Charles Schwab & Co., Inc. v. Highwater Wealth Management, LLC

Filing 61

RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE by Magistrate Judge Nina Y. Wang on 9/14/2017. I respectfully RECOMMEND that Plaintiff's Motion to Dismiss 23 be DENIED. (nywlc2, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Civil Action No. 17-cv-00803-CMA-NYW
CHARLES SCHWAB & CO., INC.,
Plaintiff,
v.
HIGHWATER WEALTH MANAGEMENT, LLC,
Defendant.

RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
Magistrate Judge Nina Y. Wang
This matter is before the court on Plaintiff Charles Schwab & Co., Inc.’s (“Plaintiff” or
“Schwab”) Motion to Dismiss (or “Motion”). [#23, filed June 2, 2017]. The undersigned
considers the Motion pursuant to 28 U.S.C. § 636(b), the Order Referring Case dated March 31,
2017 [#6], the Case Reassignment dated April 3, 2017 [#8], and the Memorandum dated June 7,
2017 [#26]. This court concludes that oral argument will not materially assist in the resolution of
this matter. Accordingly, upon careful review of the Motion and related briefing, the applicable
case law, and the entire case file, I respectfully RECOMMEND that the Motion to Dismiss be
DENIED for the reasons stated herein.
BACKGROUND
Plaintiff initiated this action by filing its Complaint on March 30, 2017. [#1]. Plaintiff, a
securities broker/dealer, entered into a custodial relationship—the Investment Manager Service
Agreement (“IMSA”)—with Highwater, a Registered Investment Advisory firm (“RIA”),
wherein Highwater could offer its clients the option of having their assets custodied with

Schwab. [Id. at ¶¶ 6–9]. However, Plaintiff alleges that its former employee Gregory Giuffra
resigned from Schwab and joined Highwater, and, in doing so, illicitly solicited business from
Plaintiff’s clients in violation of a non-solicitation agreement (the “Agreement”) with Schwab.
[#1].

Plaintiff alleges that Highwater was complicit in Mr. Giuffra’s illicit acts and even

encouraged them. [#1]. Accordingly, Plaintiff asserts the following claims against Defendant:
(1) tortious interference with contract; (2) misappropriation of trade secrets pursuant to the
Defend Trade Secrets Act, 18 U.S.C. § 1831 et seq.; (3) misappropriation of trade secrets
pursuant to the Colorado Uniform Trade Secrets Act (“CUTSA”), Colo. Rev. Stat. § 7-74-101 et
seq.; (4) unfair competition; and (5) civil conspiracy. [#1]. Presently, Plaintiff and Mr. Giuffra
are engaged in arbitration before the Financial Industry Regulatory Authority, Inc. (the “FINRA
Action”) that is set to commence in December 2017. [#3, #47]. Highwater is not a party to that
proceeding. [#3].
On May 1, 2017, Highwater filed its Answer and asserted counterclaims for:
(1) declaratory relief that the Agreement is a void agreement not to compete; and (2) tortious
interference with contract and prospective financial advantage. [#16]. Highwater then filed its
First Amended Counterclaims (“FAC”), amending its second counterclaim to tortious
interference with prospective business relations (“Counterclaim II”)—the subject of the instant
Motion to Dismiss—on May 19, 2017. [#19].
As relevant here, the FAC alleges that, on June 2, 2016, Schwab informed Highwater that
it was terminating the IMSA effective September 7, 2016—the same date Plaintiff would close
Highwater’s Investment Manager Master Account with Schwab. [Id. at ¶ 26]. The June 2
correspondence also informed Highwater that Plaintiff “would no longer accept and process any
new account opening documentation for Highwater clients or accept or process documentation to

