statute does not apply to securities transactions.

Disposition

The court granted Schwab’s motion to dismiss. It dismissed the negligence claim with leave to amend a contract claim, dismissed the unjust-enrichment claim with prejudice, and dismissed the Unfair Competition Law claim. The plaintiff was ordered to file an amended complaint within 21 days of the order. Judge Laurel Beeler stated that the order disposed of the motion identified as ECF No. 17.