Next Level Planning & Wealth Management, LLC v. Prudential Ins. Co. of America
Posted on Categories Court Decisions, Securities Arbitration

By James L. Komie

*Arbitrators do not have authority under Section 7 of the Federal Arbitration Act to issue a subpoena to a third party for the production of documents only. **A subpoena for documents must also require the third party to appear as a witness and to bring documents to the appearance, which may be prior to the hearing on the merits.

Next Level Planning & Wealth Management, LLC vs. Prudential Ins. Co. of America, No. 18-MC-65 (E.D. Wis., 2/13/19).

This dispute about the enforcement of a FINRA subpoena arises out of a non-compete case. Daniel Fleming and Patrick Maddox terminated their relationships with Prudential Insurance Co. and Pruco Securities (collectively “Prudential”) and became affiliated with Next Level, a non-FINRA financial planning and wealth management firm. After they began soliciting Prudential customers, Prudential filed a FINRA arbitration against Fleming, Maddox and Next Level. Next Level refused to participate as a non-member and the arbitration went forward against the two individuals only. In the course of the arbitration, Prudential obtained a subpoena directed to Next Level, ordering the firm to produce documents within 30 days and to appear by telephone at an “evidentiary hearing” on an unspecified date. Next Level refused to comply and filed this declaratory judgment action seeking an order quashing the subpoena.

The Federal Arbitration Act does not itself confer jurisdiction, so there must be independent grounds for the court to assert jurisdiction. Next Level contends the court has diversity jurisdiction. While the court is satisfied there is complete diversity between the parties, it is less clear that the dispute meets the $75,000 amount-in-dispute threshold. Although the cost of complying with the subpoena will be less than $75,0000, the amount in dispute in the FINRA arbitration is more than $75,000. The court finds it has jurisdiction on that basis, even though plaintiff Next Level is not a party to the arbitration.

There is no language authorizing a subpoena for documents only; it has to be part of an order to appear before the arbitrators. The FAA does not preclude subpoenas returnable prior to the hearing on the merits, but it would have to be for a pre-hearing appearance before the arbitrators, at which time the third party can be required to bring documents. While the subpoena here did require both documents and telephonic testimony, the time for production of documents was de-coupled from the appearance as a witness. The FAA does not permit same and, as such, the court refuses to enforce the subpoena.

(J. Komie: Although possibly the correct reading of Section 7 of the FAA, the court’s discussion of the policy rationale for not allowing arbitrators to issue a pre-hearing subpoena duces tecum is unpersuasive. The court’s suggestion that it is somehow less burdensome on third parties to have to both appear and produce documents, rather than simply producing the documents, simply doesn’t make any sense.

Moreover, there is no provision in the FINRA Code of Arbitration that contemplates a hearing prior to the hearing on the merits at which a third-party witness could appear before the arbitrators and bring documents. The closest is probably Rule 13501 (Other Prehearing Conferences), which allows for a prehearing conference for “any other matter that will simplify or expedite the arbitration.” Arguably, this would allow the arbitrators to schedule a prehearing at which the third-party could be required to attend and bring documents.

The court’s reference to the pre-1991 version of Rule 45 of the Federal Rules of Civil Procedure suggests another option. As the court notes, Rule 45 formerly did not provide for production of documents other than in connection with a deposition or hearing. Veteran practitioners will recall that the standard work-around was issue a subpoena for a deposition, but to state that appearance would be excused if the third party produced the requested documents prior to the date of the deposition. The same practice would seem to offer a way to obtain documents from a third party prior to hearing in the FINRA context.

Another interesting (but obscure) issue in the Next Level case is the question of what counts towards satisfying the $75,000 jurisdictional minimum for diversity jurisdiction. Is it the amount at issue between the parties in the underlying arbitration? Or is it the cost to the third party of complying with the subpoena. The court is clearly intrigued by this somewhat metaphysical question, but ultimately decides not to make an issue out of it because the parties both agreed that the jurisdictional minimum had been satisfied.)

(SOLA Ref. No. 2019-15-02)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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