Fleming v. Charles Schwab Corp.

878 F.3d 1146

Francis X FLEMING, Jr., Plaintiff–Appellant,

v.The CHARLES SCHWAB CORPORATION; Charles Schwab & Co., Inc.; Walter W. Bettinger II; UBS Securities LLC, Defendants–Appellees.

Louis Lim, Individually and on Behalf of all others Similarly Situated, Plaintiff–Appellant,

v.Charles Schwab & Co., Inc., Defendant–Appellee.

No. 16-15179

No. 16-15189

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 18, 2017 San Francisco, California

Filed December 29, 2017

Andrew Love (argued) and Susan K. Alexander, Robbins Geller Rudman & Dowd LLP, San Francisco, California; Juan Carlos Sanchez, Ashley M. Price, Benny C. Goodman III, and Andrew J. Brown, Robbins Geller Rudman & Dowd LLP, San Diego, California; Gerald L. Rutledge and Alfred G. Yates Jr., Law Office of Alfred G. Yates Jr. P.C., Pittsburgh, Pennsylvania; for Plaintiff–Appellant Francis X Fleming Jr.

Leslie E. Hurst (argued), Paula R. Brown, Thomas J. O’Reardon II, and Timothy G. Blood, Blood Hurst & O’Reardon LLP, San Diego, California; Leonid Kandinov, Ashley R. Rifkin, Kevin A. Seely, and Brian J. Robbins, Robbins Arroyo LLP, San Diego, California; David J. Harris Jr., William R. Restis, and Jeffrey R. Krinks, Finkelstein & Krinsk LLP, San Diego, California; for Plaintiff–Appellant Louis Lim.

David C. Bohan (argued), Patrick M. Smith, Peter G. Wilson, and Allison M. Freedman, Katten Muchin Rosenman LLP, Chicago, Illinois, for Defendant–Appellee UBS Securities LLC.

Gilbert R. Serota (argued) and Erica M. Connolly, Arnold & Porter LLP, San Francisco, California; Lowell Haky and Mai Klaassen, Charles Schwab & Co. Inc., San Francisco, California; for Defendants–Appellees The Charles Schwab Corp., Charles Schwab & Co. Inc., and Walter W. Bettinger II.

Before: Sandra S. Ikuta and Andrew D. Hurwitz, Circuit Judges, and Donald W. Molloy,^** District Judge.

HURWITZ, Circuit Judge:

The issue for decision is whether the Securities Litigation Uniform Standards Act ("SLUSA"), Pub L. 105–353, 112 Stat. 3227, deprived the district court of subject matter jurisdiction over complaints alleging a breach by a securities dealer of the "duty of best execution" in completing trades. The district court dismissed the appellants’ complaints pursuant to SLUSA. We affirm.

I. Background

Charles Schwab Corporation is a financial services firm that trades securities for its clients. In 2004, Schwab agreed to route 95% of its "non-directed trades" (trades for which clients have not selected another trading venue) to UBS Securities LLC ("UBS").

Louis Lim and Charles Fleming ("Plaintiffs") are Schwab retail customers. Their Account Agreements state that "Schwab routes equity and options orders for execution to" UBS and note that "Schwab may receive remuneration ... from a market center to which orders are routed." Nonetheless, Plaintiffs alleged in separate complaints that Schwab breached various state-law duties by routing trades to UBS. Plaintiffs claimed that Schwab could have routed trades to many other venues, and that its arrangement with UBS sometimes resulted in unfavorable executions, both in terms of price and speed.

A. The Complaints

On May 8, 2005, Lim filed a putative class action complaint in the Northern District of California alleging that Schwab’s routing of order executions to UBS (1) violated the California Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200 ; (2) breached Schwab’s fiduciary duty to its clients; and (3) unjustly enriched Schwab. Lim alleged that Schwab’s common law "duty of best execution in routing its clients’ orders" required Schwab to consider numerous factors when routing client trades, including "execution price, market depth, order size, and trading character of the security." By blindly routing non-directed orders to UBS, Lim alleged, Schwab breached this duty.

On June 24, 2015, Fleming filed a similar putative class action complaint in the same court against Schwab and UBS. Fleming alleged that Schwab (1) breached its contract; (2) violated the UCL; (3) engaged in intentional misrepresentation; and (4) engaged in negligent misrepresentation. Fleming also alleged that UBS violated the UCL.

B. Procedural Background

After the two cases were assigned to the same district judge, Schwab and UBS moved to dismiss the complaints, asserting that Plaintiffs lacked Article III standing or, in the alternative, that SLUSA deprived the district court of subject matter jurisdiction. The district court upheld the Plaintiffs’ standing, but dismissed both actions pursuant to SLUSA. See Hampton v. Pac. Inv. Mgmt. Co. , 869 F.3d 844, 847 (9th Cir. 2017) ("[D]ismissals under SLUSA are jurisdictional.").

