Whitesides v. ETrade Securities, LLC

• Court: District Court, N.D. California
• Decided: March 11, 2021
• Docket: 3:20-cv-05803
• Status: Unknown

Opinion

1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 BENJAMIN WHITESIDES, et al., Case No. 20-cv-05803-JSC

9 Plaintiffs, ORDER RE: MOTION TO DISMISS 10 v. AND TO STRIKE

11 E*TRADE SECURITIES, LLC, et al., 12 Defendants.

13 Three users of E*TRADE’s electronic trading service bring suit alleging that E*TRADE 14 failed to process their orders as the crude oil futures market collapsed on April 20, 2020. 15 E*TRADE’s motion to dismiss and to strike is now pending before the Court.1 (Dkt. No. 17.) 16 Having carefully considered the parties’ briefs and having had the benefit of oral argument on 17 February 25, 2021, the Court GRANTS the motion to dismiss with leave to amend. The economic 18 loss rule bars Plaintiffs’ claims and Plaintiffs have not sufficiently pleaded the existence of a 19 “special relationship”. The motion to strike is DENIED as moot. 20 I. BACKGROUND 21 A. Complaint Allegations 22 E*TRADE is one of the largest online focused broker-dealers in the world. (First 23 Amended Complaint (“FAC”) Dkt. No. 16 ¶ 18.) Customers of E*TRADE’s platform trade 24 securities through a web-based application or by calling E*TRADE’s help center. (Id. ¶ 1.) 25 E*TRADE’s platform allows retail investors to trade oil futures contracts. (Id. ¶ 2.) A futures 26 contract is effectively a promise to deliver a commodity at a certain time. (Id. ¶ 3.) The buyer of 27 1 a futures contract takes on the obligation to buy and receive the underlying asset when the contract 2 expires. (Id. ¶ 21.) The seller of a futures contract takes on the obligation to deliver the 3 underlying asset at expiration. (Id.) However, nearly all retail investors trade commodity futures 4 contracts without any expectation of receiving or delivering the underlying asset. (Id. ¶ 22.) 5 These investors close out their positions prior to the expiration of the contract. (Id.) E*TRADE 6 also allows customers to trade oil futures that are settled with cash instead of oil. (Id.) These 7 futures are known as “e-mini futures.” (Id.) Upon expiration, the value of “e-mini futures” 8 converge with the value of regular oil futures. (Id.) The benchmark for oil futures is the contract 9 on West Texas Intermediate (“WTI”) crude oil delivered to Cushing, Oklahoma. (Id. ¶ 20). 10 In early 2020, the global coronavirus pandemic caused a precipitous decline in demand for 11 oil. (Id. ¶ 23.) In addition, on March 8, 2020, Russia and Saudi Arabia announced increases in oil 12 production and Saudi Arabia announced price discounts. (Id. ¶ 24.) These announcements 13 depressed crude oil prices. (Id.) On April 20, 2020, the day before the May 2020 WTI futures 14 contracts expired, the price of these futures dropped precipitously. (Id. ¶ 30.) By the end of the 15 day, the futures closed at a negative price of -$37.63 as investors became concerned that the cost 16 to store these barrels of oil would be more than the oil was worth. (Id. ¶ 27.) When the price of 17 these futures dropped below zero, E*TRADE’s platform suffered a system failure. (Id. ¶ 31.) As 18 a result of the system failure, the platform failed to display accurate prices for crude oil futures and 19 did not allow users to close out their positions. (Id.) Prior to the system failure, it was known 20 industrywide that oil futures could trade negative. (Id. ¶ 28.) The owner of the New York 21 Mercantile Exchange sent a notice to its clearing-member firms on April 15, 2020, advising them 22 how they could test their systems using negative prices. (FAC ¶ 29.) Furthermore, CME Group, 23 Inc. warned on the day of the crash that the company’s WTI futures had the potential to trade 24 negative. (FAC ¶ 30.) 25 Plaintiffs, Benjamin Whitesides, Aziz Si Hadj Mohand, and Matthew Cheung, are 26 customers of E*TRADE’s trading platform who held “e-mini” oil futures contracts when the price 27 fell below zero. (Id. ¶¶ 35, 41, 46.) Each Plaintiff claims that he immediately attempted to sell off 1 unable to do so because of the system failure afflicting E*TRADE’s platform. (Id.) Each Plaintiff 2 alleges that he suffered substantial losses. (Id. ¶¶ 37, 43, 48.) E*TRADE’s relationship with 3 Plaintiffs is governed by a customer agreement. (Id. ¶¶ 12, 34, 39, 45.) 