Third Party Beneficiaries May Not Enforce Benefits Beyond Those Contractually Owed to Promisee

Doe v Wal-Mart Stores, Inc., 572 F3d 677 (9th Cir 2009)

Foreign suppliers contracting with Wal-Mart Stores are subject to a code of conduct Wal-Mart calls "Standards for Suppliers". Among the standards Wal-Mart requires is that suppliers must adhere to local laws and local industry standards in dealings with the supplier's employees. The suppliers are subject to on-site inspections by Wal-Mart to ensure compliance with the code of conduct.

Employees of Wal-Mart suppliers in China, Bangladesh, Indonesia, Swaziland, and Nicaragua brought a class action lawsuit against Wal-Mart suit in California superior court alleging inadequate compliance with the code of conduct, asserting that the employees of the suppliers were joint employees of both Wal-Mart and the suppliers, that the employees were third-party beneficiaries of the code of conduct, and that Wal-Mart breached its duty to conduct on-site inspections for the protection of the employees.

The district court hearing the case dismissed the case for failure to state a claim.

On appeal, the appellate court found that Wal-Mart's statement, "will undertake affirmative measures … to implement and monitor" did not create a duty for Wal-Mart. Wal-Mart was not promising to ensure its suppliers compliance with employment laws, and a third party beneficiary may not assert rights in excess of those contractually agreed upon. Marina Tenants Ass'n v. Deauville Marina Dev. Co., 181 CA3d 122, 132 (1986). Since Wal-Mart did not have a duty, the supplier employees could not rely upon their standing as third party beneficiaries to bring a cause of action. Further, without a duty, Wal-Mart cannot be negligent.

The appellate court affirmed the district court's dismissal.

Proving a breach of fiduciary duty by a securities broker-dealer becomes easier.

Oravecz v. New York Life Ins. Co., 174 CA4th 174 (2009)

Court of Appeal of the State of California

Second Appellate District

Division One

Oravecz bought investment securities in Tradex through broker-dealer Steve Roth, allegedly an employee of New York Life Insurance Company. What Oravecz believed to be an offshore trading fund was actually a Ponzi scheme. When the Ponzi scheme collapsed, and Oravecz had lost the money invested in Tradex, Oravecz sued New York Life alleging several causes of action, including breach of fiduciary duty.

New York Life successfully demurred on each of Oravecz's causes of action and was awarded summary judgment. The trial court based its decision to sustain the demurrer on the breach of fiduciary duty cause of action because, under federal law [e.g., Independent Order v. Donald, Lufkin & Jenrette, 157 F3d 933 (1998)], a fiduciary duty only arises when the investor gives discretion to chose investments and control trading authority.

Oravecz appealed, and the appellate court held that the trial court had correctly ruled on the existence of summary judgment under the federal law, but under California common law the investor need not provide a showing of discretion or control by the securities broker. As such, the trial court erred in finding that Oravecz's allegations did not sufficiently allege a claim for breach of fiduciary duty.

The federal requirement that a broker-dealer have discretion and control over an investor's assets for a breach of fiduciary duty to be owed is a reasonable standard. If not for such a duty, negligent and careless decisions by broker-dealers failing to conduct reasonable due diligence would carry few consequences. That California has no such requirement of discretion and control in effect makes each broker-dealer a babysitter for each investor, and begins a shift of responsibility to conduct due diligence away from the party making investment decisions and onto the broker. The slope is steep and icy, broker-dealers, be careful where you step.