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link existing Schwab accounts.” [Id. at ¶ 28]. Schwab then informed Highwater’s clients of the
IMSA termination and provided Highwater’s clients a list of modifications to their accounts,
including new pricing guidelines. [Id. at ¶ 29]. Highwater alleges that Plaintiff sent the IMSA
Termination Letter “to over 200 [Highwater] customers.” [Id. at ¶ 30].
Highwater contends that Schwab “intentionally attempted to portray [it] in a negative
light and create an appearance of impropriety by Highwater when Schwab sent the IMSA
Termination Letters.” [Id. at ¶ 46]. Highwater further alleges that Schwab employees made
“false and disparaging statements regarding Highwater’s products and business” to Highwater
clients. [Id. at ¶ 47]. According to Highwater, Schwab intended to steer Highwater’s clients
away from continuing their business relationship with Highwater to instead conduct business
with Schwab, and that Highwater had to make “concessions” to customers when their accounts
were moved out of Schwab. [Id. at ¶¶ 49–59]. Moreover, Schwab initiated this action to recover
from Highwater what it cannot recover from Mr. Giuffra in the FINRA Action—“a permanent
restraint on any customer contact and an improper de facto extension of the restrictive covenants
contained in the Agreement.” [Id. at ¶ 25 (emphasis in original)].
On June 2, 2017, Schwab filed the instant Motion to Dismiss. [#23]. Plaintiff moves to
dismiss Counterclaim II, because Highwater fails to allege that Schwab improperly interfered
with a prospective business relationship or that Highwater suffered any damages as a result of
any improper interference. [Id. at 7]. Highwater has filed a Response and Plaintiff a Reply.
[#28; #29]. The Motion is now ripe for Recommendation.
LEGAL STANDARD
Under Rule 12(b)(6) a court may dismiss a complaint for “failure to state a claim upon
which relief can be granted.” Fed. R. Civ. P. 12(b)(6). In deciding a motion under Rule

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12(b)(6), the court must “accept as true all well-pleaded factual allegations . . . and view these
allegations in the light most favorable to the plaintiff.” Casanova v. Ulibarri, 595 F.3d 1120,
1124 (10th Cir. 2010) (quoting Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009)).
The court may also consider materials outside the complaint without converting a motion to
dismiss to one for summary judgment if the documents are central to the plaintiff’s claims,
referred to in the complaint, and the parties do not dispute their authenticity. See Cty. of Santa
Fe, N.M. v. Public Serv. Co. of N.M., 311 F.3d 1031, 1035 (10th Cir. 2002). 1
To survive a Rule 12(b)(6) motion, a plaintiff may not rely on mere labels or conclusions,
“and a formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic Corp.
v. Twombly, 550 U.S. 544, 555 (2007). Rather, “a complaint must contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal,
129 S. Ct. 1937, 1949 (2009); see also Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir.
2008) (explaining that plausibility refers “to the scope of the allegations in a complaint,” and that
the allegations must be sufficient to nudge a plaintiff’s claim(s) “across the line from conceivable
to plausible.”). The duty of the court is to “determine whether the complaint sufficiently alleges
facts supporting all the elements necessary to establish an entitlement to relief under the legal
theory proposed.” Forest Guardians v. Forsgren, 478 F.3d 1149, 1160 (10th Cir. 2007).
ANALYSIS
Under Colorado law, to maintain a claim for tortious interference with prospective
business relations (“tortious interference”), Highwater must allege that Schwab induced or
caused a third party not to enter into or continue its business relation with Highwater, or
prevented Highwater from acquiring or continuing the prospective relation. See Harris Grp.,
1

Because Highwater attaches a copy of the IMSA Termination Letter to its FAC and Schwab
attaches a copy of the IMSA to its Motion to Dismiss, this court considers both without
converting the instant Motion to one for summary judgment.
4