4 B. Procedural History 5 On August 18, 2020, Plaintiffs filed a class action complaint against E*TRADE Securities, 6 LLC and E*TRADE Futures, LLC, alleging causes of action for breach of contract, breach of the 7 duty of good faith and fair dealing, negligence, gross negligence, and a claim under the California 8 Unlawful Competition Law (“UCL”). (Dkt. No. 1.) Defendants then moved to dismiss. (Dkt. No. 9 12.) However, on October 28, 2020, the parties stipulated to withdraw the motion to dismiss and 10 allow Plaintiffs to file an amended complaint. (Dkt. Nos. 13, 14.) Plaintiffs filed the now 11 operative FAC on November 12, 2020. (Dkt. No. 16.) The FAC amends out the claims for breach 12 of contract and breach of the duty of good faith and fair dealing, leaving only the claims for 13 negligence, gross negligence, and violation of the UCL. On December 11, 2020, Defendants 14 again moved to dismiss, or in the alternative, to strike certain portions of the pleading. (Dkt. No. 15 17.) These motions are now fully briefed, and the Court held oral argument on February 25, 2021. 16 II. LEGAL STANDARD 17 A Rule 12(b)(6) motion should be granted when the complaint does not allege “enough 18 facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 19 544, 570 (2007). A facial plausibility standard is not a “probability requirement” but mandates 20 “more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 21 662, 678 (2009) (internal quotation marks and citations omitted). In ruling on a Rule 12(b)(6) 22 motion, the court “accept[s] factual allegations in the complaint as true and construe[s] the 23 pleadings in the light most favorable to the non-moving party.” Manzarek v. St. Paul Fire & Mar. 24 Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). “[D]ismissal may be based on either a lack of a 25 cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” 26 Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 1121 (9th Cir. 2008) (internal quotation 27 marks and citations omitted); see also Neitzke v. Williams, 490 U.S. 319, 326 (1989) (“Rule 1 If a court grants a Rule 12(b)(6) motion, it “should grant leave to amend even if no request 2 to amend the pleading was made, unless it determines that the pleading could not possibly be 3 cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en 4 banc) (internal quotation marks and citations omitted). 5 III. DISCUSSION 6 A. Choice of Law 7 Defendants argue that a choice-of-law clause in E*TRADE’s customer agreement requires 8 Plaintiffs’ negligence claims be governed by New York law. Plaintiffs counter that the choice-of- 9 law clause does not reach tort claims, so California law should govern. 10 A federal court sitting in diversity applies the choice-of-law rules of the forum state.2 11 Narayan v. EGL, Inc., 616 F.3d 895, 898 (9th Cir. 2010). California, here the forum state, 12 “ordinarily examines the scope of a choice of law provision in a contract under the law designated 13 in that contract.” Id. Here, that is New York law. New York courts are reluctant to construe 14 contractual choice-of-law clauses broadly to encompass extra-contractual causes of action. Fin. 15 One Pub. Co. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 334 (2d Cir. 2005). For a choice- 16 of-law clause to cover tort claims arising incident to the contract, the language of that clause “must 17 be sufficiently broad as to encompass the entire relationship between the contracting parties.” 18 Krock v. Lipsay, 97 F.3d 640, 645 (2d Cir. 1996). However, such a broad choice-of-law clause is 19 so rare that, in 2005, the Second Circuit concluded that “no reported New York cases present such 20 a broad clause.” Fin. One, 414 F.3d at 335. 21 The choice-of-law clause contained in the customer agreement reads: “The Account 22 Holder understands that this Customer Agreement will be deemed to have been made in the State 23 of New York and will be construed, and the rights and liabilities of the parties determined, in 24 accordance with the internal laws of the State of New York.”3 (Dkt. No. 17-3 at 38.)4 Defendants 25 2 Plaintiffs allege federal jurisdiction under the Class Action Fairness Act. (FAC ¶ 16.) 