Whitesides v. ETrade Securities, LLC

Opinion

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

8 Plaintiffs, ORDER RE: MOTION TO DISMISS 9 v. SECOND AMENDED COMPLAINT

10 E*TRADE SECURITIES, LLC, et al., Re: Dkt. No. 29 Defendants. 11

12 13 Three users of E*TRADE’s electronic trading service allege that E*TRADE breached its 14 customer agreement when it failed to process their orders as the crude oil futures market collapsed 15 on April 20, 2020. Defendants E*TRADE Securities, LLC and E*TRADE Futures, LLC (collectively “E*TRADE”) move to dismiss Plaintiffs’ Second Amended Class Action Complaint 16 (“SAC”) for failure to state a claim for breach of contract.1 (Dkt. No. 29.)2 After carefully 17 considering the parties’ submissions, and having had the benefit of oral argument on June 17, 18 2021, the Court GRANTS Defendants’ motion to dismiss Plaintiffs’ SAC for failure to state a 19 claim without leave to amend. 20 BACKGROUND 21 A. Second Amended Complaint Allegations 22 E*TRADE is one of the largest online focused broker-dealers in the world. (SAC, Dkt. No. 23 28 ¶18.) Customers of E*TRADE’s platform trade securities through a web-based application or 24 by calling E*TRADE’s help center. (Id. ¶ 1.) E*TRADE’s platform allows retail investors to trade 25 26 1 All parties have consented to the jurisdiction of a magistrate judge pursuant to 28 U.S.C. Section 27 636(c). (Dkt. Nos. 6 and 9.) 1 oil futures contracts. (Id. ¶ 2.) A futures contract is effectively a promise to deliver a commodity at 2 a certain time. (Id. ¶ 3.) The buyer of a futures contract takes on the obligation to buy and receive 3 the underlying asset when the contract expires. (Id. ¶ 21.) The seller of a futures contract takes on the obligation to deliver the underlying asset at expiration. (Id.) However, nearly all retail 4 investors trade commodity futures contracts without any expectation of receiving or delivering the 5 underlying asset. (Id. ¶ 22.) These investors close out their positions prior to the expiration of the 6 contract. (Id.) E*TRADE also allows customers to trade oil futures that are settled with cash 7 instead of oil. (Id.) These futures are known as “e-mini futures.” (Id.) Upon expiration, the value 8 of “e-mini futures” converge with the value of regular oil futures. (Id.) The benchmark for oil 9 futures is the contract on West Texas Intermediate (“WTI”) crude oil delivered to Cushing, 10 Oklahoma. (Id. ¶ 20.) 11 In early 2020, the global coronavirus pandemic caused a precipitous decline in demand for 12 oil. (Id. ¶ 23.) In addition, on March 8, 2020, Russia and Saudi Arabia announced increases in oil 13 production and Saudi Arabia announced price discounts. (Id. ¶ 24.) These announcements 14 depressed crude oil prices. (Id.) On April 20, 2020, the day before the May 2020 WTI futures 15 contracts expired, the price of these futures dropped precipitously. (Id. ¶ 30.) By the end of the 16 day, the futures closed at a negative price of -$37.63 as investors became concerned that the cost 17 to store these barrels of oil would be more than the oil was worth. (Id. ¶ 27.) When the price of 18 these futures dropped below zero, E*TRADE’s platform suffered a system failure. (Id. ¶ 31.) As 19 a result of the system failure, the platform failed to display accurate prices for crude oil futures and 20 did not allow users to close out their positions. (Id.) Prior to the system failure, it was known 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. (Id. ¶ 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. (Id. ¶ 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 the contracts when the price fell below zero. (Id.) However, each Plaintiff alleges that he was 2 unable to do so because of the system failure afflicting E*TRADE’s platform. (Id.) Each Plaintiff 3 alleges that he suffered substantial losses. (Id. ¶¶ 37, 43, 48.) E*TRADE’s relationship with Plaintiffs is governed by a customer agreement (the “Agreement.”) (Id. ¶¶ 12, 34, 39, 45.) 4 B. Procedural Background 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, the parties subsequently stipulated to withdraw the motion to dismiss and allow 10 Plaintiffs to file an amended complaint. (Dkt. Nos. 13, 14.) 11 Plaintiffs filed the First Amended Complaint (“FAC”) on November 12, 2020, which 12 eliminated the claims for breach of contract and breach of duty of good faith and fair dealing, but 13 maintained the claims for negligence, gross negligence, and violation of UCL. (Dkt. No. 16.) 