Fidelity Brokerage Services Has Two Trains Runnin' in FINRA Arbitration and Federal Court

July 25, 2022

Fidelity Brokerage Services LLC filed a FINRA Arbitration Statement of Claim against a former employee citing her alleged misuse of confidential customer information. Then, on a second track, Fidelity chugs into federal court with another lawsuit, which prompted amended complaints and counterclaims, and the addition of a non-FINRA-member-firm. On top of that, the former employee filed her own claims involving alleged age and sex discrimination. What's arbitrable? What's not? Where should all of this get decided? Should one of the litigation trains get stopped in its tracks? 

Fidelity: FINRA Large Firm

Fidelity Brokerage Services LLC has been a FINRA member firm since 1979. As to the FINRA member firm's exact number of branches and registered representatives, well, that seems to be somewhere over 200 branches and around 14,000. See, for exampleIn the Matter of Fidelity Brokerage Services LLC, Respondent (FINRA AWC 2014041374401 / December 18, 2015) 

FINRA's online BrokerCheck database as of July 25, 2022, discloses that Fidelity has 21 "regulatory events" and 115 "arbitrations." 

Further, Article I: Definitions of the By-Laws of FINRA Regulation, Inc. states in pertinent part that:

(x) "Large Firm" means any broker or dealer admitted to membership in the Corporation which, at the time of determination, has 500 or more registered persons . . .

Given the above definition, Fidelity Brokerage Services is a FINRA Large Firm. Frankly, it's a very large firm -- one that seems to be 28 times the threshold of 500 registered reps.

April 2022: Fidelity's Amended Complaint

So . . . what's this FINRA Large Firm been up to lately? Among other things, Fidelity Brokerage Services sued Fairhaven Wealth Management, LLC and its employee Jennifer Taylor, a former Fidelity employee. What brought both Fairhaven and Taylor within Fidelity's crosshairs? Here's some guidance:

Plaintiff Fidelity Brokerage Services LLC ("Fidelity") files this Second Amended Complaint against Defendant Fairhaven Wealth Management, LLC ("Fairhaven"). Defendant Fairhaven hired Fidelity's former employee, Jennifer Taylor ("Taylor"), and encouraged and facilitated Taylor's misuse of Fidelity's confidential and trade secret customer information, which she obtained knowledge of and access to only as a result of her employment with Fidelity, to solicit Fidelity customers to transfer their Fidelity accounts to her at Fairhaven. Further, not only has Taylor taken and misused Fidelity's confidential customer information but she shared that confidential, trade secret customer information with Fairhaven and its employees for the specific purpose of enabling Fairhaven personnel to misuse it. Fairhaven employees then did exactly that, using Fidelity's customer information to aggressively and systematically solicit Fidelity customers to transfer their investment management business to Taylor at Fairhaven. Taylor's conduct violates her Employment Agreement with Fidelity, and Fairhaven has tortiously interfered with that contract. Both Taylor and Fairhaven have misappropriated and misused Fidelity's trade secret customer information in violation of Illinois law and the Defend Trade Secrets Act. Fairhaven has also engaged in unfair competition and conspired to take and misuse Fidelity's information in order to divert Fidelity's customers to their firm.

at Pages 1 - 2 of  Fidelity Brokerage Services LLC, Plaintiff, v. Jennifer Taylor and Fairhaven Wealth Management, LLC, Defendants/Counterclaimants (Second Amended Complaint, United States District Court for the Northern District of Illinois ("NDIL"), No 20-CV-2133 / April 12, 2022)

SIDE BAR:FINRA BrokerCheck records disclose that Jennifer Taylor was registered with Fidelity Brokerage Services from March 1996 to March 2020, and, thereafter, she joined Fairhaven Wealth Management as Senior Vice President/Wealth Advisor. Taylor is listed on BrokerCheck as having been a Vice President/Financial Consultant at Fidelity Brokerage Services, Inc. during her tenure.

