In re Robinhood Outage Litigation ( 2020 )

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 IN RE ROBINHOOD OUTAGE Master File No. 20-cv-01626-JD LITIGATION 7 8 9 10 11 STANLEY WITHOUSKI, Case No. 20-cv-03550-JD Plaintiff, 12 v. ORDER RE REMAND 13 Re: Dkt. No. 121 14 ROBINHOOD FINANCIAL LLC, et al., Defendants. 15 16 17 This case is one of several actions against defendants Robinhood Financial LLC, 18 Robinhood Markets, Inc., and Robinhood Securities, LLC (Robinhood), that the Court related and 19 consolidated. See Dkt. No. 19 (consolidation order). Robinhood is an online brokerage and 20 securities trading platform that features commission-free investing. On March 2 and 3, 2020, 21 Robinhood’s systems crashed, which prevented users from accessing their accounts to buy or sell 22 securities. The consolidated cases allege damages from the systems outage. 23 Plaintiff Withouski originally filed this putative class action in the California Superior 24 Court for the County of San Mateo. Dkt. No. 1 at ECF p. 10. He alleged California state law 25 claims on behalf of a class of Robinhood users in California for violations of the California Unfair 26 Competition Law and Consumer Legal Remedies Act, and for negligence, breach of contract, and 27 1 unjust enrichment, among others. Id. at ECF pp. 20-26. The gravamen of the complaint is that 2 Robinhood touted its “[e]xceptionally engineered” and “low-latency” technology as “the best 3 possible trade execution” system in the industry, when it actually had a “defective and unstable 4 infrastructure” with coding bugs that caused the crash in March 2020. Id. at ECF pp. 16-17. 5 Robinhood removed the case to this Court under the Securities Litigation Uniform 6 Standards Act of 1998 (SLUSA), 15 U.S.C. § 77p et seq.2 Dkt. No. 1. In Robinhood’s view, 7 Withouski’s state-law claims are in effect claims for violations of the federal securities laws, 8 which SLUSA precludes from being litigated in a state-law class action. 9 Withouski asks for the case to be remanded. Dkt. No. 12. The Court concludes that the 10 case was removed improvidently and without jurisdiction. 11 The general removal statute, 28 U.S.C. § 1441 et seq., is hostile to removal. “Principles of 12 federalism, comity, and respect for the state courts” weigh against removal, and doubts about 13 removal jurisdiction count in favor of a remand. California v. AbbVie Inc., 390 F. Supp. 3d 1176, 14 1180 (N.D. Cal. 2019). 15 Removal under SLUSA goes in the other direction. Congress enacted SLUSA to promote 16 the removal of state-law class actions that sought to bypass the restrictions imposed on securities 17 class actions by the Private Securities Litigation Reform Act of 1995. See Kircher v. Putnam 18 Funds Trust, 547 U.S. 633, 636 (2006). The authority to remove under SLUSA depends on 19 whether the state-law action is precluded. SLUSA precludes “private state-law ‘covered’ class 20 actions alleging untruth or manipulation in connection with the purchase or sale of a ‘covered’ 21 security.” Id. at 636-37 (internal citation omitted); see also Banks v. Northern Trust Corp., 929 22 F.3d 1046, 1050 (9th Cir. 2019). A “covered” class action is one in which damages are sought for 23 more than 50 people, and a “covered” security is a security traded on a national exchange or issued 24 25 2 SLUSA amended the Securities Act of 1933 and 1934. The preclusion and removal language is 26 the same in these amendments. The language for the 1933 Act is at 15 U.S.C. § 77p(b) and (c), and the language for the 1934 Act is at 15 U.S.C. § 78bb(f)(1) and (2). Because these provisions 27 are identical, they are discussed interchangeably, although strictly speaking the 1934 Act, which 1 by investment companies. See 15 U.S.C. §§ 78bb(f)(5), 77r(b)(1) and (2); Chadbourne & Parke 2 LLP v. Troice, 571 U.S. 377, 380-81 (2014). 