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In re Subpoenas Issued to Albert

United States District Court, E.D. North Carolina, Western Division

November 1, 2017




         This matter is before the court on the motion of non-parties Lynne T. Albert, Richard J. Igou, and Richard S. Zaifert ("Arbitrators" or "Movants") to quash subpoenas duces tecum issued to them by Holton B. Shepherd, Bonnie L. Shepherd, Robert C. Young, and 109 U-Pull-It, Inc. ("Plaintiffs"). [DE-23]. Plaintiffs have responded in opposition to the Arbitrators' motion to quash [DE-31], and with leave of court the Abitrators filed a reply [DE-34] and Plaintiffs filed a sur-reply [DE-3 6]. All matters raised in the briefing are ripe for decision. For the reasons set forth below, the motion to quash is allowed.

         I. BACKGROUND

         The subpoenas at issue relate to Plaintiffs' petition to vacate an arbitration award in a proceeding in which the Movants served as arbitrators (the "Underlying Arbitration"). [DE-1-2] at 12, 25-27. Defendant, LPL Financial, LLC ("LPL Financial") is regulated by the Financial Industry Regulatory Authority ("FINRA"), and the Underlying Arbitration proceeded before its subsidiary, FINRA Dispute Resolution. [DE-1-2] at 13. FINRA is a private not-for-profit corporation and a self-regulatory organization registered with the United States Securities and Exchange Commission as a national securities association, and FINRA Dispute Resolution administers a dispute resolution forum in the securities industry. [DE-24] at 2. Individuals who serve as arbitrators on FINRA panels are independent contractors and receive payment of $300 per hearing session. Id.

         On July 9, 2015, Plaintiffs initiated the Underlying Arbitration seeking over $1.3 million in damages against LPL Financial LLC ("LPL Financial"). [DE-1-2] at 14, 20-21. Plaintiffs asserted that an employee of LPL Financial inappropriately invested Plaintiffs' brokerage accounts in "risky and unsuitable investments" resulting in substantial losses. Id. at 40, 44. Before the Underlying Arbitration began, FINRA provided each party with a list of arbitrator candidates and the Arbitrator Disclosure Report for each candidate. [DE-24] at 3 (citing [DE-16-3, -16-4]). Each party was asked to rank the arbitrators in order of preference, after which FINRA selected three arbitration panelists. Id. The Underlying Arbitration panel consisted of Lynne T. Albert ("Albert"), Richard J. Igou ("Igou"), and Richard S. Zaifert ("Zaifert"). [DE-1-2] at 25-27. On December 2, 2016, upon the conclusion of the arbitration proceeding the Arbitrators entered a unanimous award in favor of Plaintiffs in the amount of $119, 117.00 ("Award"). Id. at 20-27.

         On February 28, 2017, Plaintiffs filed a motion to vacate the Award in North Carolina state court, which was removed to this court on March 30, 2017. [DE-1, -1-2]. Plaintiffs allege among other things that Albert demonstrated evident partiality in favor of LPL Financial when she failed to disclose a previous relationship with an attorney representing LPL Financial in the Underlying Arbitration ("Defense Counsel"). Id. at 12-18. Specifically, Plaintiffs claim the purported relationship consisted of serving as an arbitrator in two prior arbitration proceedings in which Defense Counsel or his law firm represented a party. [DE-31 ] at 5-6. The first of these arbitrations occurred in 2004, and Defense Counsel's client won a unanimous award before a three-person arbitration panel which included Albert ("2004 Arbitration"). [DE-1-2] at 15-16. The second arbitration occurred in 2014, and involved attorneys from Defense Counsel's law firm ("2014 Arbitration"). [DE-31] at 6. The party represented by Defense Counsel's law firm won a unanimous award before a three-person panel in the 2014 Arbitration. [DE-3 0-2].

         Albert did not disclose on the arbitrator disclosure checklist forms the two arbitrations in which she served as a panelist and Defense Counsel or his law firm appeared before her. [DE-31] at 5-6. Consequently, Plaintiffs claim Albert made two false statements on the forms by incorrectly affirming the answers on the disclosure checklists were complete and accurate, when in fact the checklists omitted the relationship with Defense Counsel. Id. Albert did, however, disclose this relationship on at least two other disclosure checklists in subsequent arbitration proceedings involving Defense Counsel and Plaintiffs' attorney ("June and July 2016 Arbitrations"). [DE-34] at 5. In the June and July 2016 Arbitrations, Albert's disclosure checklist forms indicated she "had... professional, social, or other relationships or interactions with counsel for any of the parties in [the] arbitration or their law firms." Id. Albert clarified these answers by explaining she had served on prior FINRA panels involving Plaintiffs' attorney and Defense Counsel. [DE-35-1].