Two  Lawsuit Trains Running on Non-Parallel Tracks

As to the ongoing hostilities among Fidelity Brokerage Services, Taylor, and Fairhaven Wealth Management, let's consider these disclosures:

Plaintiff Fidelity initiated an arbitration with defendant Taylor, a former employee of Fidelity, asserting claims that Taylor violated restrictive covenants and misappropriated trade secrets when she left Fidelity to join Fairhaven. Fidelity also sued Taylor in this Court with the objective of obtaining a preliminary injunction, relief that was not available in the arbitration. After obtaining expedited discovery, Fidelity amended its complaint to join Fairhaven as a defendant for its alleged complicity in Taylor's breach of her restrictive covenants. Fairhaven counterclaimed alleging the breach of a contract between Fidelity and Fairhaven, and Taylor counterclaimed alleging age and sex discrimination. Despite initiating this case and receiving some discovery, Fidelity now seeks to stay this action and bar further discovery on the pending counterclaims until the arbitration between Fidelity and Taylor concludes. Because the arbitration and this action are not parallel proceedings under the Colorado River doctrine and a stay would prejudice the counterclaimants, Fidelity's motion to stay this action is denied.

at Page 1 of Fidelity Brokerage Services LLC, Plaintiff, v. Jennifer Taylor and Fairhaven Wealth Management, LLC, Defendants/Counterclaimants (Opinion and Order, United States District Court for the Northern District of Illinois ("NDIL"), No 20-CV-2133)

My, we got a lot of comin's and goin's in that federal case! Howasabout we bullet-point of the landmark events to date:
  • Plaintiff Fidelity initiated a FINRA arbitration against Taylor seeking, in part, injunctive relief.
  • In April 2020, Fidelity sued Taylor in NDIL with the objective of obtaining a preliminary injunction, relief that was not available in the FINRA arbitration. 
  • After obtaining expedited discovery, Fidelity amended its complaint to join Fairhaven 
  • In November 2020, Fairhaven (NOT a FINRA member firm and not a party to any mandatory arbitration agreement) counterclaimed alleging the breach of a contract between Fidelity and Fairhaven, and Taylor counterclaimed alleging age and sex discrimination. 
  • Fidelity seeks to stay the NDIL action and bar further discovery on the pending counterclaims until the arbitration concludes
  • NDIL denied the Stay
Hmmm . . . lemme see here, Fidelity started the litigation pursuant to a FINRA Arbitration, but then the FINRA Large Firm filed a lawsuit in federal court. Then we got a flurry of amended complaints and counterclaims. Then we got a non-FINRA-member and age/sex discrimination claims. Then the federal court declines to stay Fidelity's federal case in favor of allowing the FINRA arbitration to conclude. Pointedly, consider this: 

Pursuant to FINRA rules, Fidelity and Taylor are required to arbitrate this dispute, so Fidelity filed a statement of claim with FINRA seeking expedited resolution, a procedure that was only available if Fidelity secured a preliminary injunction from a court. Compl. ¶ 13

at Page 2 of the NDIL Opinion

SIDE BAR: One might ask -- one might wonder -- how the hell Fidelity and Taylor are in federal court if they are each "required to arbitrate this dispute"? 

Interesting that a FINRA Large Member Firm is required to arbitrate (the Court's words, not mine!) a given dispute but manages to wind up in federal court. Not the first time this has happened. Not the last time this will happen. And, yet, it keeps happening. All sorts of Large Member Firms wind up in court when they are required under FINRA Rules to arbitrate. Which then raises the perennial question of why FINRA tolerates this crapola when it appears to be undertaken in violation of FINRA's rules. Which, as always, raises the question as to where the hell FINRA's Board of Governors is and where the hell FINRA's regulatory management is on that very issue. 

FINRA Rule 13201

And now, let's pour a bit of fuel on the fire:

FINRA Code of Arbitration Procedure for Industry Disputes Rule 13201. Statutory Employment Discrimination Claims, Disputes Arising Under a Whistleblower Statute that Prohibits the Use of Predispute Arbitration Agreements, Sexual Assault Claims, and Sexual Harassment Claims

(a) Statutory Employment Discrimination Claims
A claim alleging employment discrimination in violation of a statute, is not required to be arbitrated under the Code. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose. If the parties agree to arbitrate such a claim, the claim will be administered under Rule 13802.

(b) Disputes Arising Under a Whistleblower Statute that Prohibits the Use of Predispute Arbitration Agreements
A dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Code. Such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.