26 3 The Court considers the customer agreement as incorporated by reference into the complaint. “Even if a document is not attached to a complaint, it may be incorporated by reference into a 27 complaint if the plaintiff refers extensively to the document or the document forms the basis for 1 claim that this clause requires (1) that the contract be construed under New York law and (2) that 2 the “rights and liabilities” of the parties beyond the contract also be determined under New York 3 law. According to Defendants, if the “rights and liabilities” language referred only to contractual 4 rights and liabilities, then this would be redundant with the earlier language requiring that the 5 contract be construed under New York law. Not so. Contract construction is an important step to 6 determine the rights and liabilities of the parties to a contract, but it is not the only step. Even if 7 no party disputes the proper construction of a contract, a party may mount a challenge on grounds 8 such as duress, unconscionability, public policy, or the like. See 159 MP Corp. v. Redbridge 9 Bedford, LLC, 33 N.Y.3d 353, 360 (2019). The better reading of E*TRADE’s choice of law 10 clause is that New York law governs all aspects of the parties’ contractual rights and liabilities. 11 Therefore, the Court will analyze Plaintiffs’ negligence claims under California law. 12 Defendants also argue that the customer agreement contains an exculpatory clause that 13 contractually waives the duty of care. The exculpatory clause falls within the scope of the choice 14 of law clause because it defines the parties’ contractual rights and liabilities. Therefore, the Court 15 will analyze the application of the exculpatory clause under New York law. 16 B. Negligence Claims 17 1. Exculpatory Clause 18 Defendants argue that an exculpatory clause contained in the E*TRADE customer 19 agreement absolves Defendants from liability for ordinary negligence. 20 Under New York law, contractual provisions absolving a party from its own ordinary 21 negligence are generally enforceable. Colnaghi, U.S.A. v. Jewelers Protection Servs., 81 N.Y.2d 22 821, 823 (1993). In some cases, an exculpatory clause may be deemed void as against public 23 policy or by statute. Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 553 (1992). For example, 24 New York courts have concluded that public policy does not permit a party to insulate itself from 25 damages caused by its own grossly negligent conduct. Id. at 554. 26 The exculpatory clause contained in the customer agreement reads: “To the maximum 27 1 extent permitted by Applicable Law, no E*TRADE Indemnified Parties shall be liable for any 2 action taken or omitted to be taken by any of them hereunder or in connection herewith except for 3 their breach of this Customer Agreement, gross negligence, or willful misconduct.” (Dkt. No. 17- 4 3 at 34.) This clause unambiguously protects Defendants from any claim of ordinary negligence. 5 Plaintiffs’ briefing argues this clause is void as against public policy; however, at oral 6 argument, Plaintiffs conceded this clause barred the ordinary negligence claim. The Court agrees. 7 Plaintiffs’ brief argues that New York courts have adopted California’s Tunkl test for the public 8 policy exception. Tunkl v. Regents of the Univ. of Cal., 60 Cal.2d 92 (1963). In Tunkl, the 9 California Supreme Court declared that the “social forces” that define the public interest are 10 “volatile and dynamic”. Id. at 98. The court went on to adopt a lengthy multifactor test which 11 considers bargaining power, existing public regulation, and many other factors to determine 12 whether public policy bars the enforcement of an exculpatory clause. Id. at 98–101. Plaintiffs, 13 however, cite only a single mid-level appellate case, Ash v. N.Y. Univ. Dental Ctr., applying Tunkl 14 in New York. 564 N.Y.S.2d 308, 312–13 (1st Dep’t 1990). In fact, New York courts typically 15 approach the public policy exception very differently than Tunkl. For example, in Corwin v. NYC 16 Bike Share, LLC, the Southern District of New York explained that “Public Policy” in New York 17 is “ascertained by reference to the laws and legal precedents and not from general considerations 18 of supposed public interests.” 