Roskind v. Morgan Stanley Dean Witter & Co.

• Decision Date: 27 April 2000
• Docket Number: No. A087546.,A087546.
• Parties: James ROSKIND, Plaintiff and Appellant, v. MORGAN STANLEY DEAN WITTER & CO., Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

95 Cal.Rptr.2d 258

80 Cal.App.4th 345

James ROSKIND, Plaintiff and Appellant, v. MORGAN STANLEY DEAN WITTER & CO., Defendant and Respondent.

No. A087546.

Court of Appeal, First District, Division 5.

April 27, 2000.

As Modified on Denial of Rehearing May 26, 2000.

Review Denied August 16, 2000.^*

[95 Cal.Rptr.2d 259]

[80 Cal.App.4th 347]

Berman, DeValerio, Pease & Tabacco, Joseph J. Tabacco, Jr., Nicole Lavallee, San Francisco, Jennifer S. Abrams, Susan G. Kupfer, for Appellant.

Gibson, Dunn & Crutcher, Jonathan C. Dickey, Palo Alto, Gail E. Lees, Los Angeles, Steven S. Kimball, San Francisco, Steven Buchholz, Palo Alto, for Respondent.

STEVENS, J.

Does federal law preempt a state law cause of action brought under California's unfair competition law (UCL), Business and Professions Code section 17200 et seq.,¹ where a brokerage firm is alleged to have violated its duty to its customers, by not executing their orders for stock sales in a fair and timely manner, and by instead "trading ahead" for its own benefit before processing those sales for its customers? We conclude there is no provision of federal law that preempts a state law cause of action under the UCL in these circumstances, and therefore we must reverse the judgment of the trial court.

I. FACTS AND PROCEDURAL HISTORY

As this appeal proceeds from a judgment following a ruling sustaining a demurrer without leave to amend, we must accept the facts as properly pleaded by appellant James Roskind.

Appellant alleged that he owned a large block of stock in Netscape, which was listed on the NASDAQ (National Association of Securities Dealers Automated Quotation System) exchange. Appellant instructed his stockbroker, Morgan Stanley Dean Witter & Co. (Morgan), to sell 14,000 shares of Netscape stock on his behalf. Instead of selling appellant's stock in a timely fashion, for the $68 per share at which the stock was then trading, Morgan delayed the sale of appellant's stock for a crucial 77 minutes, during which time the value of Netscape stock dropped to $65.50 per share. During this delay period, Morgan "traded ahead" by selling its own large block of Netscape stock first, at $66 per share, then sold appellant's stock at prices between $65.25 and $65.75 per share. Some of the sales of Netscape stock that Morgan executed for appellant were at a price that was so low that it was outside the "bid/ask range" established for Netscape at the time of those sales. As a result of Morgan's delay and its trading ahead, appellant lost more than $34,000, which he would otherwise have gained if his stock had been sold in a timely fashion.

Appellant complained about Morgan's behavior in trading ahead in Netscape stock, first to Morgan, and then to the Market Regulation Committee of the National Association of Securities Dealers, Inc. (NASD), a private self-regulating group of dealers on the NASDAQ exchange. NASD investigated the matter, and Morgan decided to accept a settlement of charges brought by the NASD. The settlement between NASD and Morgan resulted in the censure of Morgan by NASD, the imposition of a fine of $35,000, and the repayment to appellant of more than $34,000. Morgan also made repayment to two other affected customers. However, Morgan did not pay appellant the entire interest he claimed was also due on the amount of the loss. Nor was Morgan ordered to repay any other customers, other than appellant and the two customers named in the NASD settlement.

Appellant then brought this class action lawsuit, seeking restitution and injunctive relief for himself and all other similarly situated customers of Morgan who had lost money as a result of Morgan's practice of trading ahead. His complaint states two causes of action arising under California state law. The first cause of action, brought under the UCL, alleges that the practice of trading ahead is an unfair and unlawful business practice under the UCL. The second cause of action alleges a breach of fiduciary duty by Morgan in trading ahead of its clients.

Morgan sought to remove the lawsuit from state court to the federal district court for the Northern District of California. However, the federal court found that the complaint did not raise a claim within the federal court's jurisdiction, and therefore was not properly removable. The federal court then remanded the action to state court.

When the matter returned to state court on remand, Morgan filed a demurrer, contending that federal law preempted appellant's claims. The trial court ultimately sustained the demurrer without leave to amend on the grounds of federal preemption. This appeal followed.

II. DISCUSSION

A. STANDARD OF REVIEW

"For purposes of ruling on a demurrer, the court assumes the truth of all well-pleaded allegations of a complaint. The ability of the plaintiff to prove them is not in issue." (Diamond Multimedia Systems, Inc. v. Superior Court (1999) 19 Cal.4th 1036, 1041, 80 Cal.Rptr.2d 828, 968 P.2d 539, fn. 4 (Diamond).) Instead, the facts alleged must be treated as having been admitted, and we review de novo to determine whether the facts as pleaded could entitle the plaintiff to any legal remedy as a matter of law. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38, 77 Cal.Rptr.2d 709, 960 P.2d 513 (Quelimane).)

