Shepherd et al v. LPL Financial LLC
ORDER denying 37 Motion for Protective Order; denying 37 Motion to Stay. Signed by US Magistrate Judge Robert B. Jones, Jr on 11/20/2017. (Briggeman, N.)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
IN THE MATTER OF THE
HOLTON B. SHEPHERD, et al.,
LPL FINANCIAL LLC,
This 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.
On July 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.
On 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).
Defendant 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. [DE38] 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. 1 Id. at 6–11.
The 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 omitted).
Defendant 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
At the conclusion of Plaintiffs’ response brief, they ask the court to enter a scheduling order consistent with their
Rule 26(f) report or, alternatively, request guidance on how to submit the petition to vacate to he heard “in the manner
. . . of motions.” Pls.’ Resp. [DE-43] at 12 (quoting 9 U.S.C. § 6). These issues are raised in the parties’ Rule 26(f)
reports and are not before the undersigned at this time.
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 arbitration.
In any 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. 2 Pls.’ Resp. [DE-43] at 6. It
Plaintiffs did serve discovery requests on non-parties, including document subpoenas to the three arbitrators, which
the court quashed [DE-45], and a document subpoena to Defendant’s law firm, to which the firm objected but no
related motions have been filed, Def.’s Mem. [DE-38] at 1 & Exs. A, B [DE-38-1, -38-2]. It is noteworthy that while
Defendant’s law firm lodged several objections to the subpoena, it left open the possibility that it would consider
complying with a more limited request. [DE-38-2] at 3.
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.
For the reasons set forth above, the motion for protective order and to stay discovery [DE37] is denied.
SO ORDERED, the 20th day of November 2017.
Robert B. Jones, Jr.
United States Magistrate Judge
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