Third Circuit Allows Putative Class Action To Proceed Against Investment Services Provider, Finding Breach Of Contract Claim Not Barred Under SLUSA Where Alleged Misrepresentations Were Objectively Immaterial To Plaintiffs And The Claim Asserted
On September 4, 2018, the United States Court of Appeals for the Third Circuit affirmed the partial denial of a motion to dismiss a putative class action against investment services provider Vanguard Group (the “Company”). Alex Taksir, et al. v. The Vanguard Group, No. 17-3585 (3d. Cir. Sept. 4, 2018). Plaintiffs alleged that the Company violated Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (“UTPCPL”) and breached its contract with plaintiffs by overcharging on per-trade commissions. According to the Complaint, the Company’s website represented that commissions were $2 per stock trade for customers who maintained account balances of between $500,000 and $1,000,000, but the Company allegedly charged plaintiffs—who met the prerequisite balance requirements—$7 per trade. The United States District Court for the Eastern District of Pennsylvania dismissed the UTPCPL claim, but held that the breach of contract claim was not barred by the Securities Litigation Uniform Standards Act (“SLUSA”)—which precludes parties from bringing class actions based on state law claims relating to “a misrepresentation or omission of a material fact in connection with the purchase or sales of a covered security”—because no misrepresentations were made “in connection with” a covered security. The Company sought leave to file an interlocutory appeal, which the Third Circuit granted.
The Company argued that the District Court erred by concluding that SLUSA does not bar plaintiff’s breach of contract claim. According to the Company, the alleged overcharge of commissions constitutes a misrepresentation “in connection with” the purchase or sale of a covered security. The Third Circuit first evaluated the Company’s argument that the United States Supreme Court’s 2014 ruling in Chadbourne & Parke LLP v. Troice, 571 U.S. 377, 386–87 (2014)—in which the Supreme Court concluded that the scope of “in connection with” did not “extend further than misrepresentations that are material to the purchase or sale of a covered security”—was inapplicable because Troice addressed the purchase or sale of “uncovered” securities. The Third Circuit disagreed, finding that that the Supreme Court in Troice did not limit its reasoning to the distinction between covered and uncovered securities, and that the Third Circuit need not do so here. The Court was also not persuaded by the Company’s attempt to distinguish Troice based on decisions from the Seventh, Eighth, and Ninth Circuits, which applied a purportedly broader “in connection with” standard for SLUSA preclusion as stated by the Supreme Court in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006). The Third Circuit noted that the Supreme Court in Troice expressly stated that it was clarifying Dabit, and not modifying it, and therefore the Court may appropriately “look to Troice for guidance.” Moreover, the Court found that each of the appellate cases cited by the Company was distinguishable from this case because each involved “the direct breach of a duty that the broker owe[d] customers pertaining to a securities transaction,” and therefore the alleged misconduct at issue in those cases was “plainly material” to the brokerage customers. The Court further noted that both the Seventh and Ninth Circuits have concluded in similarly situated cases that inflated commission fees do not trigger the SLUSA bar, and likewise the same result should apply in this case.
Turning next to the issue of materiality, the Third Circuit addressed the Company’s argument that even if Troice applied, SLUSA’s “in connection with” standard would still be met because the District Court erred by treating the rule of materiality the same as “subjective reliance,” and by ruling as a matter of law that “no reasonable investor would consider it important when deciding whether to buy or sell securities that he was allegedly being overcharged.” The Court agreed with the District Court’s conclusion that “a reasonable investor would not be swayed” by the overcharges on commission fees, emphasizing that the reduced commissions at issue were only available for customers with at least $500,000 invested in the Company’s accounts, and thus the “single digit differences in trading commissions” were “objectively immaterial” in comparison to the amounts invested. The Court further agreed with the District Court’s distinction between the facts in this case and those in cases where the alleged misrepresentation constituted a breach of duty of “best execution,” noting that the false promise to obtain “the best available price” is material to brokerage customers, which differs from the “incidental and low-value overcharges in this case.” The Court also rejected the Company’s contention that a customer concedes that a contractual term is material to their securities transaction merely by attempting to enforce that term.
Finally, the Court rejected the Company’s argument that while plaintiffs’ claim sounded in contract, it was in fact a fraud claim barred by SLUSA because the misrepresentation prong is satisfied under SLUSA. The Court held that whether the Company’s alleged conduct constituted a misrepresentation or a breach of contract was irrelevant because even if the conduct were a misrepresentation, it is not a misrepresentation that is “material or adequately connected to a securities transaction.” Accordingly, the Third Circuit found that plaintiffs’ breach of contract claim was not precluded by SLUSA, and affirmed the District Court’s denial of the Company’s motion to dismiss the breach of contract claim.