(c) Sexual Assault and Sexual Harassment Claims
A party alleging a sexual assault claim or sexual harassment claim that has agreed to arbitrate before the dispute arose may elect post dispute not to arbitrate such a claim under the Code. Such a claim may be arbitrated if the parties have agreed to arbitrate it after the dispute arose. If the parties arbitrate such a claim, the claim will be administered under Rule 13802.

"Not Required" as in, no, you don't belong in a FINRA Arbitration 

In addition to Taylor having asserted what appear to be some non-arbitrable claims against Fidelity, we have additional factors that undercut the Large Member Firm's foray into FINRA Arbitration:

Fairhaven is not a FINRA member firm, and it has no relevant arbitration agreement with Fidelity, which would have been waived in any event when Fidelity opted to sue Fairhaven in this forum.2 As for Taylor's counterclaims, under FINRA Rule 13201(a), statutory employment discrimination claims are "not required to be arbitrated under the Code" unless the parties so agree. Mot to Compel at 7, ECF No. 112. Taylor has not so agreed. 
= = = = =
Footnote 2:  Fidelity half-heartedly argues that Fairhaven might be required to arbitrate under an "Investment Advisor Representation and Indemnification" agreement, which includes an agreement to arbitrate before FINRA. Mot. for Stay at 3, ECF No. 114. Fairhaven responds that Fidelity waived any right to arbitration by suing it in federal court, and further that none of the claims in this lawsuit touch on that contract, which applies to "any order, instruction or representation" Fairhaven gives to Fidelity with respect to a client. Resp. at 3, ECF No. 119. Fidelity concedes that it has waived its ability to compel arbitration, Reply at 11, ECF No. 123, but argues that Fairhaven's willingness to arbitrate undermines its argument that it would be prejudiced by a delay: Fairhaven has had no problem agreeing to arbitrate in the past, Fidelity contends, so it should have no problem submitting to FINRA jurisdiction in this dispute. The Court finds this argument unpersuasive. The parties did not bargain for an arbitration clause in the custodial agreement, that they did so in a separate contract is irrelevant.

at Page 3 of the NDIL Opinion

The Counterclaims

As with many lawsuits, you have the "at first" posture of the case. Afterwards, you have the "and then" posture of the case. Which inevitably leads to things winding up in a much different shape than from where they started [Ed: footnote omitted]:

The parties agree that Fidelity's original claims against Taylor, and several of Taylor's counterclaims in this action, must be arbitrated before FINRA, but they dispute what should happen with Taylor's counterclaims and the dispute between Fidelity and Fairhaven while the arbitration proceeds. Fidelity does not seriously dispute that Taylor's statutory employment discrimination claims and Fairhaven's counterclaims are either not arbitrable or not required to be arbitrated, and the counterclaimants have no desire to take their claims before a FINRA panel. Fidelity contends that this action should be stayed because there are overlapping factual issues between the arbitrable and non-arbitrable claims, which creates a risk of inconsistent rulings as between the FINRA panel and this Court. Fairhaven and Taylor respond that due to the nature of the claims and how FINRA handles adjudications, there is no such risk, and moreover that this case is not parallel to the FINRA proceeding under Colorado River Water Conservation Dist. V. United States, 424 U.S. 800, 817 (1976). Fairhaven also argues that it will be prejudiced by a stay because it could be subject to third-party discovery in the FINRA action -- Fidelity has already sought a subpoena against it from the FINRA panel -- while being unable to pursue any discovery against Fidelity and being forced to wait years to litigate its own claims.

at Pages 5 - 5 of the NDIL Opinion

Statutory Employment Discrimination Claims

Somewhat lost in the Court's narrative is a fairly stunning and I argue "disturbing" development; namely, that Fidelity is somehow before FINRA's arbitration forum litigating a matter involving Sexual Harassment Claims despite the language (and the spirit) of FINRA Rule 13201. Add into that mix the fact that Fairhaven is not a FINRA member firm and not a party to any arbitration agreement, and, yet again, we have Fidelity litigating before FINRA's arbitration forum. In Fidelity's favor is the fact that some of its claims against Taylor (and some of her counterclaims) appear subject to mandatory intra-industry arbitration. But that mandate does not cover "statutory employment discrimination claims" and does not cover non-member Fairhaven's counterclaims. Moreover, Taylor dropped all of her federal counterclaims that are NOT based on age/sex discrimination. Keep in mind that Fidelity filed the NDIL lawsuit that Fidelity is arguing must be stayed in favor of the FINRA arbitration that Fidelity also initiated. 