Inc. v. Robinson, 209 P.3d 1188, 1196 (Colo. App. 2009) (quoting RESTATEMENT (SECOND) OF
TORTS § 766). Highwater need not prove the existence of an underlying contract; rather, it must
demonstrate “intentional and improper interference such that a particular contract is prevented
from being formed.” Shell v. Am. Family Rights Ass’n, 899 F. Supp. 2d 1035, 1060 (D. Colo.
2012) (citing Id. at 1195–96). “However, a protected relationship exists only if there is a
reasonable likelihood or probability that a contract would have resulted; there must be something
beyond a mere hope.” Klein v. Grynberg, 44 F.3d 1497, 1506 (10th Cir. 1995); see also
Campfield v. State Farm Mut. Auto. Ins. Co., 532 F.3d 1111, 1122 (10th Cir. 2008) (noting a
plaintiff “must show that there was a reasonable likelihood that a contract would have resulted
but for the wrongful interference.”).
Here, Schwab moves to dismiss Counterclaim II because Highwater fails to allege any
improper interference by Schwab that caused Highwater damages. First, regarding the IMSA
Termination Letter, Schwab argues for dismissal because (1) Highwater provides only
conclusory allegations that Schwab intended to “steer customers away from Highwater,” as the
IMSA Termination Letter contained no false statements about Highwater; (2) Schwab was
contractually entitled to terminate the IMSA and cannot be liable for exercising its contractual
rights; and (3) there are no allegations that the IMSA Termination Letter caused damages. See
[#23 at 7–10; #29 at 3–4]. Second, as to the allegation that Schwab immediately terminated the
processing of any new accounts for clients of Highwater, this allegation fails because it is
conclusory, ignores the plain language of Schwab’s rights under the IMSA, and fails to allege
damages, i.e., this did not prevent Highwater clients from entering new contracts with
Highwater. [#23 at 10–11]. Finally, as to any allegedly false statements Schwab made to
Highwater’s clients, Schwab argues that Highwater fails to allege how the one proffered false

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statement (“that Highwater did not owe its customers a fiduciary duty”) caused any damage to
Highwater. [#23 at 11–12; #29 at 5]. Specifically, Schwab contends that there are no allegations
that any customers terminated their relationship with Highwater or that prospective clients
refused to do business with Highwater because of this statement. [#23 at 11; #29 at 6].
To start, the IMSA, on its face, includes a bilateral termination provision. See [#23-4 at 5
(“Either party may terminate this Agreement at any time by giving written notice to the other.”)].
Consistent with the IMSA’s termination provision, the IMSA Termination Letter states that
Schwab is terminating the IMSA with Highwater effective September 7, 2016, and, that effective
immediately, Schwab will “no longer accept and process new account opening documentation
for [Highwater’s] clients.” [#19-1]. Accordingly, the termination, standing alone, does not
constitute improper behavior. In Caven v. American Federal Savings and Loan Association of
Colorado, a mortgagee (“American Federal”) and mortgagor (“Mr. Caven”) entered into a
modification agreement whereby American Federal had the contractual right to approve any
subsequent purchasers of Mr. Caven’s property. 837 F.2d 427, 429–30 (10th Cir. 1988). Mr.
Caven found two purchasers for his property and submitted them to American Federal.
Subsequently, American Federal sought a substantial increase in the interest rate before it would
approve the two purchasers. Id. at 429. Mr. Caven rebuffed the notion, and the subsequent
purchasers withdrew from the purchase. Id. Following this withdrawal, Mr. Caven’s broker,
who stood to gain commissions on the sale of the property, filed a claim against American
Federal for tortious interference with contractual relations, i.e., that American Federal’s demand
for an increased interest rate caused the broker to lose his commissions under his broker-contract
with Mr. Caven. Id. The United States Court of Appeals for the Tenth Circuit (“Tenth Circuit”)
held that the broker’s tortious interference with contractual relations claim failed as a matter of

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law, because American Federal had the absolute right to insist on an increase in the interest rate
under the terms of its loan agreement with Mr. Caven; thus, the broker could not prove that the
American Federal’s actions were improper.

Id. at 432 (quoting Radiology Prof’l Corp. v.

Trinidad Area Health Ass'n, Inc., 565 P.2d 952, 954 (Colo. App. 1977) (citation omitted)).
Similarly, the IMSA Termination Letter sent to Highwater’s clients standing alone, or
coupled with the IMSA Termination Letter to Highwater, does not adequately plead a tortious
interference claim. Highwater does not argue that Schwab was not entitled to notify customers
of the impending change of relationship [#28], and the correspondence itself provides facially
neutral information. [#19-1 at 3–4]. Accordingly, I conclude that the IMSA Termination Letters
[#19-1], standing alone, cannot form the basis of Counterclaim II, as each fails to demonstrate
Schwab’s improper interference. See Caven, 837 F.2d at 432; Jefferson Cty. Sch. Dist. No. R-1
v. Moody’s Inv’rs Servs., Inc., 175 F.3d 848, 858 (10th Cir. 1999) (noting, “in instances in which
a plaintiff’s tortious interference claims are based on lawful conduct or speech, [Colorado] courts
have concluded that such lawful activity is insufficient to establish the required element of
improper conduct.”).
Nonetheless, the FAC contains several allegations concerning Schwab’s conduct in
addition to the IMSA Termination Letters to support its tortious interference counterclaim. For
example, Highwater alleges that, after Schwab received notice that its clients were moving their
assets to Highwater, Schwab “attempted to talk customers out of moving their accounts to
Highwater by giving the customers knowingly false information, all with the motive of creating
an unfair and unlawful competitive advantage[.]” [#19 at ¶ 52; #28 at 7]. Further, Highwater
alleges that Schwab’s employees “made false and disparaging statements regarding Highwater’s
products and business, for example telling customers that Highwater did not owe its customers a