238 F.Supp.3d 475, 491 (S.D.N.Y. 2017). The Corwin court then 19 considered the exculpatory clause at issue against three specific “sources of public policy” 20 identified by the plaintiffs in New York statutes and common law. Id. Plaintiffs here have not 21 offered any source of public policy or other basis under New York law for invalidating the 22 exculpatory clause in E*TRADE’s customer agreement. Accordingly, the exculpatory clause is 23 enforceable and Plaintiffs’ ordinary negligence claim is dismissed. 24 2. Economic Loss Rule 25 Defendants next argue that the economic loss rule requires the dismissal of Plaintiffs’ 26 negligence and gross negligence claims. Plaintiffs maintain that the economic loss rule is 27 inapplicable and that, in any event, there is a “special relationship” between the parties permitting 1 In California, the economic loss rule ordinarily prevents a party to a contract from 2 recovering in tort for purely economic loss. Robinson Helicopter Co., Inc. v. Dana Corp., 34 3 Cal.4th 979, 988 (2004). The rule applies equally to claims for negligence and gross negligence. 4 See Rejects Skate Magazine v. Acutrack, Inc., No. C 06-2590 CW, 2006 WL 2458759, at *6 (N.D. 5 Cal. August 22, 2006) (applying the economic loss rule to dismiss both negligence and gross 6 negligence claims). The purpose of the rule is to “prevent[] the law of contract and the law of tort 7 from dissolving one into the other.” Robinson Helicopter Co., 24 Cal.4th at 988 (internal 8 quotation marks and citation omitted). However, conduct amounting to a breach of contract 9 becomes tortious and justifies the recovery of economic loss when “it also violates a duty 10 independent of the contract arising from principles of tort law.” Id. at 989. 11 a. Economic Loss Rule and Service Contracts 12 Plaintiffs first argue that the economic loss rule does not apply where the parties have 13 contracted for the performance of services. As support, they cite North American Chemical Co. v. 14 Superior Court, 59 Cal. App. 4th 764 (1997). However, the North American Chemical court did 15 not categorically hold that the economic loss rule does not apply when the parties have contracted 16 for the performance of services. Id. at 785. Instead, the court held that, where the contract is for 17 the performance of services, a “special relationship” between the contracting parties may create an 18 independent duty of care permitting the plaintiff to recover economic losses in tort. Id. The court 19 then applied the six-factor “special relationship” test as announced by the California Supreme 20 Court in J’Aire Corp. v. Gregory, 24 Cal.3d 799, 804 (1979). Thus, under North American 21 Chemical, a party to a contract for services may argue that there exists a special relationship 22 between the parties giving rise to a duty of care independent of the contract. 23 b. Economic Loss Rule and Parties in Contractual Privity 24 Notwithstanding North American Chemical, Defendants argue that under California law, 25 parties in contractual privity can never be in a special relationship giving rise to an independent 26 duty of care that permits the recovery of economic losses. As support they cite a recent 27 unpublished Ninth Circuit decision holding that privity between a digital platform and its users 1 Fed.Appx. ---, 2020 WL 7658357, at *2 (9th Cir. 2020). Berk relies on another California 2 appellate decision, Stop Loss Ins. Brokers, Inc. v. Brown & Toland Med. Grp., 143 Cal. App. 4th 3 1036 (2006) (limiting the “special relationship” test to cases where the defendant’s negligent 4 performance of a contract injures a third party). Berk’s holding is in accord with several other 5 district court decisions. See Body Jewelz, Inc. v. Valley Forge Ins. Co., 241 F. Supp. 3d 1084, 6 1092 (C.D. Cal. 2017); Kelomar, Inc. v. Kulow, No. 90CV0353 BTM(PCL), 2009 WL 3818817 7 (S.D. Cal. November 12, 2009). 