Eighth Circuit Holds Rule 23(b)(3)’s Predominance Requirement Not Met in Securities Fraud Action Against Brokerage Firm

In Ford v. TD Ameritrade Holding Corp., 2021 U.S. App. LEXIS 12008 (8th Cir. Apr. 23, 2021), the United States Court of Appeals for the Eighth Circuit reversed a district court’s order certifying a class of customers who had used the defendant’s brokerage services to trade securities and were allegedly injured by defendant’s undisclosed “order routing practices.”  The Eighth Circuit determined that plaintiff’s expert’s proposed algorithm could not overcome the complex, trade-by-trade inquiry needed to adjudicate each class member’s economic loss, and so failed to satisfy Federal Rule of Civil Procedure 23(b)(3)’s requirement that common issues of law or fact predominate of issues affecting individual class members.  The decision is significant because the Eighth Circuit did not view recent technological advances in simplifying the analysis of voluminous, complex data as necessarily altering the nature of what is an inherently individualized analysis for Rule 23(b)(3) purposes.

Securities brokers have a duty of “best execution,” requiring their “reasonable efforts to maximize the economic benefit to the client in each transaction.”  Defendant TD Ameritrade, Inc.’s (“TD Ameritrade”) order routing practices allegedly violated this duty by systematically sending customer orders to trading venues that paid TD Ameritrade the most money, rather than to venues that provided the best economic outcome for its customers.  As a result, it allegedly left orders unfilled, or filled orders at a sub-optimal price or in a manner that adversely affected performance after execution.  Plaintiff, a customer, claimed that, by this conduct, TD Ameritrade, its parent, and its CEO violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5.

Plaintiff moved to certify a customer class.  The magistrate judge recommended denying the motion on the ground that proving each customer suffered an economic loss would require highly individualized, trade-by-trade inquiries, and so Rule 23(b)(3) was not met.  The district judge, however, disagreed.  It held that plaintiff’s expert “had developed an algorithm that could solve the predominance problem by making automatic determinations of economic loss for each customer,” and granted the motion.

The Eighth Circuit granted defendants permission to appeal the district court’s class certification order.  In reversing the district court, the Eighth Circuit first explained that “best execution” cases differ from typical securities fraud actions because the alleged fraud does not directly affect the security’s trading price.  Rather, in a “best execution” case, any economic loss (a liability element) arises, if at all, from the difference between the price at which the customer’s trade was executed and any better price that was then available from an alternative trading source.  Thus, to satisfy Rule 23(b)(3)’s predominance, a plaintiff must propose a class-wide method to establish this particular type of economic loss for each class member.  The Eighth Circuit noted that the Third Circuit in 2001 had rejected efforts to certify a class in a similar “best execution” case on the ground that the proposed method failed to obviate the need for trade-by-trade economic loss determinations.

Plaintiff argued that technological advances since 2001 have enabled courts to now adjudicate “best execution” claims through the class action devise.  Plaintiff pointed out that his expert represented that the proposed algorithm could instantly analyze “hundreds of millions of data points” to assess order-execution quality using TD Ameritrade’s trading history data and published data on market conditions at the time of each trade.  Specifically, the proposed algorithm would identify each trade’s “better price” by comparing the trade’s actual price with published data showing the highest price a buyer was willing to pay, and the lowest price a seller was willing to accept, for a particular stock at any given time.

The Eighth Circuit, however, found the algorithm failed to overcome the individualized nature of this inquiry.  It noted that both sides’ experts agreed that certain transactions had to be excluded from the algorithm’s analysis to account for those instances when unusual market conditions would have prevented TD Ameritrade from executing a trade other than at an “inferior” price.  Although plaintiff’s expert claimed the algorithm could automatically “filter out”’ such instances, the experts disagreed about which transactions should be excluded.  The Eighth Circuit determined that, to resolve this issue, the parties’ respective experts would need to “bring their own judgments to bear on a trade-by-trade basis,” ultimately requiring the trier of fact to make highly individualized determinations.  It further found that, when placing an order, a customer’s trading strategy can bear on the economic loss question but that the algorithm could not account for the customer’s state-of-mind at the time of the trade.  It concluded that “[d]espite advances in technology, individual evidence and inquiry is still required to determine economic loss for each class member.”

In addition to rejecting the proposed algorithm’s ability to deliver as promised, the Eighth Circuit’s opinion also commented on the relationship between advances in computing technology and Rule 23(b)(3)’s requirement that common questions predominate over individualized ones.  While acknowledging that “[a]dvanced computing power can expedite [an economic loss] determination,” it observed that such advances do not necessarily “convert[] individual evidence into common evidence” when the underlying inquiry is inherently individualized.  Hence, the Eighth Circuit’s opinion is significant as it suggests that the speed and efficiency by which technology allows individual questions to be adjudicated does not bear on the Rule 23(b)(3) inquiry which asks whether common questions “predominate” over individual questions.

