Opinion ID: 2222259
Heading Depth: 1
Heading Rank: 10

Heading: Operational Capability

Text: On appeal, Ameritrade argues that to the extent that appellants' fifth cause of action, entitled Negligence, is based on the allegation that Ameritrade failed to meet a certain level of operational capability, such claim was properly dismissed by virtue of the district court's ruling in favor of Ameritrade on its motion for summary judgment. Ameritrade argues that claims involving operational capability are preempted by federal law and, thus, that dismissal of the fifth cause of action was proper. As we understand Ameritrade's assertion, its preemption argument is limited to claims based on operational capability as alleged in the fifth cause of action. In this connection, we specifically make no comment regarding the potential for preemption as to any other cause of action. On this record, we reject Ameritrade's assertion of preemption as to the fifth cause of action and, therefore, agree with appellants that the district court's dismissal of the fifth cause of action was error. It has been proposed that a securities firm's operational capability includes the ability to assure the prompt and accurate entry of customer orders, execution, comparison, allocation, clearance and settlement of securities transactions, the maintenance of customer accounts, and the delivery of funds and securities. Operational Capability Requirements of Registered Broker-Dealers and Transfer Agents and Year 2000 Compliance, 64 Fed.Reg. 12127, 12128 (March 11, 1999) (proposed rules). The parties direct the court to 15 U.S.C. § 78 o (b)(7) (2000) as the recent source of federal operational capability. This section reads in relevant part as follows: No registered broker or dealer or government securities broker or government securities dealer registered (or required to register) under section 78 o -5(a)(1)(A) of this title shall effect any transaction in, or induce the purchase or sale of, any security unless such broker or dealer meets such standards of operational capability and such broker or dealer and all natural persons associated with such broker or dealer meet such standards of training, experience, competence, and such other qualifications as the [Securities and Exchange] Commission finds necessary or appropriate in the public interest or for the protection of investors. The parties assert, and the court understands, that federal rules and regulations defining the standards of operational capability as noted in 15 U.S.C. § 78 o (b)(7) have been considered but were not adopted during the class period. Federal preemption arises from the Supremacy Clause of the U.S. Constitution and is the concept that state law that conflicts with federal law is invalid. Eyl v. Ciba-Geigy Corp., 264 Neb. 582, 650 N.W.2d 744 (2002). A fundamental principle of the Constitution is that Congress has the power to preempt state law. Crosby v. National Foreign Trade Council, 530 U.S. 363, 372, 120 S.Ct. 2288, 147 L.Ed.2d 352 (2000). There are three types of federal preemption: express, implied, and conflict preemption. Eyl v. Ciba-Geigy Corp., supra . Express preemption occurs when the U.S. Congress explicitly declares federal legislation to have a preemptive effect. It can also occur when a federal agency, acting within the scope of its powers conferred by Congress, expressly declares an intent to preempt state law. Id. Even without an express declaration from Congress or a federal agency, federal preemption may be implied, and state law claims may be preempted, when Congress is determined to have intended federal law to `occupy the field' to the exclusion of state law claims. Crosby v. National Foreign Trade Council, 530 U.S. at 372, 120 S.Ct. 2288. Finally, to the extent state law conflicts with a federal statute, the state law is naturally preempted. Id. We will find preemption where it is impossible for a private party to comply with both state and federal law.... Id. Ameritrade indicates in its appellate brief that its preemption argument is founded on conflict preemption. Appellants argue that the concept embodied in federal operational capability has long been recognized and coexists with state law principles. Brief for appellants at 30. Appellants further argue that in the absence of explicit federal rules and regulations regarding operational capability, their claims concerning Ameritrade's alleged failure to meet operational capability during the class period are not preempted and that the district court erred to the extent it stated to the contrary. Ameritrade responds that by virtue of preemption, any standard of operational capability imposed as a result of a state court's ruling in this case would conflict with federal precepts regarding operational capability or federal standards to be set under 15 U.S.C. § 78 o (b)(7), and that the state court should, therefore, forebear ruling on appellants' claims pertaining to operational capability. In this regard, Ameritrade relies on cases such as Guice v. Charles Schwab & Co., Inc., 89 N.Y.2d 31, 674 N.E.2d 282, 651 N.Y.S.2d 352 (1996), cert. denied 520 U.S. 1118, 117 S.Ct. 1250, 137 L.Ed.2d 331 (1997). This court finds Guice distinguishable. In Guice, the New York Court of Appeals determined that although the plaintiffs-investors' complaints regarding order flow payments were alleged as common-law causes of action, such claims were preempted by the 1975 amendments to the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (2000), and implementing regulations promulgated by the