Wright v. Charles Schwab & Co., Inc.

Background

Robert Wright brought a putative class action against Charles Schwab & Co., Inc. He alleged that Schwab’s online trading platform malfunctioned when he tried to close a short position in 6,300 shares of Royal Caribbean stock on April 20, 2020. Instead of closing the short position, the system purchased replacement shares. Wright alleged that repeated attempts produced duplicate orders, creating a 31,500-share long position purchased on margin with loaned funds totaling $1.1 million. He sold the shares at a loss exceeding $10,000 and alleged that Schwab did not fully compensate him. He also alleged another malfunction on April 22, 2020, and said that Schwab representatives acknowledged an ongoing system problem.

Wright alleged violations of the unlawful and unfair prongs of California’s Unfair Competition Law, breach of contract, and breach of the implied covenant of good faith and fair dealing. The parties’ relationship was governed by Schwab’s brokerage agreement. That agreement stated that Schwab could be liable for losses when it failed to complete a transaction on time or in the correct amount, but excluded liability for certain events outside Schwab’s direct control, including bugs and other technical problems. It also addressed order cancellation and required customers to notify Schwab immediately about certain transaction errors.

Motion to Dismiss

Schwab moved to dismiss the contract and Unfair Competition Law claims. It argued that the agreement excluded liability for system bugs and technical errors, that Wright had breached the agreement by repeatedly entering orders and failing to call a Schwab representative, and that the alleged conduct did not support an unlawful or unfair practice. Schwab also argued that the implied-covenant claim was not a separate viable claim.

Under the federal pleading standard, the court considered whether the amended complaint alleged enough facts to make the claims plausible, rather than merely possible. At this stage, the court accepted the complaint’s factual allegations as true for purposes of the motion.

Contract Claim

The court denied the motion to dismiss the breach-of-contract claim. It held that the agreement’s disclaimer applied to technical errors outside Schwab’s direct control, but the complaint plausibly alleged that Schwab knew about the ongoing platform problem and that its developers and programmers were working to identify and fix it. Whether Schwab had direct control over the malfunction was a factual issue that could not be resolved at the pleading stage.

The court also rejected Schwab’s argument that Wright’s conduct required dismissal. Wright alleged that the repeated attempts occurred over about 10 minutes and that he notified Schwab of the malfunction. Whether he responded to the glitch and notified Schwab adequately was another factual issue. The court therefore concluded that Wright plausibly stated a breach-of-contract claim.

Implied Covenant

The court granted the motion to dismiss the claim for breach of the implied covenant of good faith and fair dealing. Under California law, the implied covenant cannot add substantive duties or limits beyond the contract’s specific terms. Because Wright’s theory was that Schwab failed to execute his and the class members’ orders as instructed, and the brokerage agreement already defined Schwab’s liability, the court held that the implied-covenant claim was superfluous.

The court also rejected Wright’s argument that the Financial Industry Regulatory Authority’s best-execution rule prevented Schwab from disclaiming liability. The court explained that the rule concerns reasonable diligence in finding the best market for an order and did not apply to the alleged platform glitch.

Unfair Competition Law Claims

The court granted the motion to dismiss the Unfair Competition Law claim. It did not dismiss the claim merely because it involved securities transactions. The court viewed the alleged platform glitches as related to, but separate from, the securities transactions and therefore did not apply the general bar involving deceptive conduct in securities transactions on the limited briefing provided.

The court dismissed the unlawful-prong claim because the breach-of-contract claim could not serve as the required unlawful conduct where the parties’ contract defined their remedies. The court dismissed the unfair-prong claim because Wright had not plausibly alleged an unfair practice. The theory that Schwab failed to use due care to maintain an error-free platform amounted to a negligence claim, which the court said was barred as a stand-alone claim by the economic-loss doctrine and did not satisfy the applicable tests for an unfair practice.

Disposition

The court denied the motion to dismiss the breach-of-contract claim and granted the motion to dismiss the claim for breach of the implied covenant of good faith and fair dealing and the Unfair Competition Law claim. The order stated that this disposed of the motion identified as ECF No. 39. Judge Laurel Beeler signed the order as a United States Magistrate Judge.