8 However, in R Power Biofuels, LLC v. Chemex LLC, the district court predicted that the 9 California Supreme Court would follow North American Chemical and conclude that parties in 10 privity can have a special relationship giving rise to an independent duty of care. No. 16-CV- 11 00716-LHK, 2016 WL 6663002, at *5 (N.D. Cal. November 11, 2016). Courts in this district 12 have consistently followed R Power Biofuels’ holding. See In re Yahoo! Inc. Customer Data Sec. 13 Breach Litig., 313 F. Supp. 3d 1113, 1131–32 (N.D. Cal. 2018); Kemp v. Wells Fargo Bank, N.A., 14 No. 17-CV-01259-MEJ, 2017 WL 4805567, at *3 (N.D. Cal. October 25, 2017). 15 In resolving questions of state law, the Court is bound by “pronouncements from the 16 state’s highest court.” See Jerry Beeman & Pharmacy Servs., Inc. v. Anthem Prescription Mgmt., 17 LLC, 652 F.3d 1085, 1092 (9th Cir. 2011). The Court is also “obligated to follow the decisions of 18 the state’s intermediate appellate courts unless the court finds convincing evidence that the state’s 19 supreme court likely would not follow them.” Id. (internal quotations and brackets omitted). As 20 usual, the Court is also bound by published decisions from the Ninth Circuit. Where there is no 21 clear binding authority, the Court’s task is to “predict how the highest state court would decide the 22 issue.” Id. at 1106. 23 Here, neither the California Supreme Court nor the Ninth Circuit have decided, in a 24 published decision, whether parties in contractual privity can also be in a “special relationship”, 25 and the lower California appellate courts are split. Therefore, it is the Court’s task to predict how 26 the California Supreme Court would decide this issue. The starting point is the most recent 27 California Supreme Court decision on the economic loss rule: S. Cal. Gas Leak Cases, 7 Cal.5th 1 leak which drove residents away and devastated the local economy. Id. at 396. The local 2 businesses did not allege that the gas leak resulted in personal injury or property damage—instead, 3 they sought to recover lost business income. Id. Affirming dismissal, the court held that liability 4 in negligence for purely economic losses is “the exception, not the rule” and the “primary 5 exception” arises when parties are in a “special relationship.” Id. at 400. The court further held 6 that “[d]eciding whether to impose a duty of care turns on a careful consideration of the sum total 7 of the policy considerations at play, not a mere tallying of some finite, one-size-fits-all set of 8 factors.” Id. at 401. Under the facts of S. Cal. Gas Leak, the court was especially concerned by 9 the prospect of “limitless liability and unending litigation” should the court permit the recovery of 10 economic losses for all persons affected by such a disaster. Id. at 403. Weighing these policy 11 considerations, the court affirmed dismissal. 12 The California Supreme Court’s flexible, fact-specific approach to the question of duty in 13 S. Cal. Gas Leak suggests that it would carefully examine the policy considerations at play before 14 categorically barring negligence actions for economic loss where the parties are in privity of 15 contract. The conflicting decisions raise many such policy arguments. Those courts which have 16 refused to recognize a “special relationship” between contracting parties have reasoned that 17 allowing contracting parties to recover in tort “undermines the predictability that parties seek 18 when they enter into a contract.” Body Jewelz, 241 F. Supp. 3d at 1093. Recognizing a duty 19 between contracting parties may also “blur the law’s distinction between contract and tort 20 remedies.” Stop Loss, 143 Cal. App. 4th at 1043. Those courts which have recognized a “special 21 relationship” between contracting parties have also pointed to policy considerations. The North 22 American Chemical court argues that, where the contract is for services, “defendant’s reasonable 23 and competent performance is the whole purpose of the contract” and a contractual allocation of 24 losses away from the negligently performing party would “defeat the contract’s purpose.” 59 Cal. 25 App. 4th at 784–85. Similarly, courts have emphasized the need to “incentivize the service 26 provider’s due care.” R Power Biofuels, 2016 WL 6663002 at 5; see also Yahoo!, 313 F. Supp. 3d 27 at 1132. 