United States District Court, E.D. North Carolina, Western Division
IN THE MATTER OF THE ARBITRATION BETWEEN HOLTON B. SHEPHERD, et al., Plaintiffs,
LPL FINANCIAL LLC, Defendant.
B. Jones, Jr. United States Magistrate Judge.
matter is before the court on the motion of Defendant LPL
Financial LLC (“Defendant” or “LPL
Financial”) for a protective order and to stay
discovery. [DE-37]. Plaintiffs have responded in opposition
to the motion [DE-43], and the issues are ripe for decision.
For the reasons set forth below, the motion for protective
order and to stay discovery is denied.
9, 2015, Plaintiffs initiated arbitration (the
“Underlying Arbitration”) seeking over $1.3
million in damages against LPL Financial. [DE-1-2] at 14,
20-21. Plaintiffs asserted that an employee of LPL Financial
inappropriately invested Plaintiffs' brokerage accounts
resulting in substantial losses. Id. at 40, 44. The
Underlying Arbitration panel consisted of three arbitrators,
and on December 2, 2016, the panel issued a unanimous award
in favor of Plaintiffs in the amount of $119, 117.00.
Id. at 20-27.
February 28, 2017, Plaintiffs filed a petition to vacate the
arbitration award in North Carolina state court, which was
removed to this court on March 30, 2017. [DE-1, -1-2].
Plaintiffs alleged that LPL Financial failed to produce
certain documents that were responsive to a document request
in the Underlying Arbitration and that one of the
arbitrators, Lynne T. 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. Id. at
12-18. On May 5, 2017, LPL Financial filed a response in
opposition to the petition and cross-petition to confirm the
arbitration award. [DE-16]. In response to the order for
discovery plan [DE-21], the parties filed competing Rule
26(f) reports, in which Plaintiffs seek a period of discovery
on issues to include “failures by the arbitrators (such
as arbitrator disclosure failures) and by [LPL Financial]
(such as discovery failures), ” [DE-42] ¶ 3(a),
and Defendant takes the position that no discovery is
warranted, [DE-41] ¶ 3(a).
seeks a protective order pursuant to 9 U.S.C. § 6,
Fed.R.Civ.P. 81(a)(6)(B), and Fed.R.Civ.P. 26(c) to preclude
Plaintiffs from conducting discovery and to stay discovery
pending disposition of the petition to vacate and response
thereto. Def.'s Mot. [DE-37] at 1. Specifically,
Defendant argues that petitions to vacate must be heard as
motions under Section 6 of the Federal Arbitration Act
(“FAA”) and, as such, discovery is disfavored and
Plaintiffs must demonstrate “clear evidence of
impropriety” to obtain even limited discovery.
Def.'s Mem. [DE-38] at 2, 4-10. Plaintiffs contend that
Defendant applies the clear evidence standard too broadly and
that they are entitled to at least some discovery under
Fed.R.Civ.P. 26(b), where the information sought is
“relevant and necessary to the determination of an
issue raised.” Pls.' Resp. [DE-43] at 4-6 (citation
omitted). Plaintiffs alternatively argue that applying either
the relevance or clear evidence standard they are entitled to
some discovery. Id. at 6-11.
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/V
Allegra, 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
concedes that “discovery is not completely foreclosed
in vacatur proceedings, ” but argues that courts only
rarely allow it upon a showing of clear evidence of
impropriety. Def.'s Mem. [DE-38] at 6. The court
previously applied the clear evidence of impropriety standard
when assessing the propriety of subpoenas served by
Plaintiffs on the non-party arbitrators. See In re
Subpoenas Issued to Albert, No. 5:17-CV-150-D, 2017 WL
4976443, at *2 (E.D. N.C. Nov. 1, 2017) (“[T]he weight
of persuasive case law demands a heightened showing of
‘clear evidence of impropriety' to obtain discovery
from a non-party arbitrator.”). However, the court is
not convinced that the clear evidence standard applies more
broadly, as Defendant urges, to all discovery sought,
including from a party or a non-party other than an
arbitrator. The cases cited by Defendant in support of
requiring a showing of clear evidence of impropriety in order
to conduct any discovery largely address discovery sought
from arbitrators. See e.g., Andros v. Marc Rich
& Co., A.G., 579 F.2d 691, 702 (2d Cir. 1978)
(requiring clear evidence of impropriety to obtain discovery
from an arbitrator); Hoeft v. MVL Grp., Inc., 343
F.3d 57, 66 (2d Cir. 2003) (“[A]rbitrators may not be
deposed absent ‘clear evidence of
impropriety.'”), overruled on other grounds by
Hall St. Assocs. v. Mattel, Inc., 552 U.S. 576 (2008);
Midwest Generation EME, LLC v. Continuum Chem.
Corp., 768 F.Supp.2d 939, 943 (N.D. Ill. 2010) (applying
the clear evidence of impropriety standard to request to take
limited discovery of an arbitrator). Importantly, Plaintiffs
assert not only arbitrator bias as a basis for vacating the
underlying arbitration award, but also Defendant's
failure to produce requested documents in the underlying
event, the court need not decide now what standard to apply,
because there are no disputed discovery requests before the
court to consider, and at the time the instant motion was
briefed by the parties, no discovery had been served on
Defendant. Pls.' Resp. [DE-43] at 6. It would be
imprudent to attempt to predict what discovery Plaintiffs
might seek, and the court expresses no opinion on what, if
any, limited discovery might ultimately be justified. As a
general matter, a “limited scope of judicial review,
” Richmond, Fredericksburg & Potomac R. Co. v.
Transportation Commc'ns Int'l Union, 973 F.2d
276, 278 (4th Cir. 1992), and “restricted inquiry into
factual issues” O.R. Sec, Inc. v. Prof'l
Planning Assocs., Inc., 857 F.2d 742, 747-48 (11th Cir.
1988), support the “strong federal policy favoring
arbitrability, ” In re Nat 'l Risk
Underwriters, Inc., 1989 WL 100649, at *3, 884 F.2d 1389
(4th Cir. 1989) (per curiam) (citation omitted), and allowing
full-blown discovery in a proceeding such as this would
undermine that policy. However, these principles fail to
justify the preemptive ban Defendant seeks on all discovery.
Accordingly, Defendant's motion for a protective order
and to stay discovery pending the court's ruling on the
motion to vacate is denied.
reasons set forth above, the motion for protective order and
to stay discovery [DE-37] is denied.