Charles Schwab Corp. v. Goldman Sachs Grp., Inc., 11832

• Decision Date: 13 August 2020
• Docket Number: Index 654674/18,11832
• Citation: 186 A.D.3d 431,129 N.Y.S.3d 54
• Parties: The CHARLES SCHWAB CORPORATION, et al., Plaintiffs–Appellants, v. The GOLDMAN SACHS GROUP, INC., et al., Defendants–Respondents.
• Court: New York Supreme Court — Appellate Division

186 A.D.3d 431

129 N.Y.S.3d 54

The CHARLES SCHWAB CORPORATION, et al., Plaintiffs–Appellants,

v.The GOLDMAN SACHS GROUP, INC., et al., Defendants–Respondents.

11832

Index 654674/18

Supreme Court, Appellate Division, First Department, New York.

ENTERED: AUGUST 13, 2020

Friedman Kaplan Seiler & Adelman LLP, New York (Robert S. Smith of counsel), for The Charles Schwab Corporation and Charles Schwab & Co., Inc., appellants.

Kaplan Rice LLP, New York (Howard J. Kaplan of counsel), for TD Ameritrade Holding Corporation, TD Ameritrade Online Holdings Corporation and TD Ameritrade, Inc., appellants.

Cleary Gottlieb Steen & Hamilton LLP, New York (Thomas J. Moloney of counsel), for respondents.

Gische, J.P., Kapnick, Webber, Kern, Gonza´lez, JJ.

Order, Supreme Court, New York County (O. Peter Sherwood, J.), entered June 21, 2019, which granted defendants' motion to dismiss the complaint, unanimously reversed, on the law, with costs, and the amended complaint reinstated.

In 1999, plaintiffs, a number of retail brokerage firms, established Epoch, an online investment bank company. Plaintiffs established Epoch in an effort to facilitate the sale of newly-issued securities directly to their customers. Epoch had a distribution agreement with plaintiffs, providing that plaintiffs and their retail customers would be able to participate in Epoch's securities offerings. This distribution agreement did not have a set term, but was terminable upon the happening of certain events that included a change in control in any of the plaintiffs.

The Goldman Sachs Group, Inc. and Goldman Sachs & Co. LLC (together, Goldman) acquired Epoch from plaintiffs in 2001. Goldman contends that it believed it was investing in a "potentially very valuable new distribution mechanism" for the online sale of securities, and paid $192 million to purchase it. In a 2001 press release, Goldman explained that through the acquisition it would "obtain the exclusive right to distribute equity offerings, including IPOs [initial public offerings], to [plaintiffs]' customers," and that those customers would "receive access to U.S. equity research from Goldman [ ]." The press release noted that plaintiffs had nearly 10 million active accounts and approximately $1 trillion in customer assets. Finally, it summarized that Epoch would provide "exclusive access" to the "important individual investor segment through one of the largest brokerage networks in the United States."

At the time of the acquisition, Goldman and plaintiffs negotiated changes to Epoch's original distribution agreement, which led to the Amended and Restated Distribution Agreement being executed by plaintiffs, Goldman and Epoch on June 12, 2001 (the distribution agreement). The distribution agreement provided, among other things, that Goldman would "invite through Epoch each of the [plaintiffs] to participate in Offerings on the terms set forth herein." The agreement provided for the allocation to plaintiffs of 15% of Goldman's "Fee Retention" in oversubscribed public offerings, among other things.

It is undisputed that the distribution agreement had no expiration date. Goldman also entered into several other agreements with some of the plaintiffs at the time of the acquisition. While the distribution agreement provided for an "Exclusive Period" during which the parties were bound to work together, this exclusivity period expired on December 15, 2007. Goldman claims that it attempted on numerous occasions to reach a consensual termination of the distribution agreement starting as early as March of 2008, but that no consensual agreement could be reached. The distribution agreement has thus essentially operated as a one-way "option" contract in plaintiffs' favor since 2007.

According to the complaint, Goldman continued to benefit from Epoch, even after the exclusive period expired, in light of the access it granted to individual investors interested in IPOs and secondary public offerings (SPOs). Plaintiffs contend that Goldman was able to promote access to such investors when competing for appointments as lead managing underwriter on IPOs and SPOs, and received a higher dealer concession than it otherwise would have in light of its ability to guarantee allocations. Further, when an offering was undersubscribed, the purchases from plaintiffs' customers helped Goldman to fill the inventory of shares to be issued. They contend that orders from their customers increased the likelihood that the offering would become oversubscribed, thus allowing Goldman to invoke an over-allotment option to earn additional fees.

In or around 2013, Goldman moved its distribution of IPO shares in-house to its own investment banking arm, rather than continuing to do so through Epoch. At that time, Goldman repurposed Epoch as an underwriter for its insurance and reinsurance businesses and sold the system as part of a spin-off. Plaintiffs contend that Goldman has never claimed that this event affected its obligations under the distribution agreement. In February of 2013, Goldman, Epoch and plaintiffs executed an Assignment, Assumption and Release Agreement (the assignment agreement) through which Goldman reaffirmed the distribution agreement. In April 2018, Goldman's counsel sent plaintiffs a letter stating that it was providing 90 days notice of Goldman's termination of the distribution agreement.

Plaintiffs commenced this action through the filing and serving of a summons and complaint and a proposed order to show cause requesting an application for a preliminary injunction and a temporary restraining order (TRO). The court denied the TRO and declined to hear argument on the preliminary...