1 None of these policy arguments are especially compelling. While predictability in the 2 enforcement of contracts is an important public policy, the California Supreme Court has 3 expressed skepticism regarding contracts of adhesion drafted by parties with superior bargaining 4 power. See Tunkl, 60 Cal.2d at 100. Furthermore, the California Supreme Court has explicitly 5 limited the power of contracting parties to allocate liabilities where one party acts with gross 6 negligence, as alleged here. See City of Santa Barbara v. Superior Court, 41 Cal.4th 747, 781 7 (2007). The policy arguments in North American Chemical are also unconvincing because they 8 are overbroad and fail to grapple with the distinction between tort and contract remedies. North 9 American Chemical imagines tort remedies as a stand in for contract remedies because contract 10 remedies are too easily disclaimed. 59 Cal. App. 4th at 784–85. But this is a drastic argument and 11 its reasoning has been rejected by the California Supreme Court. See Aas v. Superior Court, 24 12 Cal.4th 627, 643 (2000) (superseded by statute on other grounds) (rejecting a broad reading of 13 North American Chemical and holding that courts generally enforce breaches of contract through 14 contract law, except when the actions that constitute breach violate a social policy that merits the 15 imposition of tort remedies). Lastly, regarding the argument that tort law must incentivize a 16 service provider’s due care, this may be an important public policy, but courts do not typically 17 impose liability for economic losses to this end. See S. Cal. Gas Leak, 7 Cal.5th at 400. 18 In all, the sum total of policy considerations does not justify a blanket rule barring or 19 allowing the recovery of economic losses when parties are in privity of contract. Instead, the Court 20 predicts that the California Supreme Court would hold that courts must examine the particular 21 policy considerations at play under the facts of each case to determine if a special relationship 22 exists giving rise to an independent duty of care. 23 c. Whether Plaintiffs Have Pled a Special Relationship 24 To judge the existence of a special relationship giving rise to an independent duty, courts 25 consider six factors: (1) the extent to which the transaction was intended to affect the plaintiff, (2) 26 the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered 27 injury, (4) the closeness of the connection between the defendant’s conduct and the injury 1 future harm. J’Aire, 24 Cal.3d at 804; see also Aas, 24 Cal.4th at 644 (superseded by statute on 2 other grounds). 3 Here, the first of the J’Aire factors is the most important. Drawing all reasonable 4 inferences from the facts alleged in Plaintiffs’ favor, E*TRADE’s trading platform was not 5 intended to affect Plaintiffs in any way particular to Plaintiffs. Ott v. Alfa-Laval Agri, Inc., is 6 instructive. 31 Cal. App. 4th 1439 (1995). In Ott, the court rejected a milk farm’s contention that 7 there existed a “special relationship” between the farm and a manufacturer of milking equipment. 8 Id. at 1456. The farm had argued that the milking equipment was “intended to affect” dairymen 9 like the plaintiffs. Id. at 1455. The court rejected this argument, concluding that the plaintiffs 10 needed to show intent “particular to the plaintiffs, as opposed to all potential purchasers of the 11 equipment.” Id. Plaintiffs in this case do not plead intent particular to them, as opposed to all 12 users of E*TRADE’s trading platform. See also In re Sony Gaming Networks & Customer Data 13 Sec. Breach Litig., 996 F. Supp. 2d 942, 972 (S.D. Cal. 2014) (holding that the first factor weighed 14 against imposing a special relationship where the defendant did not develop goods and services for 15 the plaintiffs’ “specific benefit, above and beyond what was offered to all consumers”). 16 Plaintiffs’ failure to plead intent specific to them also implicates important policy 17 considerations which disfavor recognizing a duty of care. As the court held in S. Cal. Gas Leak, a 18 duty of care should not be recognized where it would create limitless liability and unending 19 litigation. 