Orrick Secures Class Action Dismissal for Morgan Stanley in Ninth Circuit


In a case of first impression, the Ninth Circuit Court of Appeals recently held that federal securities law preempts the enforcement of California’s “forced patronage” statute against brokerage firms that forbid their employees from opening outside trading accounts. 

In that case, the plaintiff financial advisors had brought separate actions against Morgan Stanley, Wells Fargo and Merrill Lynch, which were consolidated in the Ninth Circuit for appeal. Each of those brokerage firms had designed employee trading policies which generally prohibited financial advisors from opening outside accounts at other institutions.

The plaintiffs claimed that this “in-house” requirement violates California Labor Code section 450, which prevents an employer from requiring patronage of its employees.  Although no provision of federal law expressly requires in-house account policies, the Ninth Circuit found that federal law gives brokerage firms the discretion to design employee trading policies which it determines will best prevent and detect insider trading and other securities abuses, including polices requiring in-house accounts.  

Since plaintiffs’ claims under Section 450 would be an obstacle to the accomplishment of federal objectives in preventing insider trading, they were preempted by federal law.

The Orrick team representing Morgan Stanley included Supreme Court and appellate partner Joshua Rosenkranz, who argued the appeal before the Ninth Circuit, employment law partners Lynne Hermle and Jessica Perry, securities litigation and regulatory enforcement partner Kenneth Herzinger, employment law of counsel Trish Higgins and Supreme Court and appellate senior associate Robert Yablon.

The consolidated appeal is Douglas K. Mc Daniel v. Wells Fargo Investments, et al. No. 11-17017.