A demurrer merely tests the legal sufficiency of the complaint, not its factual truth. (Hernandez v. City of Pomona (1996) 49 Cal.App.4th 1492, 1497, 57 Cal. Rptr.2d 406.) On appeal, "[w]e give the complaint a reasonable interpretation, reading it as a whole and viewing its parts in context. [Citations.] We deem to be true all material facts properly pled. [Citation.]" (Lazar v. Hertz Corp. (1999) 69 Cal.App.4th 1494, 1501 .) "In other words, `plaintiff need only plead facts showing that he may be entitled to some relief [citation].' (Alcorn v. Anbro Engineering, Inc. (1970) 2 Cal.3d 493, 496 [86 Cal.Rptr. 88, 468 P.2d 216].)" (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 572, 108 Cal.Rptr. 480, 510 P.2d 1032 (Gruenberg); accord, Quelimane, supra, 19 Cal.4th at p. 38, 77 Cal. Rptr.2d 709, 960 P.2d 513; Moore v. Regents of University of California (1990) 51 Cal.3d 120, 125, 271 Cal.Rptr. 146, 793 P.2d 479.)

Despite these uniform authorities holding that we are presented with a pure question of law that we must review de novo, Morgan argues that we should review only for an abuse of discretion. We reject this argument. The cases cited by Morgan for this result do not support its position as to a demurrer, and, in the review of a judgment following trial, deal instead with the very different issue of whether a court in a UCL action may grant equitable relief, such as an injunction. (See Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 179, 83 Cal.Rptr.2d 548, 973 P.2d 527 (Cel-Tech) [UCL remedies are generally limited to civil penalties, restitution and injunctive relief]; Olsen v. Breeze, Inc. (1996) 48 Cal.App.4th 608, 620, 55 Cal.Rptr.2d 818 [no abuse of discretion where court declined to grant injunctive relief, because claim of unenforceability of contract was without merit]; California Grocers Assn. v. Bank of America (1994) 22 Cal.App.4th 205, 215-218, 27 Cal. Rptr.2d 396 [trial court abused its discretion by granting injunctive relief, because claims of unconscionability were without merit].)

In the instant case, we do not review an order granting or denying injunctive relief following trial. Instead, we review a judgment entered after the sustaining of a demurrer without leave to amend, which presents the question of whether "it appears that the plaintiff is entitled to any relief at the hands of the court against the defendants." This presents "a pure question of law." (CAMSI IV v. Hunter Technology Corp. (1991) 230 Cal.App.3d 1525, 1530, 282 Cal.Rptr. 80, quoting Gruenberg, supra, 9 Cal.3d at p. 572, 108 Cal.Rptr. 480, 510 P.2d 1032, internal quotation marks omitted.) We construe the allegations of the complaint liberally "`with a view to substantial justice between the parties.'" (CAMSI, IV, supra, 230 Cal. App.3d at p. 1530, 282 Cal.Rptr. 80, citing, inter alia, Code Civ. Proc., § 452.)

B. THE UCL CAUSE OF ACTION WAS NOT PREEMPTED BY FEDERAL LAW

1. Background on the UCL

Appellant's first cause of action rests on section 17200, the main substantive provision of the UCL. The remedies available under this law are "cumulative ... to the remedies or penalties available under all other laws of this state." (§ 17205.) The UCL "does not proscribe specific practices. Rather, as relevant here, it defines `unfair competition' to include `any unlawful, unfair or fraudulent business act or practice.' (§ 17200.) Its coverage is `sweeping, embracing "`anything that can properly be called a business practice and that at the same time is forbidden by law.'"' (Rubin v. Green (1993) 4 Cal.4th 1187, 1200 [17 Cal.Rptr.2d 828, 847 P.2d 1044], quoting Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 113 [101 Cal.Rptr. 745, 496 P.2d 817].) ... By proscribing `any unlawful' business practice, `section 17200 "borrows" violations of other laws and treats them as unlawful practices' that the unfair competition law makes independently actionable. (State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093, 1103 , citing Farmers Ins. Exchange v. Superior Court [1992] 2 Cal.4th [377] at p. 383 [6 Cal.Rptr.2d 487, 826 P.2d 730].)" (Cel-Tech, supra, 20 Cal.4th at p. 180, 83 Cal.Rptr.2d 548, 973 P.2d 527, fn. omitted.)

"However, the law does more than just borrow. The statutory language referring to `any unlawful, unfair or fraudulent' practice (italics added) makes clear that a practice may be deemed unfair even if not specifically proscribed by some other law. `Because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition—acts or practices which are unlawful, or...