II. Discussion

A. Standing

We must examine at the outset our power under Article III of the Constitution to resolve these cases. See NoGWEN All. of Lane Cty., Inc. v. Aldridge , 855 F.2d 1380, 1382 (9th Cir. 1988). Article III requires that a plaintiff "show (1) she has suffered an ‘injury in fact’ that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision." Bernhardt v. Cty. of L.A. , 279 F.3d 862, 868–69 (9th Cir. 2002). The district court found that "plaintiffs have adequately alleged the existence of an injury in fact" and rejected the defendants’ standing arguments. We agree and review the district court’s standing determination de novo. Arakaki v. Lingle , 477 F.3d 1048, 1056 (9th Cir. 2007).

The seminal inquiry is whether the alleged injury "is both ‘concrete and particularized.’ " Spokeo, Inc. v. Robins , ––– U.S. ––––, 136 S.Ct. 1540, 1545, 194 L.Ed.2d 635 (2016) (quoting Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc. , 528 U.S. 167, 180–81, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000) ). Although related, concreteness and particularity are distinct concepts. Id. at 1548. Particularized injuries "affect the plaintiff in a personal and individual way," while a "concrete injury must be de facto ; that is, it must actually exist." Id. (quoting Lujan v. Defs. of Wildlife , 504 U.S. 555, 560 n.1, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) ) (internal quotation marks omitted).

Fleming’s complaint alleged that because of the Schwab-UBS agreement, he "missed opportunities to profit when [his] trades failed to be executed or failed to obtain the best price," and cited academic work supporting his contention that the agreement affected execution prices. Similarly, Lim’s complaint alleged "Schwab’s routing of nearly all [Plaintiffs’] non-directed orders to UBS does not allow [Plaintiffs] to receive the most advantageous prices for their trades" and that UBS "regularly and routinely executes [Plaintiffs’] trades at price less favorable than the best price available in the broader marketplace."

The complaints alleged both particularized and concrete injuries—higher execution prices than might have occurred with a different market center. The complaints thus alleged the required injury in fact. That the eventual monetary damage arising from Schwab’s conduct may be small does not negate Plaintiffs’ standing. See Czyzewski v. Jevic Holding Corp. , ––– U.S. ––––, 137 S.Ct. 973, 983, 197 L.Ed.2d 398 (2017).

Schwab asserts that Article III is not satisfied because Plaintiffs have not identified particular trades that caused them losses. But, the complaints alleged that at least some of the Plaintiffs’ trades were more costly and less expeditious than they would have been if not routed to UBS. Whether the Plaintiffs can identify those trades at a later stage of litigation does not deprive them of standing to sue. At the motion to dismiss stage, "we presume[ ] that general allegations embrace those specific facts that are necessary to support the claim." Lujan , 504 U.S. at 561, 112 S.Ct. 2130 (alteration in original) (quoting Lujan v. Nat’l Wildlife Fed’n , 497 U.S. 871, 889, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990) ) (internal quotation marks omitted).

Contrary to the defendants’ assertions, Spokeo does not require a contrary result. Spokeo merely reiterated longstanding Article III jurisprudence requiring both concrete and particularized harms. See 136 S.Ct. at 1548 ("We have made it clear time and time again that an injury in fact must be both concrete and particularized." (italics in original)). Thus, "a bare [statutory] procedural violation," such as an improperly reported zip code by a consumer reporting agency, cannot by itself give rise to concrete harm. Id. at 1550. But here, Plaintiffs alleged more—overpaying for securities trades and losses from trades not executed promptly. Those concrete injuries, if proved, are redressable through monetary damages.¹

B. SLUSA

1. Background

In the early 1990s, Congress became concerned that "private securities litigation was ... being used to injure the entire U.S. economy." Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit , 547 U.S. 71, 81, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006) (internal quotation marks and citations omitted). To stem abuses from "nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and manipulation by class action lawyers of the clients whom they purportedly represent," Congress passed the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. 104–67, 109 Stat. 737. Dabit , 547 U.S. at 81, 126 S.Ct. 1503 (internal quotation marks omitted). PSLRA imposed heightened pleading standards for claims under § 10(b) of the Security Exchange Act of 1934 and Rule 10b–5.² See 15 U.S.C. § 78u–4(b). But, PSLRA had the unintended effect of encouraging claims under state securities laws, which were not subject to the new pleading rules. Dabit , 547 U.S. at 82, 126 S.Ct. 1503.

Seeking "to prevent state class actions alleging fraud ‘from being used to frustrate the objectives’ of [ ] PSLRA," Congress enacted SLUSA in 1998. Freeman...