14 Defendants again moved to dismiss, or in the alternative, to strike certain portions of the pleading. 15 (Dkt. No. 17.) The Court thereafter granted Defendants’ motion to dismiss without leave to amend 16 for the ordinary negligence claim but with leave to amend as to Plaintiffs’ other claims. (Dkt No. 17 27.) 18 Plaintiffs then filed the now operative SAC, which repleads the claims for breach of 19 contract, breach of the duty of good faith and fair dealing, and violation under the UCL, but does 20 not include any negligence claims. Defendants again moved to dismiss, or in the alternative, to strike certain portions of the pleading. (Dkt. No. 29.) Defendants’ motion to dismiss is now fully 21 briefed, and the Court heard oral argument on June 17, 2021. 22 DISCUSSION 23 In the SAC, Plaintiffs pivoted from negligence claims to breach of contract and breach of 24 the covenant of good faith and fair dealing claims; however, in their motion to dismiss opposition, 25 Plaintiffs withdrew their breach of the covenant and fair dealing claim and their UCL claim. (Dkt. 26 No. 31 at 6 n.1.) Thus, the sole claim before the Court is a breach of contract claim based on the 27 Agreement. 1 A. Breach of Contract 2 To state a claim for breach of contract under New York law, the plaintiff must show “the 3 existence of a contract, the plaintiff’s performance pursuant to the contract, the defendant’s breach 4 of his or her contractual obligations, and damages resulting from the breach.”3 Canzona v. 5 Atanasio, 118 A.D.3d 837, 839 (N.Y. App. Div. 2014). 6 Plaintiffs allege that E*TRADE breached the Agreement by not permitting them to trade 7 their shares on April 20, 2020 when the price of crude oil went negative. In particular, as to the 8 breach they allege as follows: 9 68. E*TRADE breached its Customer Agreement by, among other 10 things, (i) failing to provide adequate technological systems necessary to perform under these contracts; (ii) failing to provide trading 11 services when an Outage occurred due to a lack of infrastructure and alternate means for customers to place timely trades; (iii) failing to 12 provide access to its trading services in a timely manner and (iv) otherwise permitting the Outage to occur and thereby prohibiting the 13 parties from performing in a timely manner (or at all) under the contracts. 14 (Dkt No. 28 at 20 at ¶ 68.) 15 Defendants contend that the claim fails because Plaintiffs do not identify any Agreement 16 provision which E*TRADE breached. Under New York law, a necessary element of a breach of 17 contract claim is the identity of the contract provision allegedly breached. Barker v. Time Warner 18 Cable, Inc., 83 A.D.3d 750, 752 (N.Y. App. Div. 2011.) Further, to state a claim for breach of 19 contract, a plaintiff must allege facts that plausibly support the existence of contractual terms that 20 were allegedly breached by the defendant’s conduct. See Press Rentals Inc. v. Genesis Fluid Sols. 21 Ltd., No. 5:11-CV-02579 EJD, 2013 WL 485654, at *4 (N.D. Cal. Feb. 6, 2013); see also Moss v. 22 U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (“to survive a motion to dismiss, the non- 23 conclusory ‘factual content,’ and reasonable inferences from that content, must be plausibly 24 suggestive of a claim entitling the plaintiff to relief”). 25 26 27 1 While the SAC attaches the Agreement, it does not identify any Agreement provision 2 which required Defendants to offer trading services at all times such that its failure to do so on 3 April 20, 2020 constitutes a breach of contract. Instead, the only Agreement provisions the SAC identifies are first, that “E*TRADE offers a variety of ways to access the Account, including 4 telephone, online, mobile application and interactive voice response services.” (Dkt. No. 28 ¶ 67.) 5 And, second, “E*TRADE’s website and mobile application may make available ‘Market Data’ 6 which is defined as ‘all data distributed by E*TRADE regarding bids, offers and market 7 transactions and all information based on any such data.” (Id.) Neither the SAC nor Plaintiffs’ 8 opposition explains how E*TRADE’s trading system failure on April 20, 2020 was a breach of 9 either provision. Neither provision supports an inference of the existence of a promise to offer 10 trading services at all times, or at least offer trading services when the price of crude oil goes 11 negative. 