McDaniel et al v. Wells Fargo Investments, LLC et al

Filing 34

ORDER by Judge Samuel Conti granting 22 Motion to Dismiss (sclc2, COURT STAFF) (Filed on 7/22/2011)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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DOUGLAS K. McDANIEL and BRYAN
CLARK, on behalf of themselves,
all others similarly situated,
and the general public,

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Plaintiffs,

United States District Court

For the Northern District of California

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v.

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WELLS FARGO INVESTMENTS, LLC, a
Delaware limited liability
company, WELLS FARGO BANK, N.A.,
a National Association, WELLS
FARGO ADVISORS, LLC, a Delaware
limited liability company, and
DOES 1 through 50, inclusive,

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Defendants.

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) Case No. 10-4916 SC
)
) ORDER GRANTING DEFENDANTS'
) MOTION TO DISMISS
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I.

INTRODUCTION

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On July 9, 2010, Plaintiffs Douglas K. McDaniel ("McDaniel")

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and Bryan Clark ("Clark") (collectively, "Plaintiffs") filed this

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action in San Francisco County Superior Court on behalf of

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themselves and all others similarly situated against Defendants

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Wells Fargo Investments, LLC, Wells Fargo Bank, N.A., and Wells

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Fargo Advisors, LLC (collectively, "Wells Fargo" or "Defendants").

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ECF No. 1 ("Notice of Removal") Ex. A ("Compl.").

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removed the action on October 29, 2010, pursuant to the Class

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Action Fairness Act, 28 U.S.C. § 1332(d).

Wells Fargo

See Notice of Removal.

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Plaintiffs filed a First Amended Complaint on April 6, 2011. ECF

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No. 18 ("FAC").

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to Federal Rule of Civil Procedure 12(b)(6), arguing that

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Plaintiffs' state law claim is preempted by federal law.

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22 ("Mot.").

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27 ("Reply"), 30 ("Surreply").1

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1(b), the Court finds the Motion suitable for determination without

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oral argument.

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Wells Fargo's Motion and dismisses this action with prejudice.

Wells Fargo now moves to dismiss the FAC pursuant

The Motion is fully briefed.

ECF No.

ECF Nos. 24 ("Opp'n"),

Pursuant to Civil Local Rule 7-

For the reasons stated below, the Court GRANTS

United States District Court

For the Northern District of California

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II.

BACKGROUND
Plaintiff McDaniel alleges that he was formerly employed as a

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financial consultant by Wells Fargo Investments, LLC, and Wells

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Fargo, N.A.

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employee of Wells Fargo Advisors, LLC.

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Plaintiffs allege a single claim for violation of California's

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Unfair Competition Law ("UCL"), Cal. Bus. and Prof. Code § 17200.

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Id. ¶¶ 25-30.

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violated section 450 of the California Labor Code by requiring

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plaintiffs and other California employees to maintain their

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securities brokerage accounts with and/or obtain their other

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investment-related services from defendants."

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450 of the California Labor Code provides in pertinent part: "No

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employer . . . may compel or coerce any employee . . . to patronize

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his or her employer, or any other person, in the purchase of any

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thing of value."

FAC ¶¶ 5, 21.

Plaintiff Clark alleges he is a former
Id. ¶ 6

In their FAC,

Specifically, Plaintiffs allege that "defendants

Id. ¶ 27.

Section

Cal. Lab. Code § 450.

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Plaintiffs filed a Motion for Leave to File a Surreply and
attached a Surreply to the Motion. ECF No. 30. The Court GRANTS
leave to file the Surreply and has considered the arguments therein
in reaching its decision.
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III. LEGAL STANDARDS
A motion to dismiss under Federal Rule of Civil Procedure

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12(b)(6) "tests the legal sufficiency of a claim."

Navarro v.

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Block, 250 F.3d 729, 732 (9th Cir. 2001).

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on the lack of a cognizable legal theory or the absence of

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sufficient facts alleged under a cognizable legal theory.

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Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.

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1990).

Dismissal can be based

"When there are well-pleaded factual allegations, a court

United States District Court

For the Northern District of California

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should assume their veracity and then determine whether they

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plausibly give rise to an entitlement to relief."

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Iqbal, 129 S. Ct. 1937, 1950 (2009).

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court must accept as true all of the allegations contained in a

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complaint is inapplicable to legal conclusions.

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recitals of the elements of a cause of action, supported by mere

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conclusory statements, do not suffice."

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(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).

Ashcroft v.

However, "the tenet that a

Threadbare

Iqbal, 129 S. Ct. at 1950

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IV.

DISCUSSION
Defendants argue that Plaintiffs' claim is preempted by

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federal law because it conflicts with the securities regulatory

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framework established by Congress.