Securities and Exchange Commission. The existence of explicit commission regulations was critical to the New York court's analysis and its conclusion that New York common law was preempted because it could interfere with the regulations which exhibited the method by which the federal government sought to reach its stated goal regarding order flow. See International Paper Co. v. Ouellette, 479 U.S. 481, 107 S.Ct. 805, 93 L.Ed.2d 883 (1987). Compare Roskind v. Morgan Stanley Dean Witter & Co., 80 Cal.App.4th 345, 95 Cal.Rptr.2d 258 (2000), cert. denied 531 U.S. 1119, 121 S.Ct. 868, 148 L.Ed.2d 781 (2001) (stating that in absence of federal rules or regulations, plaintiff-investor action pertaining to trading ahead brought under California unfair competition law and breach of fiduciary duty not preempted). Although decided under other federal statutory provisions, we find cases such as Abada v. Charles Schwab & Co., Inc., 127 F.Supp.2d 1101 (S.D.Cal.2000), Spielman v. Merrill Lynch, Pierce, Fenner & Smith Inc., No. 01 Civ. 3013(DLC), 2001 WL 1182927 (S.D.N.Y. Oct.9, 2001), appeal dismissed 332 F.3d 116 (2d Cir.2003) (appeal of district court's remand order based on perceived lack of federal jurisdiction dismissed), and Shaw v. Charles Schwab & Co., Inc., 128 F.Supp.2d 1270 (C.D.Cal. 2001), more instructive. Abada involved an investor's allegations under state law that defendant's online broker failed to timely place his order contrary to the broker's advertisements. In Abada, the federal court rejected the defendant's arguments that the claim was solely subject to the federal Private Securities Litigation Reform Act of 1995, Pub.L. 104-67, 109 Stat. 737, 756 (1995) (codified in part at 15 U.S.C. §§ 77z-1 and 78u (Supp. V 1999)). The case was remanded to the state court. The court observed that any loss suffered by plaintiff was the result of [the defendant]'s technical inability to process an order request and that the alleged misrepresentation by the defendant did not affect the value of the security but merely involved the relationship between [the defendant] and its customers. 127 F.Supp.2d at 1103. Spielman involved an investor's allegations under six state law causes of action that the defendant misrepresented transaction fees. In Spielman, the federal court rejected the defendant's argument that the case was preempted under the federal Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb(f) (2000). The case was remanded to state court. The court observed that the transaction fees charged by [the defendant] affect the cost of trading, [and] this cost is part of [the defendant]'s bargain with its accountholders. Spielman v. Merrill Lynch, Pierce, Fenner & Smith Inc., 2001 WL 1182927 at . In this regard, the court observed that the plaintiff's lawsuit did not involve the value of any particular security, compare In re Ames Dept. Stores Inc. Stock Litigation, 991 F.2d 953 (2d Cir.1993), nor did it relate to the quality of the investment, compare Suez Equity Investors v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir.2001), both areas traditionally reserved for federal court. Shaw involved plaintiffs-investors' allegations under state law that the defendant's broker's commission rate for Web-based trading was improper and challenged the efficacy of broker's Web-based trading system as being deficient. In Shaw, the federal court rejected the defendant's arguments that the plaintiffs' claims were preempted under the Securities Litigation Uniform Standards Act of 1998. The case was remanded to the state court. The court observed that the defendant's actions induced [the plaintiffs] to select Defendant as their broker rather than some other brokerage firm and that the claims relate to the vehicle by which [the defendant] delivered securities. 128 F.Supp.2d at 1274. The court is aware that the federal provisions and state laws at issue in Abada, Spielman, Shaw, and other similar cases are not precisely the same as the ones raised herein. However, we take away from such cases the knowledge that in the absence of preemptive regulations, facets of investor claims involving the relationship between investors and their brokers; the bargains struck between investors and their brokers; and the efficacy of a broker's trading system, especially as compared to its representations regarding the same, have been permitted to proceed in state court. The allegations of the fifth cause of action which incorporate all previous allegations appear to bear on each of these facets. With due regard to 15 U.S.C. § 78 o (b)(7) as it relates to operational capability, and in the absence of a record which may clarify appellants' true claims, we are not persuaded that the issues raised by the allegations in the petition's fifth cause of action, as they are currently pled are preempted. It has been observed that a court should not assume that Congress exercises its Supremacy Clause power lightly ... and [it] must be `certain of Congress' intent' before [it] find[s] that federal law overrides the balance between state and federal powers. Missouri Mun. League v. F.C.C., 299 F.3d 949, 953 (8th Cir.2002) (quoting Gregory v. Ashcroft, 501 U.S. 452, 111 S.Ct. 2395, 115 L.Ed.2d 410 (1991)), cert. granted No. 02-1386, 2003 WL 1609505 (U.S. June 23, 2003). Given the law and record before us, we cannot make the preemption assumption urged by Ameritrade. Accordingly, we conclude that the district court erred in granting Ameritrade's motion for summary judgment on all causes of action, including the fifth cause of action.