The U.S. Supreme Court Limits TCPA Liability By Narrowly Interpreting ATDS

On April 1, 2021, the U.S. Supreme Court in the class action case of Facebook, Inc. v. Duguid, No. 19-511, resolved a circuit court split on the meaning of automatic telephone dialing system (“ATDS”) under the Telephone Consumer Protection Act (“TCPA”) by unanimously reversing the Ninth Circuit’s broad definition and narrowly interpreting ATDS.  Bringing much needed clarity the Federal Communications Commission has not been able to provide to date, the Supreme Court held that to qualify as ATDS “a device must have the capacity to store a telephone number using a random or sequential number generator, or to produce a telephone number using a random or sequential number generator.”  This ruling significantly narrows liability, including class action liability, under the TCPA. Continue Reading

Strengthening the TCPA’s Sovereign Immunity Shield—Fourth Circuit Rules Federal Employees Are Not Liable for Government-Mandated Robocalls

In a resounding victory for public-private partnerships, the Fourth Circuit’s decision in Cunningham v. Lester, et al., No. 20-1086, — F.3d —- (4th Cir. Mar. 4, 2021) has affirmed federal employees’ immunity from the Telephone Consumer Protection Act (“TCPA”) when acting in furtherance of a government mandate.  The TCPA imposes strict statutory penalties for unsolicited robocalls ranging from $500 to $1,500 per violation.  But the Supreme Court has held the TCPA does not contain a waiver of sovereign immunity. See Campbell-Ewald Co. v. Gomez, 577 U.S. 153, 166 (2016).  The question presented in Cunningham was whether a plaintiff can avoid the TCPA’s sovereign-immunity shield by suing federal employees for damages in their individual capacities.  The Fourth Circuit ruled that a plaintiff can do no such thing. Continue Reading

More on McGill: Ninth Circuit Affirms Order Enforcing Arbitration of Public Injunctive Relief Claims

Arbitration clauses with class action waivers remain one of the most effective lines of defense against consumer class actions.  They are also one of the most challenged.  As we have discussed in prior posts, including here, here, and here, consumer arbitration clauses have come under fire in California if they prohibit plaintiffs from obtaining “public injunctive relief” in any forum.  This is the so-called McGill rule, which comes from the California Supreme Court’s decision in McGill v. CitiBank, N.A., 2 Cal.5th 945 (2017). Continue Reading

The Scoop on All that Vanilla Flavor Litigation

This article was originally published on Food Navigator on January 13, 2021.

If your company sells any vanilla-flavored food or beverage product, then you are probably aware of the innumerable class action cases that have been filed over the last 18 months attacking these products – 67 cases by our count.  Here, we trace the history of this litigation and the outcomes achieved to date. Continue Reading

Food & Beverage Class Actions: What You Need to Know for 2021

This article was originally posted in Food Manufacturing on January 6, 2021.

Despite the COVID-19 pandemic, the number of putative class actions targeting the food and beverage industry increased in 2020 and show no signs of slowing down in 2021. The number of class actions filed against beverage companies in New York increased while the number of cases filed in California decreased. While the Northern District of California, which had become known as the “food court” remained a popular jurisdiction for these suits, filings in New York outpaced those in California. The factual basis of the claims also continues to evolve. Early cases challenged the description of food and beverages as “all natural” when the products contained additives allegedly rendering the “all natural” representation false and misleading. Continue Reading

Supreme Court to Address Class Action Standing in Ramirez Case: To Recover, Must Absent Class Members Establish Actual Injury?

The U.S. Supreme Court granted certiorari on December 16, 2020 in TransUnion, LLC v. Ramirez on the question of “[w]hether either Article III or Rule 23 permits a damages class action where the vast majority of the class suffered no actual injury, let alone an injury anything like what the class representative suffered.” Ramirez will give the high court the opportunity to clarify how Article III standing requirements apply to class members in class actions. Continue Reading

It’s Not Pop Secret, Ninth Circuit Affirms that Plaintiff Didn’t Have a Leg to Stand On

The Ninth Circuit’s recent decision in McGee v. S-L Snacks Nat’l,., confirms that nutrition fact panel and ingredient disclosures provide information that can be used to support a motion to dismiss and remain important tools for defeating consumer class actions. Continue Reading

No Reason to Blush

*This post originally appeared as an article in the August 2020 edition of Happi Magazine.

Beauty companies face an uptick in alleged false-labeling class actions. Whether the actions are justified or vexatious, one thing is certain: they are expensive to defend. By keeping the following labeling-related litigation trends in mind when considering and reviewing product labels and marketing, beauty companies can, hopefully, avoid becoming a litigation target. Continue Reading

The Sixth Circuit Broadly Defines ATDS, Widening The Split Among Circuits Before The Supreme Court Rules Next Year

On July 29, 2020, the Sixth Circuit joined the Second and the Ninth Circuits in expansively defining Automatic Telephone Dialing System (“ATDS”) under the Telephone Consumer Protection Act (“TCPA”).  In Allan v. Pa. Higher Educ. Assistance Agency, No. 19-2043 (6th Cir. July 29, 2020), the Sixth Circuit held that “devices that dial from a stored list of numbers”—i.e. “predictive dialers”—qualify as an ATDS under the TCPA.  The Third, Seventh, and Eleventh Circuits have applied a more stringent definition, requiring that an ATDS have the capacity to generate random or sequential telephone numbers and to dial them.  Now the Circuit Courts are split on this issue 3-3.  The U.S. Supreme Court recently accepted review of the definition of ATDS and will presumably resolve this split in its next terms, likely by the spring of 2021. Continue Reading

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