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Defendants argue that federal regulators have granted firms like

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Wells Fargo discretion to restrict the external trading activities

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of their employees in order to prevent abusive practices such as

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insider trading.

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claim is preempted because, if successful, it would eliminate this

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discretion, thereby impeding the accomplishment of Congressional

Id. at 2.

Mot. at 17-20.

Specifically,

Defendants contend that Plaintiffs'

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objectives.

Id. at 20.

Plaintiffs counter by asserting that their

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claim is not preempted by federal regulations because Wells Fargo

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could change its policy in a manner that would comply with both

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federal regulations and California Labor Code Section 450.

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at 3.

Opp'n

The Court agrees with Defendants.

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A.

Federal Preemption of State Law

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Federal laws preempt conflicting state laws under the

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Supremacy Clause, which states: "Laws of the United States . . .

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shall be the supreme Law of the Land."

U.S. Const. art. VI, cl. 2.

United States District Court

For the Northern District of California

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"The phrase 'Laws of the United States' encompasses both federal

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statutes themselves and federal regulations that are properly

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adopted in accordance with statutory authorization."

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York v. FCC, 486 U.S. 57, 63, (1988) (quoting U.S. Const. art. VI,

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cl. 2.).

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agency will pre-empt any state or local law that conflicts with

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such regulations or frustrates the purposes thereof."

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"[T]he purpose of Congress is the ultimate touchstone of pre-

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emption analysis."

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516 (1992).

City of New

As such, "[t]he statutorily authorized regulations of an

Id. at 64.

Cipollone v. Liggett Grp., Inc., 505 U.S. 504,

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Federal law may preempt state law in three ways: (1) express

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preemption, where Congress explicitly defines the extent to which

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its enactments preempt state law; (2) field preemption, where state

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law attempts to regulate conduct in a field that Congress intended

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federal law exclusively to occupy; or (3) conflict preemption,

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where it is impossible to comply with both state and federal

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requirements or where state law "stands as an obstacle to the

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accomplishment and execution of the full purpose and objectives of

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Congress."

Indus. Truck Ass'n, Inc. v. Henry, 125 F.3d 1305, 1309

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(9th Cir. 1997).

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B.

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"The Securities Exchange Act of 1934 created a system of

Federal Securities Law and Regulatory Scheme

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supervised self-regulation in the securities industry" by

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delegating government power to self-regulatory organizations

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("SROs"), such as the New York Stock Exchange ("NYSE") and the

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National Association of Securities Dealers ("NASD").2

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Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119, 1128 (9th

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Cir. 2005).

Credit

Within this framework, SROs are responsible for much

United States District Court

For the Northern District of California

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of the day-to-day regulation of securities markets, while the

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Securities and Exchange Commission ("SEC") is charged with ultimate

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responsibility and control of the national market system for

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securities.

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(1963).

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by the SEC, designed to enforce "compliance by members of the

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industry with both the legal requirements laid down in the Exchange

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Act and ethical standards going beyond those requirements."

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Grunwald, 400 F.3d at 1128 (internal citation omitted).

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this regulatory scheme, SROs are the primary regulators of

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securities broker-dealers.

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1209, 1213-14 (9th Cir. 1998).

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that "SRO rules approved by the [SEC] . . . preempt conflicting

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state law when the two are in conflict, either directly or because

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See Silver v. N.Y. Stock Exch., 373 U.S. 341, 352

SROs promulgate rules and regulations, subject to approval

Within

Sparta Surgical Corp. v. NASD, 159 F.3d
The Ninth Circuit has made clear

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In 2007, the NASD and the NYSE consolidated their memberregulation operations into one self-regulatory organization known
as the Financial Industry Regulatory Authority ("FINRA"). See
Karsner v. Lothian, 532 F.3d 876, 879 n.1 (D.C. Cir. 2008). NASD
rules and incorporated NYSE rules remain in effect until superseded
by new consolidated FINRA rules. See FINRA Information Notice,
"Continuing Application of NASD Rules and Incorporated NYSE Rules,"
December 8, 2008,
http://www.finra.org/Industry/Regulation/Notices/2008/P117507.
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the state law stands as an obstacle to the accomplishment of the

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objectives of Congress."

Grunwald, 400 F.3d at 1128.

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The SEC and SROs require securities firms to monitor their

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employees' personal securities transactions and maintain procedures

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that each firm determines to be reasonably designed to prevent

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potential securities violations by employees.

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Rule 342.21(a) requires member firms to subject trades in listed

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securities by its employees "to review procedures that the member .

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. . determines to be reasonably designed to identify trades that

For example, NYSE

United States District Court

For the Northern District of California

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may violate" securities laws or NYSE rules against conduct such as

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insider trading.

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member firms conduct prompt internal investigation into any trade

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that may have violated any securities law or rules.

