McDaniel v. Wells Fargo Investments

Summarized by:

  • Court: 9th Circuit Court of Appeals Archives
  • Area(s) of Law: Preemption
  • Date Filed: 04-09-2013
  • Case #: 11-17017; 11-55859; 11-55943; 11-55958
  • Judge(s)/Court Below: Circuit Judge O’Scannlain for the Court; Circuit Judges Trott and Clifton
  • Full Text Opinion

The federal Securities Exchange Act and related “self-regulatory organizations” rules preempt the enforcement of California Labor Code § 450(a) against brokerage houses that forbid their employees from opening outside trading accounts where the state restriction imposed is a significant federal regulatory objective.

Former employees of Wells Fargo Investments, Wells Fargo Bank, Wells Fargo Advisors (collectively “Wells Fargo”), Morgan Stanley Smith Barney (“Morgan Stanley”), and Merrill Lynch, Pierce, Fenner & Smith (“Merrill Lynch”) filed class action suits against their past employers based on California Labor Code § 450(a) that forbids forced-patronage. Under the Securities Exchange Act and related self-regulatory organizations (“SRO”) rules, brokerage firms are required to “take measures reasonably designed to prevent their employees from misusing material, nonpublic information.” Wells Fargo, Morgan Stanley, and Merrill Lynch had polices forbidding their financial advisors from opening self-directed trading accounts outside the firm. After the district courts held that the “federal securities regulatory framework” precluded the state-law claims, all parties appealed. The Ninth Circuit held that the statute regulates an area traditionally of state concern, and therefore, it is presumed that Congress did not intend to preempt state law. The panel also held that “[w]here…federal law grants an actor ‘a choice,’ and state law ‘would restrict that choice,’ state law is preempted if preserving ‘that choice was a significant federal regulatory objective.’” The panel found that the Securities Exchange Act allowed for “securities firms to decide for themselves how best to monitor their employees’ trading,” and that the employment policies at issue were expected as a means to reduce insider trading. The panel held that the district court correctly found that the Act and related SRO rules preempted state law against forced-patronage. AFFIRMED.

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