7 Cal.5th at 403. The court echoed concerns expressed in the Restatement of Torts that 20 purely economic losses “proliferate more easily than losses of other kinds and are not self- 21 limiting.” Id. at 407 (internal quotations omitted). The result is that liability for economic loss 22 may be “indeterminate and out of proportion to a defendant’s culpability.” Id. (internal quotations 23 and brackets omitted). In cases where courts have recognized a right to recover economic losses, 24 the foregoing considerations have often been “weak or absent”. Id. Should the Court recognize a 25 duty of care to prevent economic loss under the alleged facts of this case, then there would be no 26 meaningful limits on the tort exposure of service providers who market services to the public. 27 Any person who used the service and suffered economic loss could sue. This broad duty would 1 run contrary to the California Supreme Court’s holding that tort liability for economic losses is the 2 exception, not the rule. Id. at 400. 3 The Court is not persuaded by the contrary holding in Yahoo!, 313 F. Supp. 3d at 1132. In 4 Yahoo!, users of the defendant’s email service sued the defendant over multiple data breaches that 5 exposed many users’ personal information to hackers. Id. at 1122. The court concluded that the 6 first factor favored a special relationship because “the contract entered into between the parties 7 related to email services for Plaintiffs.” Id. at 1132. The court did not require a showing of intent 8 particular to the plaintiffs. The Yahoo! court’s analysis is unpersuasive because it would render 9 the first factor meaningless when the parties are in contractual privity. Any time parties are in 10 contractual privity, the contract entered into will relate to the services offered under the contract. 11 But this abbreviated analysis does not allow courts to take account of the policy consequences of 12 extending liability for economic losses to all parties in contractual privity. Used properly, the first 13 J’Aire factor is a tool for courts to limit recovery for economic losses to those relationships that 14 are truly “special”. See S. Cal. Gas Leak, 7 Cal.5th at 401. Mere privity of contract should not 15 shortcut this analysis. 16 The second J’Aire factor considers the foreseeability of the injury. Here, Plaintiffs have 17 alleged sufficient facts to raise a plausible inference that the injury was foreseeable; specifically, 18 Plaintiffs allege that the owner of the New York Mercantile Exchange sent a notice five days 19 before the crash to its clearing-member firms advising them how they could test their systems 20 using negative prices. (FAC ¶ 29.) Plaintiffs further allege that CME Group, Inc. announced on 21 the day of the crash that CME’s futures can trade negative. (Id. ¶ 30.) The third and fourth J’Aire 22 factors consider the degree of certainty that the plaintiff suffered injury and the closeness of the 23 connection between the defendant’s conduct and the injury suffered. While Plaintiffs adequately 24 allege that they suffered an injury, the connection alleged between the defendant’s conduct and the 25 injury suffered is attenuated. Plaintiffs allege that E*TRADE suffered a system failure only after 26 the price of futures contracts went negative. (Id. ¶ 4.) Consequently, only those losses suffered 27 after prices had already gone negative could be connected to Defendant’s conduct. Furthermore, 1 price fell below zero, meaning that Plaintiffs would have faced difficulties filling their orders even 2 if E*TRADE’s platform had accepted them.5 This further difficulty which Plaintiffs would have 3 faced in mitigating their losses attenuates the connection between the defendant’s conduct and the 4 injury suffered. See Andrews v. Plains All American Pipeline, L.P., No. CV 15-4113 PSG 5 (JEMx), 2017 WL 10543401, at *12 (C.D. Cal. Aug. 25, 2017) (where the causal chain leading to 6 the plaintiff’s loss involves independent actors exercising independent judgement, causation may 7 be attenuated). 8 The fifth J’Aire factor considers the moral blame attributable to the defendant’s conduct. 9 To establish moral blame, courts look for allegations that the defendants knew of a deficiency and 10 failed to act. See J’Aire, 24 Cal.3d at 805; Yahoo!, 313 F. Supp. 3d at 1132. While Plaintiffs 11 allege that E*TRADE knew that oil futures contracts could go negative, they do not plausibly 12 allege that E*TRADE knew of the deficiencies in their own system which caused the outage. 