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fiduciary duty.” [#19 at ¶ 47; #28 at 7–8]. Highwater then identifies at least one customer who
did not continue its business with Highwater based on Schwab’s misleading information. [Id. at
¶¶ 55–56].

Additionally, Highwater intimates that Schwab initiated this action to prohibit

Highwater from conducting/soliciting business from former Schwab clients pursuant to the
Agreement between Schwab and Mr. Giuffra. See [id. at ¶ 25].
Under Colorado law, it is “‘not necessary that [the plaintiff] identify a specific customer
relationship or a specific customer’ with whom he or she had a prospective relationship.” Pers.
Dep’t, Inc. v. Prof’l Staff Leasing Corp., 297 F. App’x 773, 777 (10th Cir. 2008) (quoting Ervin
v. Amoco Oil Co., 885 P.2d 246, 254 (Colo. App. 1994) (emphasis added), rev’d on other
grounds, 908 P.2d 493, 502 (Colo. 1995)). Again, Highwater need allege only that Schwab
intentionally and improperly interfered with such relationships. See Amoco Oil Co. v. Ervin, 908
P.2d 493, 502 (Colo. 1995). 2 This requires the court to analyze several factors, including but not
limited to, “(i) the nature of the interfering conduct; (ii) the actor’s motive; (iii) the relations
between the parties; and (iv) the proximity of the conduct to the alleged interference.” Tara
Woods Ltd. P’ship v. Fannie Mae, 731 F. Supp. 2d 1103, 1120 (D. Colo. 2010).
To be sure, Hightower’s Counterclaim would benefit from further factual development
and discovery may not be used as a “fishing expedition or an undirected rummaging for evidence
of some unknown wrongdoing.” See Cuomo v. The Clearing House Ass’n, L.L.C., 557 U.S. 519,
2

“However, a plaintiff may not sue a competitor, qua competitor, for intentional interference
with a prospective business relation[,]” id., unless the tortfeasor employs “wrongful means,” as
competitors have a privilege to compete with one another, including the inducing of third parties
not to do business with their competitors, see L-3 Commc’ns Corp. v. Jaxon Eng’g & Maint.,
Inc., Civil Action No. 10–cv–02868–MSK–KMT, 2013 WL 1231908, at *6 (D. Colo. Feb. 25,
2013) (defining “wrongful means” under Colorado law to include unfounded litigation). Here,
there is no indication that Schwab and Highwater are competitors given that Highwater, as an
RIA, cannot maintain custody of its clients’ investments unlike Schwab a broker-dealer. See [#1
at ¶¶ 6, 8]. Thus, this court focuses on whether Highwater alleges that Schwab’s conduct was
improper.
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531 (2009).

But in considering Highwater’s allegations in a light most favorable to it, and in

accordance with above factors, I respectfully conclude that Highwater has sufficiently alleged
Schwab’s improper interference with Highwater’s prospective business relationships to survive
dismissal at this juncture. That is, Schwab attempted to steer Highwater’s clients way from
Highwater through false and disparaging comments about Highwater’s products and services
soon after Schwab terminated the IMSA. See Perkins v. Fed. Fruit & Produce Co., Inc., 861 F.
Supp. 2d 1285, 1291–92 (D. Colo. 2012) (holding the plaintiffs’ allegations that the defendants’
“negative and false remarks about the Plaintiffs” sufficient to state a tortious interference claim
where the plaintiffs alleged that those statements “led to numerous employment rejections from
prospective employers.”). See also [#28 at 6 (“The essence of Highwater’s tortious interference
claim is that Schwab improperly interfered with potential customer relationships by providing
false information to the customers about Highwater.”)]. Highwater also identifies at least one
client that refused to transfer its account to Highwater after having such a conversation with a
Schwab employee. See Tara Woods Ltd. P’ship, 731 F. Supp. 2d at 1121 (holding sufficient to
state a tortious interference claim the plaintiff’s allegation that prospective buyers, which the
court assumed to exist, were discouraged from extending offers based on the defendant’s
improper noticing of non-asbestos-related defaults).