         Plaintiffs served document subpoenas dated June 5, 2017, on each of the Arbitrators, seeking (1) copies of the answers filed by any respondent in a listing of specifically-identified FINRA Dispute Resolution matters; and (2) copies of the answers filed by any respondent in any other FINRA Dispute Resolution matters where any of the Arbitrators presided and certain counsel, including Defense Counsel, represented LPL Financial. [DE-25-1 through -25-3]. In response to the subpoenas, the Arbitrators filed the instant motion to quash the subpoenas. [DE-23].

         II. ANALYSIS

         The parties disagree regarding the standard applicable to the instant discovery dispute. The Arbitrators contend that Plaintiffs must demonstrate "clear evidence of impropriety" to justify post-award discovery from an arbitrator. [DE-24] at 4-7. Plaintiffs contend that the relevance standard of Fed.R.Civ.P. 26(b) governs document subpoenas related to the issue of arbitrator bias, and the clear evidence standard is only applicable when a party is seeking to depose an arbitrator or the discovery is aimed at questioning the merits of the arbitrator's decision. [DE-31] at 2-4. The court agrees with the Arbitrators that Plaintiffs must demonstrate clear evidence of impropriety to obtain the requested documents from the Arbitrators.

         The Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1 et seq., governs the instant case. See Glass v. Kidder Peabody & Co., 114 F.3d 446, 458 (4th Cir. 1997) (noting the FAA's applicability to an arbitration involving a brokerage account dispute); Smith Barney, Inc. v. Bardolph, 131 N.C.App. 810, 812, 509 S.E.2d 255, 257 (1998) (stating that brokerage agreements "fall within the broad construction" of the FAA). This is so despite Plaintiffs' assertion of both federal and state law as grounds for vacatur. See Carpenter v. Brooks, 139 N.C.App. 745, 749, 534 S.E.2d 641, 645 (2000) (concluding the FAA rather than the North Carolina Uniform Arbitration Act applied to a motion to vacate an arbitration award related to a brokerage contract, which implicated interstate commerce). Once applied, "[t]he 'body of federal substantive law' generated by elaboration of [the] FAA ... is equally binding on state and federal courts." Vaden v. Discover Bank, 556 U.S. 49, 59 (2009) (quoting Southland Corp. v. Keating, 465 U.S. 1, 12 (1984)).

         In proceedings under the FAA, the Federal Rules of Civil Procedure govern except to the extent Title 9 provides other procedures. Fed.R.Civ.P. 81 (a)(6)(B); see Application of Deiulemar Compagnia Di Navigazione S.p.A. v. M/VAllegra, 198 F.3d 473, 482 (4th Cir. 1999) (recognizing that "Rule 81 [] would authorize a district court, in enforcing an arbitration agreement, to 'order discovery pursuant to Fed.R.Civ.P. 26 on matters relevant to the existence of an arbitration agreement.'") (citation omitted). The Federal Rules generally allow parties to "obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case ...." Fed.R.Civ.P. 26(b)(1). Notwithstanding, the weight of persuasive case law demands a heightened showing of "clear evidence of impropriety" to obtain discovery from a non-party arbitrator.[1] See Lucent Techs. Inc. v. Tatung Co., 379 F.3d 24, 32 (2d Cir. 2004) (concluding discovery into potential arbitrator bias was not appropriate where the party "has not presented the 'clear evidence of impropriety' we have held necessary before granting post-award discovery into potential arbitrator bias.") (citing Andros v. Marc Rich & Co., A.G., 579 F, 2d 691, 702 (2d Cir. 1978)); Van Pelt v. UBS Fin. Servs., No. 3:05-CV-477, 2006 WL 1698861, at *2 (W.D. N.C. June 14, 2006) (applying the clear evidence of impropriety standard and denying discovery of an arbitrator's employment records to determine whether he failed to disclose a to material fact); see also Trans Atlantic Lines LLC v. Am. Steamship Owners Mut. Prot. & Indem. Ass'n, Inc., 253 F.Supp.3d 725 (S.D.N.Y. 2017) ("In order to take discovery from the ADR panel itself, a litigant must present 'clear evidence of impropriety, ' such as bias or corruption.") (citation omitted).

         While the Fourth Circuit Court of Appeals has not squarely addressed the issue, it has recognized that

there exists a strong federal policy favoring arbitrability. Moses H. Cone Memorial Hospital v. Mercury Constr. Corp.,460 U.S. 1, 24-25 (1983). Concomitant with this federal policy favoring arbitration is the belief that the arbitration process, as the forum selected by the parties for the resolution of their dispute, must operate with a minimum of judicial supervision. The arbitration process represents a faster and less expensive alternative to litigating disputes in court. As a result, the arbitration process must not become but the first step in the ...

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