13 Paragraph seven of the complaint does allege that E*TRADE failed to “correct known 14 deficiencies” and “ignored multiple red flags,” but these allegations are vague and conclusory. 15 See Iqbal, 556 U.S. at 681 (2009) (conclusory allegations are “not entitled to be assumed true”). 16 The FAC does not offer specific factual allegations from which the Court could infer that 17 E*TRADE knew of these deficiencies. Lastly, the sixth J’Aire factor considers the policy of 18 preventing future harm. Here, Plaintiffs do not identify any compelling policy argument that 19 requires tort liability for malfunctions in the operation of an online trading platform. Cf. Ales- 20 Peratis Foods Internat., Inc. v. American Can Co., 164 Cal. App. 3d 277, 289–90 (1985) 21 (extending liability under the J’Aire factors where the defendant sold defective and potentially 22 dangerous food packaging); Huang v. Garner, 157 Cal. App. 3d 404, 424 (1984) (extending 23 liability under the J’Aire factors where the defendants built and sold houses with dangerous 24 defects); Yahoo!, 313 F. Supp. 3d at 1132–33 (extending liability under the J’Aire factors for a 25 serious consumer data breach). 26 Weighing the J’Aire factors, the Court declines to recognize a duty of care to prevent 27 1 economic losses under the alleged facts. The only factor to weigh in favor of a duty is 2 foreseeability of the harm; however, as the California Supreme Court has warned, foreseeability 3 “provides virtually no limit on liability for nonphysical harm.” S. Cal Gas Leak, 7 Cal.5th at 401. 4 Accordingly, Plaintiffs’ claim for gross negligence is dismissed. Plaintiffs’ claim for ordinary 5 negligence also merits dismissal on this alternative ground. Plaintiffs have conceded that, should 6 the negligence claims fail, the UCL claim must also fail. (Dkt. No. 18 at 29:27–30:1.) 7 Accordingly, Plaintiffs’ claim under the UCL is also dismissed. 8 C. Leave to Amend 9 If a court grants a Rule 12(b)(6) motion, it “should grant leave to amend even if no request 10 to amend the pleading was made, unless it determines that the pleading could not possibly be 11 cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en 12 banc) (internal quotation marks and citations omitted). Here, the ordinary negligence claim is 13 barred by the exculpatory clause and cannot be cured by amendment. However, Plaintiffs may 14 attempt to cure the deficiencies in their gross negligence and UCL claims by alleging other facts 15 which tip the balance of the J’Aire factors. Plaintiffs may also choose to reassert their contract 16 claims. Defendants argue that Plaintiffs have abandoned their contract claims by amending them 17 out. As support, they cite Sierra Med. Servs. All. v. Kent, 883 F.3d 1216 (9th Cir. 2018), and 18 Lacey v. Maricopa County, 693 F.3d 896 (9th Cir. 2012). But these cases only hold that claims 19 not in the operative complaint are waived on appeal. Sierra Med. Servs., 883 F.3d at 1223; Lacey, 20 693 F.3d at 928. The standard for granting leave to amend is much more forgiving. See Ross v. 21 Trex Company, Inc., No. C 09-670 JF (PVT) & C 09-1878 JF (PVT), 2010 WL 11570868, at *3 22 (N.D. Cal. March 16, 2010) (allowing plaintiffs to reassert claims they had previously amended 23 out). Accordingly, the Court will grant leave to amend, except with respect to the ordinary 24 negligence claim. 25 D. Motion to Strike 26 Because the complaint is dismissed, E*TRADE’s separate motion to strike is denied as 27 moot. IV. CONCLUSION For the reasons set forth above, the Court GRANTS the motion to dismiss. The ordinary 2 negligence claim is dismissed without leave to amend. The remaining claims are dismissed with 3 leave to amend. Plaintiffs may also reassert their contract claims. Any amended complaint must 4 be filed within 30 days of this Order. The Court sets a video case management conference for 5 May 27, 2021 at 1:30 p.m. 6 The motion to strike is DENIED as moot. 7 This Order disposes of Docket No. 17. 8 IT IS SO ORDERED. , 9 re Dated: March 11, 2021 10 JXCQUELINE SCOTT CORLE United States Magistrate Judge

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