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ABADA v. CHARLES SCHWAB & CO.

September 7, 1999

AARON ABADA, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
CHARLES SCHWAB & CO., INC., A CALIFORNIA CORPORATION, AND DOES 1 THROUGH 10, DEFENDANT.



The opinion of the court was delivered by: Keep, District Judge.

                          ORDER DENYING MOTION TO
                              REMAND TO STATE
                                   COURT

Plaintiff filed the present motion for remand to state court on July 23, 1999. An opposition was filed by Defendant on August 16, 1999. Both parties are represented by counsel.

I. Background

This action arises out of a dispute over public statements made by Charles Schwab & Company, Inc. (hereafter, "Schwab") regarding Schwab's on-line brokerage account services and its capacity to handle and execute on-line trades. Plaintiff Aaron Abada asserts five causes of actions against Schwab, individually and on behalf of all others similarly situated, alleging violations of unfair trade practices under California's Business & Professions Code, Section § 17200 et seq., violations of false and misleading advertising under California's Business & Professions Code, Section § 17500 et seq., unjust enrichment, negligent misrepresentation, and fraud and deceit.

Plaintiff alleges that he opened an online securities trading account with Schwab in reliance on Schwab's representations at its internet site "that Schwab would provide fast, high quality executions." Plaintiffs Complaint, ¶ 9. Plaintiff further alleges that Schwab made representations in its on-line brochure that "[m]arket orders entered while the market is open are subject to immediate execution," and that once a customer "confirm[s]" his or her order, it is "sent through Schwab directly to the trading floor." Id. at ¶ 17. According to Plaintiff, however, "in light of the large number of Schwab accounts and the rapid rate at which it had been adding new accounts, Schwab knew or should have known that its representations to customers regarding the manner in which their accounts would be handled were false." Id. at ¶ 19.

On November 13, 1998, the internet company known as "theglobe.com" (hereafter, "TGLO") was scheduled to begin secondary trading on the NASDAQ after the initial public offering of TGLO stock the previous day. See Defendant's Opposition, at p. 2, lines 10-12. On that day, Plaintiff alleges that at approximately 9:20 a.m. E.S.T., shortly before the market opened, he placed a market order to buy 500 shares of TGLO stock through Schwab's web site and thereafter received an "Order Acknowledgment." See Plaintiff's Complaint, ¶ 29. Plaintiff further alleges that shortly after the market opened, when TGLO was trading at $50 1/8 a share, Plaintiff decided to liquidate his recently-purchased TGLO stocks. See id. at ¶ 30. However, according to Plaintiff, after numerous failed attempts to access his Schwab account through the Schwab web site, Plaintiff finally "was able to log onto his Schwab account," only to find that his "account did not reflect an order confirmation." id. In fact, Plaintiff alleges his order confirmation was delayed over three hours. See id. at ¶¶ 6, 31. In addition, Plaintiff states that he later learned that "shares were purchased in his account at $86 1/2, which was $36 more than the price" at which Plaintiff placed his original' order on-line. Id. By the time Plaintiff was informed of his purchase, Plaintiff alleges that the price had dropped to $70 a share. See id. at ¶ 6. As a consequence of his inability to access his Schwab account and the delay of his order of TGLO shares, Plaintiff alleges "substantial losses within his accouAt." Id. at ¶ 6.

On April 5, 1999, Plaintiff filed this action against Schwab in the Superior Court for the County of San Diego, purporting to represent:

      all investors who had online accounts with Schab
      on November 13, 1998, and: (A) who placed market
      orders to purchase or sell TGLO; (B) whose market
      orders were delayed by more than one minute and
      executed at disadvantageous prices, or whose
      market orders were not confirmed instantaneously,
      and (C) who were damaged thereby. Id. at ¶ 7.

On May 6, 1999, Defendant filed a notice of removal of this action to this court, pursuant to 28 U.S.C. § 1441 and 1446 and the Securities Litigation Uniform Standards Act of 1998, Pub.L. No. 105-353, 112 Stat. 3227 (1998) (hereafter "the Uniform Standards Act").

On July 23, 1999, Plaintiff filed this motion to remand the action to state court. Defendant opposes, alleging that Plaintiff's claims, notwithstanding Plaintiff's attempts at "creative pleading," are all preempted by the Uniform Standards Act. See Defendant's Opposition, at p. 1, lines 13-20. Defendant alleges that pursuant to the Uniform Standards Act, "every claim alleging fraud or misrepresentation in connection with the purchase or sale of a security traded on a national exchange, like Plaintiff's claims here, must be brought in federal court." Id., at p. 5, lines 12-15. In reply, Plaintiff asserts that Schwab has failed to carry its burden of establishing that removal is proper under the artful pleading doctrine. See Plaintiffs Memorandum in Support of Plaintiffs Motion to Remand to State Court, at pp. 2-4 ("Plaintiffs Memorandum"). Moreover, Plaintiff asserts that Schwab's alleged misrepresentations are not "in connection with the purchase or sale of a covered security" within the meaning of 15 U.S.C. § 78bb(f)(1) of the Uniform Standards Act and that the Uniform Standards Act was not meant to preempt non-securities fraud claims like Plaintiffs claim, which is based on state statutory or common law. See id., at p. 4-5. Therefore, Plaintiff asserts that this action should be remanded to state court.

II. Legal Standard

Removal jurisdiction is governed by 28 U.S.C. § 1441, et seq. Doubts as to removability are usually resolved in favor of remanding the case to state court. See Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 61 S.Ct. 868, 85 L.Ed. 1214 (1941); See also Boggs v. Lewis, 863 F.2d 662, 663 (9th Cir. 1988). The defendant has the burden of establishing that removal is proper. See Nishimoto v. Federman-Bachrach & Assocs., 903 F.2d 709, 712 n. 3 (9th Cir. 1990).

Removal is only appropriate for cases that might have originally been brought in federal court. See Caterpillar, Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987). Cases arise under federal law only if the complaint establishes either that federal law creates the cause of action or that the plaintiff's right to relief necessarily depends on the resolution of substantial questions of federal law. See Franchise Tax Board of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 10, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). The plaintiff is the master of the claim, and federal jurisdiction exists only when a federal question is presented on the face of the properly pleaded complaint. See Caterpillar, 482 U.S. at 392, 107 S.Ct. 2425 (citing Gully v. First Nat'l Bank, 299 U.S. 109, 112-13, 57 S.Ct. 96, 81 L.Ed. 70 (1936)). "[I]t is well settled law that a case may not be removed to federal court on the basis of a federal defense, including the defense of preemption, even if the defense is anticipated in the plaintiffs complaint, and even if both parties concede that the federal defense is the only question truly at issue." Id. at 393, 107 S.Ct. 2425 (italics in original) (citing Franchise Tax Board of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. at 12, 103 S.Ct. 2841.)

However, there exists an "`independent corollary' to the well-pleaded complaint rule" called the" "complete preemption' doctrine. Id. at 393, 107 S.Ct. 2425 (quoting Franchise Tax Board, 463 U.S. at 22, 103 S.Ct. 2841). Complete preemption occurs where the "preemptive force of a statute" is so "extraordinary" as to convert state claims into federal claims. Id. at 393, 103 S.Ct. 2841. "Once an area of state law has been completely preempted, any claim purportedly based on that preempted state law is considered, from its inception, a ...


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