12 In their opposition and at oral argument Plaintiffs identified the Agreement’s definition of 13 Service as the breached Agreement provision. The Agreement defines Service to “mean the 14 securities brokerage, commodity futures brokerage, financial, and other services that E*TRADE 15 may offer from time to time.” (Dkt. No. 28 at 28.) The plain language of that definition does not 16 obligate E*TRADE to provide trading services at all times and Plaintiffs do not otherwise explain 17 how that definition gave rise to such an obligation. It is not plausible that it did. 18 Plaintiffs’ failure to identify an Agreement provision that required E*TRADE to give 19 Plaintiffs the ability to execute trades at all times is unsurprising given that the Agreement 20 specifically states: “The Account Holder understands and agrees that E*TRADE does not guarantee uninterrupted access to the Service or any feature of the Service.” (Dkt. No. 28 at 41, 21 ¶11) (emphasis added). The Agreement thus specifically warns that E *TRADE is not promising 22 that its brokerage services will be available at particular times, in contrast to Plaintiffs’ 23 unsupported theory that Defendants promised that the brokerage services would be available at all 24 times, or, at least on April 20, 2020. Plaintiffs’ attempt at oral argument to limit the reach of 25 paragraph 11 to unavailability due to maintenance or repair of the System is unpersuasive. The 26 first sentence of the paragraph is unambiguous and unequivocal: “E*TRADE does not guarantee 27 uninterrupted access to the Service or any feature of the Service.” (Id.) Plaintiffs have thus failed 1 to allege facts that support an inference that E*TRADE breached the Agreement by failing to offer 2 uninterrupted access to the Service. See Lowry v. EMC Mortg. Co., 710 Fed. Appx. 752 (9th Cir. 3 2018) (district court properly dismissed breach of contract claim because plaintiffs “failed to identify a contract provision” imposing legally enforceable obligations upon defendants). 4 In their written opposition Plaintiffs argue for the first time that E*TRADE made false and 5 misleading statements on its website regarding the services it provided. (Dkt. No. 31 at 14.) The 6 Court declines to consider this argument which is untethered to the SAC’s allegations. See 7 Campanelli v. Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996) (holding that when evaluating a 8 Rule 12(b)(6) motion to dismiss courts may only review the contents of the plaintiffs’ complaint). 9 In any event, Plaintiffs do not identify any website statements, let alone plausibly false and 10 misleading statements. The breach of contract claim fails. 11 B. Leave to Amend 12 If a court grants a Rule 12(b)(6) motion, it “should grant leave to amend even if no request 13 to amend the pleading was made, unless it determines that the pleading could not possibly be 14 cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en 15 banc) (internal quotation marks and citations omitted). 16 The Court dismisses Plaintiffs’ contract claim without leave to amend as amendment 17 would be futile. This is Plaintiffs’ third iteration of their complaint. They omitted the contract 18 claim from the FAC and only reasserted it after deciding not to pursue their negligence theory. 19 Despite attaching the Agreement to the SAC, neither the SAC nor their written opposition 20 identifies any contract provision that E*TRADE plausibly breached. Further, their opposition ignored paragraph 11 of the Agreement even though it was prominently raised in the motion to 21 dismiss. The Court nonetheless gave Plaintiffs the opportunity to address the contract language at 22 oral argument, but Plaintiffs did not persuade the Court that paragraph 11 does not defeat their 23 claim. And the opposition’s vague reference to a website representation is insufficient given that 24 in three different versions of the complaint, two written oppositions, and two oral arguments they 25 have failed to identify any website statements that obligated E*TRADE to provide Plaintiffs with 26 uninterrupted access to the Trading Service. Accordingly, the motion is granted, and leave is 27 denied. 1 CONCLUSION 2 For the reasons stated above, Defendants’ motion to dismiss is granted without leave to 3 amend. Defendants’ request for judicial notice is denied as moot. A separate judgment will issue. 4 This Order disposes of Docket No. 29. 5 IT IS SO ORDERED. 6 Dated: June 24, 2021 7 , 3 ne JAQQUELINE SCOTT CORL 9 United States Magistrate Judge 10 11 a 12

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