Additioanlly, Highwater alleges that

Schwab initiated this action to prohibit Highwater from conducting further business with former
Schwab clients in violation of the unenforceable Agreement between Mr. Giuffra and Schwab.
Cf. Occusafe, Inc. v. EG&G Rocky Flats, Inc., 54 F.3d 618, 623 (10th Cir. 1995) (explaining that
a plaintiff may maintain a tortious interference claim against a competitor who employs
“wrongful means,” which “refers to conduct such as physical violence, fraud, civil suits, and
criminal prosecutions.” (emphasis added) (internal quotation marks and citations omitted)).

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Thus, I respectfully RECOMMEND that Schwab’s Motion to Dismiss be DENIED, and
that Counterclaim II remain on the basis of Schwab’s alleged conduct apart from the IMSA
Termination Letters. 3
CONCLUSION
Therefore, for the reasons stated herein, I respectfully RECOMMEND that:
(1)

Plaintiff Charles Schwab & Co., Inc’s Motion to Dismiss [#23] be DENIED. 4

DATED: September 14, 2017

BY THE COURT:

s/Nina Y. Wang__________
United States Magistrate Judge
3

For this reason, this court does not consider Highwater’s request to amend its FAC contained in
its Response. See [#28 at 9]. I note, however, that such a request must be made by a formal
motion, see D.C.COLO.LCivR 7.1(d), and that in the absence of the proposed second amended
counterclaims, this court cannot determine whether leave to amend is warranted, see Garman v.
Campbell Cty. Sch. Dist. No. 1, 630 F.3d 977, 986 (10th Cir. 2010) (upholding denial of leave to
amend where the party failed to file a motion explaining the bases for any proposed amendment
but merely included one line in a brief suggesting the possibility of amendment).
4

Within fourteen days after service of a copy of the Recommendation, any party may serve and
file written objections to the Magistrate Judge’s proposed findings and recommendations with
the Clerk of the United States District Court for the District of Colorado. 28 U.S.C. § 636(b)(1);
Fed. R. Civ. P. 72(b); In re Griego, 64 F.3d 580, 583 (10th Cir. 1995). A general objection that
does not put the District Court on notice of the basis for the objection will not preserve the
objection for de novo review. “[A] party’s objections to the magistrate judge’s report and
recommendation must be both timely and specific to preserve an issue for de novo review by the
district court or for appellate review.” United States v. One Parcel of Real Prop. Known as 2121
E. 30th St., 73 F.3d 1057, 1060 (10th Cir. 1996). Failure to make timely objections may bar de
novo review by the District Judge of the Magistrate Judge’s proposed findings and
recommendations and will result in a waiver of the right to appeal from a judgment of the district
court based on the proposed findings and recommendations of the magistrate judge. See Vega v.
Suthers, 195 F.3d 573, 579-80 (10th Cir. 1999) (District Court’s decision to review a Magistrate
Judge’s recommendation de novo despite the lack of an objection does not preclude application
of the “firm waiver rule”); Int’l Surplus Lines Ins. Co. v. Wyo. Coal Refining Sys., Inc., 52 F.3d
901, 904 (10th Cir. 1995) (by failing to object to certain portions of the Magistrate Judge’s order,
cross-claimant had waived its right to appeal those portions of the ruling); Ayala v. United States,
980 F.2d 1342, 1352 (10th Cir. 1992) (by their failure to file objections, plaintiffs waived their
right to appeal the Magistrate Judge’s ruling). But see Morales-Fernandez v. INS, 418 F.3d 1116,
1122 (10th Cir. 2005) (firm waiver rule does not apply when the interests of justice require
review).
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