Whitesides v. ETrade Securities, LLC
- Jacquelyn Corley
- 3:20-cv-05803
- U.S. District Court · Northern District of California
- 15
In Whitesides v. E*TRADE, Judge Corley dismissed the customers’ claims, allowed amendment of most claims, and denied the motion to strike as moot.
The three named plaintiffs—Benjamin Whitesides, Aziz Si Hadj Mohand, and Matthew Cheung—and the E*TRADE defendants were affected. The order dismissed the asserted negligence, gross-negligence, and Unlawful Competition Law claims, while allowing amendment of most of those claims and permitting the plaintiffs to reassert contract claims.
What happened
In Whitesides v. ETRADE Securities, LLC, three ETRADE users alleged that a system failure prevented them from closing oil-futures positions during the market’s collapse on April 20, 2020, causing substantial losses.
The court held that the customer agreement’s exculpatory clause barred the ordinary-negligence claim. It also held that the plaintiffs had not shown a special relationship creating a separate duty that would allow them to recover purely financial losses for gross negligence. Because the plaintiffs conceded that their Unlawful Competition Law claim depended on the negligence claims, that claim also failed.
Judge Corley granted the motion to dismiss. The ordinary-negligence claim was dismissed without leave to amend, while the gross-negligence and Unlawful Competition Law claims were dismissed with leave to amend; the plaintiffs could also reassert their contract claims. The motion to strike was denied as moot.
The detailed version
- Whitesides v. ETrade Securities, LLC · No. 3:20-cv-05803
- Jacquelyn Corley
- Mar. 11, 2021
Background
Benjamin Whitesides, Aziz Si Hadj Mohand, and Matthew Cheung sued ETRADE Securities, LLC and ETRADE Futures, LLC. They alleged that they held cash-settled oil futures when prices fell below zero on April 20, 2020, and that an E*TRADE platform failure displayed inaccurate prices and prevented them from closing their positions. The operative complaint asserted negligence, gross negligence, and a claim under California’s Unlawful Competition Law. The plaintiffs had previously asserted contract and contract-related claims but removed those claims from the operative complaint.
E*TRADE moved to dismiss under Rule 12(b)(6), which tests whether a complaint plausibly alleges a legally valid claim, and separately moved to strike portions of the pleading.
Choice of Law
The customer agreement stated that it would be construed under New York law and that the parties’ contractual rights and liabilities would be determined under New York law. The court interpreted that provision as governing the parties’ contractual rights and liabilities, including the agreement’s exculpatory clause. It nevertheless analyzed the negligence claims under California law because the choice-of-law provision did not broadly encompass the plaintiffs’ extra-contractual tort claims.
Ordinary Negligence
Under New York law, the court concluded that the customer agreement’s exculpatory clause clearly protected E*TRADE from liability for ordinary negligence. The clause did not protect against gross negligence or willful misconduct. The plaintiffs conceded at oral argument that the clause barred their ordinary-negligence claim, and the court rejected their argument that they had identified a New York public-policy basis for invalidating the clause. The ordinary-negligence claim was therefore dismissed without leave to amend.
Economic Loss Rule and Gross Negligence
California’s economic loss rule generally prevents a party to a contract from recovering purely financial losses through tort claims. An exception may apply when the defendant owed an independent duty of care based on a “special relationship.” The court predicted that contractual privity does not automatically prevent such a relationship, but that courts must examine the policy considerations and facts of each case.
The court applied the six factors associated with the special-relationship analysis. It found that the ETRADE platform was not alleged to have been intended to affect these plaintiffs in a way particular to them rather than all platform users. The plaintiffs sufficiently alleged that their injuries were foreseeable and that they suffered injury, but the court found the connection between ETRADE’s conduct and the losses attenuated because the platform failure occurred only after prices had fallen below zero and the plaintiffs might have had difficulty filling their orders even if the platform had accepted them.
The court also found that the plaintiffs did not plausibly allege ETRADE knew about the specific system deficiencies that caused the outage. Their allegations that ETRADE had ignored known deficiencies and red flags were vague and conclusory. The plaintiffs identified no compelling policy requiring tort liability for malfunctions in an online trading platform. Weighing the factors, the court declined to recognize an independent duty of care under the alleged facts and dismissed the gross-negligence claim under the economic loss rule.
Unlawful Competition Law Claim and Leave to Amend
The plaintiffs conceded that their Unlawful Competition Law claim would fail if the negligence claims failed. The court therefore dismissed that claim as well. It granted leave to amend the gross-negligence and Unlawful Competition Law claims because additional facts might alter the special-relationship analysis. The court did not allow amendment of the ordinary-negligence claim because the exculpatory clause barred it. The court also stated that the plaintiffs could reassert their contract claims.
Disposition
The court granted the motion to dismiss. The ordinary-negligence claim was dismissed without leave to amend, and the remaining claims were dismissed with leave to amend. Any amended complaint had to be filed within 30 days of the order. The separate motion to strike was denied as moot.
Read the full 15-page opinion on CourtListener, the free public archive maintained by the Free Law Project.