3 If these conditions are met, a state-law class action is precluded and may be removed to 4 federal court. 15 U.S.C. § 78bb(f)(2). The Supreme Court has taken pains to emphasize that 5 removal is strictly confined to precluded cases. Kircher, 547 U.S. at 645 (“removal and 6 jurisdiction to deal with removed cases is limited to those precluded” by SLUSA); see also Cyan, 7 138 S. Ct. at 1076 (underscoring same). “If the action is precluded, neither the district court nor 8 the state court may entertain it, and the proper course is to dismiss. If the action is not precluded, 9 the federal court likewise has no jurisdiction to touch the case on the merits, and the proper course 10 is to remand to the state court that can deal with it.” Kircher, 547 U.S. at 644. 11 Withouski’s claims are not precluded by SLUSA, and so a remand is required. It is readily 12 apparent from the complaint that Withouski has not brought any claims “in connection with” the 13 securities laws as that concept has traditionally been construed. To be sure, the complaint alleges 14 fraud and contract claims against a brokerage company, but not every breach of contract or 15 misleading statement by a broker adds up to a violation of the securities laws. See Chadbourne, 16 571 U.S. at 391-92; Freeman Investments, L.P. v. Pac. Life Ins. Co., 704 F.3d 1110, 1116 (9th Cir. 17 2013) (citing Walling v. BeverlyEnters., 476 F.2d 393, 397 (9th Cir. 1973)). The “basic purpose 18 of the 1934 and 1933 regulatory statutes is ‘to insure honest securities markets and thereby 19 promote investor confidence.’” Chadbourne, 571 U.S. at 390 (internal citation omitted). 20 Consequently, SLUSA applies only where a defendant’s deceptive conduct made “a significant 21 difference to someone’s decision to purchase or sell a covered security.” Id. at 387; see also 22 Banks, 929 F.3d at 1051. “The fraud in question must relate to the nature of the securities, the 23 risks associated with their purchase or sale, or some other factor with similar connection to the 24 securities themselves.” Freeman Investments, 704 F.3d at 1116 (quoting Falkowski v. Imation 25 Corp., 309 F.3d 1123, 1130-31 (9th Cir. 2002)); see also Desai v. Deutsche Bank Securities Ltd., 26 573 F.3d 931, 940 (9th Cir. 2009) (an omission must “stem from the failure to disclose accurate 27 information relating to the value of a security where one has a duty to disclose it.”). A merely 1 1116. For these reasons, the classic paradigms of securities violations “in connection with” 2 || buying or selling a security involve insider trading, manipulation of share prices, diversion of 3 investment opportunities, fraudulent overvaluation, and similar dishonest practices that relate 4 directly to the securities markets. See, e.g., Chadbourne, 571 U.S. at 388; Banks, 929 F.3d at 5 1051; Freeman, 704 F.3d at 1117. 6 Withouski does not allege anything like these concerns against Robinhood. The complaint 7 is based entirely on the allegation that Robinhood promised users robust and best-in-class 8 technology, and failed to deliver it. This conduct is well outside the boundaries of the claims that 9 || Congress intended to preclude under SLUSA. The Ninth Circuit has suggested as much in a 10 similar SLUSA context. See Fleming v. Charles Schwab Corp., 878 F.3d 1146, 1154 (9th Cir. 11 2017) (expressing doubt that a trading systems crash would be covered by SLUSA). Robinhood 12 || has not provided any good reason for transforming the claims about its systems crash into 5 13 securities violations. 14 Robinhood removed solely on the grounds of SLUSA preclusion. Since the claims in the 3 15 complaint are not precluded, this was error. The case was removed improvidently and without 16 || jurisdiction, and is remanded to the California Superior Court. IT IS SO ORDERED. 18 Dated: October 19, 2020 19 20 JAMES PONATO- United States District Judge 22 23 24 25 26 27 28