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Similarly, NASD Rule 3010 requires each member to "establish and

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maintain a system to supervise the activities of each registered

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representative . . . that is reasonably designed to achieve

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compliance with applicable securities laws and regulation and all

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applicable NASD rules."

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requires each member to designate a principal or principals to

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establish and maintain supervisory control policies.

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Rule 3130.

NYSE Rule 342.21(a).

It further mandates that

NASD Rule 3010.

Id.

Likewise, FINRA Rule 3130

See FINRA

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The federal securities regulatory framework grants member

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firms the discretion to determine how to oversee and supervise

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their employees' trading activities, including the discretion to

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require employees to maintain their security accounts in house.

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For example, in 2002, the SEC approved NYSE Rule 407, which

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expressly provides member firms with discretion to determine if and

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when an employee may be permitted to open a brokerage account

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NYSE Rule 407.3

member firms have a legal obligation either to maintain their

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accounts with their employer's firm or to obtain consent before

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opening an account or placing trades outside the firm.

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Defs' RJN Ex. T, James Giannino, Former Non-Registered Employee,

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NYSE Hearing Panel Dec. 01-7 (NYSE Jan. 17, 2001) (sanctioning

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former employee of PaineWebber, Inc., and Charles Schwab & Co.,

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Inc. for maintaining an account at another firm).4

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requirement of "consent" from the firm, rather than mere "notice"

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United States District Court

outside the firm.

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For the Northern District of California

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Under Rule 407, employees of

by the employee, shows that the rule grants the firm discretion to

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determine its own compliance policies and to withhold consent for

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outside accounts.

See, e.g.,

Rule 407's

The legislative history of other rules within the federal

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securities regulatory scheme leaves no doubt that firms have

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discretion to require employees to maintain their accounts in-

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house.

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through the Insider Trading and Securities Fraud Enforcement Act

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("ITSFEA"), which provided that:

For example, in 1988, Congress amended the Exchange Act

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NYSE Rule 407(b) provides: "No member . . . or employee
associated with a member organization shall establish or maintain
any securities or commodities account or enter into any securities
transaction with respect to which such person has any financial
interest or the power, directly or indirectly, to make investment
decisions, at another member or member organization, or a domestic
or foreign non-member broker-dealer, investment advisor, bank,
other financial institution, or otherwise without the prior written
consent of another person designated by the member or member
organization under Rule 342(b)(1) to sign such consents and review
such accounts."
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Both parties filed requests for judicial notice asking the Court
to take notice of various statutes, regulations, and associated
legislative histories. ECF Nos. 23 ("Defs.' RJN"), 26 ("Pls.'
RJN"), 28 ("Defs.' Supp. RJN"). Because the documents submitted
are publicly available and not subject to reasonable dispute, the
Court GRANTS both RJNs pursuant to Federal Rule of Evidence 201.
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Every
registered
broker
or
dealer
shall
establish,
maintain,
and
enforce
written
policies and procedures reasonably designed,
taking into consideration the nature of such
broker's or dealer's business, to prevent the
misuse in violation of this chapter ... of
material, nonpublic information by such broker
or dealer or any person associated with such
broker or dealer.

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15 U.S.C. § 78o(g).

In passing the ITSFEA, Congress expressed its

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expectation "that a firm's supervisory system would include, at a

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minimum, employment policies such as those requiring personnel to

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conduct their securities trading through in-house accounts or

United States District Court

For the Northern District of California

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requiring that any trading in outside accounts be reported

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expeditiously to the employing firm."

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(1988), as reprinted in 1988 U.S.C.C.A.N. 6043, 6058-59 (emphasis

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added).

H.R. Rep. 100–910, at *22

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Similarly, when approving NASD Rule 3050, which requires

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employees to provide written notice to the member firm before

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opening a securities account with another member, the SEC stated:

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[T]he NASD is of the opinion that the amendment
would prevent instances in which trades may be
made on inside information because the employer
member was not aware of the existence of the
account
with
another
member.
The
NASD
acknowledges the fact that there may be
circumstances which dictate that an associated
person hold an account with someone other than
their employer member, and this amendment would
not serve to prevent that.

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Order Approving Proposed Rule Relating to Written Notification of

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Employer Members By Associated Person Regarding Relations With Each

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Member, 56 Fed. Reg. 10,931-932 (Mar. 14, 1991) (emphasis added).

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The SEC's statement suggests that it expected that members would

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require employee accounts to be held in house except in limited

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circumstances.

Indeed, in 1990, the SEC's Division of Market

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Regulation "undertook a comprehensive review of broker-dealer

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policies and procedures."

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Dealer Policies and Procedures Designed to Segment the Flow and

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Prevent the Misuse of Material Nonpublic Information 1–2 (1990).

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The review found that "almost all firms require[d] employees to

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maintain accounts with the firm" and that "[t]his restriction

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generally extend[ed] to accounts of family members."

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21.

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that "at this time, no aspect of current procedures require

United States District Court

For the Northern District of California

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SEC Div. of Mkt. Regulation, Broker–

Id. at 8 n.

The SEC did not criticize such policies, instead determining

Commission rulemaking."

Id. at 18.

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C.

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Plaintiffs argue that California Labor Code Section 450

Plaintiffs' UCL Claim Is Preempted by Federal Law

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requires Wells Fargo to permit its California employees to open and

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maintain securities accounts outside the firm, or at least to

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refrain from charging employees for in-house services.

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They argue that because no regulation specifically requires Wells

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Fargo to impose an in-house account requirement, there is no

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conflict between the federal regulatory scheme and Section 450.

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Id.

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not bar their claim because it is not impossible for Wells Fargo to

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comply with federal securities regulations and Section 450.

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in this circuit have recently rejected this argument in cases

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similar to this one.

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Barney LLC, No. 10-1455, 2011 WL 2161325, at *7 (C.D. Cal. May 23,

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2011); Heilemann v. Bank of America Corp., No. 10-8623, 2011 U.S.

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Dist. LEXIS 68155, *5 (C.D. Cal. June 6, 2011).

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reasons set forth in those decisions, the Court concludes that

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Plaintiffs' claim is preempted.

Opp'n at 3.

In other words, Plaintiffs argue that conflict preemption does

Courts

See Bloemendaal v. Morgan Stanley Smith

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For the same

Conflict preemption applies not only where it is impossible to

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comply with both state and federal law, but also where state law

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"stands as an obstacle to the accomplishment and execution of the

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full purpose and objectives of Congress."

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The federal securities regulatory framework unmistakably provides

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discretion for firms to decide how best to monitor the trading

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activities of employees.

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NYSE Rule 407, as well as from the legislative histories of

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numerous other regulations.5

Henry, 125 F.3d at 1309.

That discretion is plain from the text of

Plaintiffs seek to use Section 450 to

United States District Court

For the Northern District of California

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eliminate that discretion.

Controlling case law prohibits the use

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of state law to such end.

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(finding California Judicial Council's disqualification rules

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preempted because they would remove discretion given to NASD

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Director of Arbitration); Chae v. SLM Corp., 593 F.3d 936, 942-43,

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946 (9th Cir. 2010) (finding UCL claim challenging billing

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statements used by student loan servicer preempted by federal

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regulations that provided servicers with flexibility concerning

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billing statements).

See Grunwald, 400 F.3d at 1133-34

Grunwald and Chae both involved situations in which regulatory

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rules granted discretion to the defendant and the Ninth Circuit

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held that plaintiffs could not use state law to impinge upon that

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Plaintiffs argue that even if NYSE Rule 407 preempts their claim
against Wells Fargo Bank, N.A. and Wells Fargo Advisors, LLC, its
preemptive effect does not extend to their claim against Wells
Fargo Investments, LLC, because that entity was not a member of the
NYSE during the relevant time period. Opp'n at 10-11. This
argument fails because it is not only NYSE Rule 407 that preempts
Plaintiffs' claim. The preemptive effect of the Exchange Act,
ITSFEA, and NASD rules also bar Plaintiffs' claim. See
Bloemendaal, 2011 WL 2161352, at *7 ("[p]reventing Defendant from
creating and enforcing a policy that Congress and the [SEC] have
expressly and implicitly approved undoubtedly frustrates the
Congressional goals behind the Exchange Act and ITSFEA, namely
preventing insider trading.").
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discretion.

The same applies here.

The comprehensive federal

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regulatory scheme requires securities firms to monitor their

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employees' trading activities and grants firms discretion in

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determining effective methods for doing so.

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SEC have recognized that one such method is requiring employees to

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conduct their securities trading in-house.

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does the regulatory scheme limit firms' discretion to require

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employees who open in-house accounts to incur the normal charges

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paid by all customers.

Both Congress and the

Furthermore, nowhere

Plaintiffs' attempt to eliminate firms'

United States District Court

For the Northern District of California

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discretion would pose a formidable "obstacle to the accomplishment

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and execution of the full purpose and objectives of Congress."

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Henry, 125 F.3d at 1309.

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V.

CONCLUSION
For the foregoing reasons, the Court GRANTS the Motion to

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Dismiss filed by Wells Fargo Investments, LLC, Wells Fargo Bank,

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N.A., and Wells Fargo Advisors, LLC.

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Plaintiffs Douglas McDaniel and Bryan Clark's action WITH

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PREJUDICE.

The Court DISMISSES

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IT IS SO ORDERED.

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Dated: July 22, 2011
UNITED STATES DISTRICT JUDGE

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