Title VII Claims

In embarking upon its analysis, NDIL first considers whether there is some "parallel" relationship between the FINRA arbitration and federal case, such, that there is a substantial likelihood that the non-federal litigation will dispose of all the claims in the federal case. In resolving this thorny threshold question, NDIL states in pertinent part that:

[T]he arguments that Fidelity offers regarding preclusion are unpersuasive. If Taylor were to arbitrate her Title VII claim, the Court would be required to afford no deference to the arbitration panel's findings, though it could admit them into evidence. The same would be true of the arbitrator's decision regarding Taylor's legally distinct wrongful discharge counterclaim in arbitration -- any findings regarding those things identified by Fidelity, such as the circumstances of her departure from her former employer, would not bind this Court as it considers Taylor's Title VII claim. Not only is Taylor not required to arbitrate her Title VII case, but the Court must hear her case in federal court if she wishes, and it cannot afford preclusive effect to the arbitration panel's findings as they relate to Taylor's Title VII claim. Thus, the arbitration will not dispose of Taylor's claims.

at Page 8 of the NDIL Opinion

Issue Preclusion

In the other aspect of its deliberations, NDIL considered Fairhaven's counterclaims and whether "issue preclusion" in the FINRA arbitration could impact the federal court:

[I]ssue preclusion applies where 1) the party (or its privy) against whom issue preclusion is asserted was fully represented in the prior litigation; 2) the issue sought to be precluded is identical to an issue involved in the prior litigation; 3) the issue was actually litigated and decided on the merits; and 4) the resolution of that issue was necessary to the tribunal's judgment. . . .

at Pages 9 - 10 of the NDIL Opinion

After meticulously parsing through the parties' respective positions, the Court ultimately finds that:

[T]he arbitration and this federal action are not parallel because there is not "a substantial likelihood that the [non-federal] litigation will dispose of all claims presented in the federal case." Freed, 756 F.3d at 1018. Nothing that happens in the arbitration will bind the Court or Taylor with respect to her Title VII claim. And while there are some overlapping factual issues between Fairhaven's counterclaims in this action and Taylor's in the arbitration, the Court finds it unlikely that any of the arbitrators' findings will bind Fairhaven in the federal action, given the differences between the claims advanced and the non-identity of the parties in the two actions. That ends the Colorado River inquiry. Id. The discussion above has also swept in two of the factors to be considered under Fidelity's preferred Volkswagen test: "the risk of inconsistent rulings" and "the extent to which parties will be bound by the arbitrators' decision[.]" 474 F.3d at 972. That leaves the question of prejudice.  

at Page 14 of the NDIL Opinion

A Matter of Prejudice?

Would it be all that much of an imposition to ask Fairhaven and Taylor to just allow the FINRA Arbitration to run its course? Would the likely FINRA Discovery prove so burdensome? As to the issue of prejudice, the Court framed the focus on:

1) waiting for arbitration to conclude could delay these proceedings by years, and 2) a stay would likely encourage Fidelity to continue pursuing third-party discovery against Fairhaven in the arbitration, while preventing Fairhaven from taking discovery in this action, even though it was Fidelity who chose to bring Fairhaven into this federal action.

at Page 14 of the NDIL Opinion

In a likely unintentional but inescapably dismissive rebuff, NDIL noted that:

On March 23, 2022, before the parties fully briefed Fidelity's request for a stay, the Court held a motion hearing. There, it heard starkly divergent estimates for how long a stay would likely last. Counsel for Fidelity, citing her long experience with FINRA arbitrations, estimated that the arbitration would take about nine months. ECF No. 117 at 24:6-8. Fairhaven's counsel estimated that arbitration would last between two and three years. The Court finds Fairhaven's estimate far more likely. Indeed, it appears that Fidelity's counsel was off the mark even representing her own experience with FINRA arbitrations, which closely matches the estimate given by Fairhaven's counsel. Fairhaven demonstrated this by providing a list of FINRA arbitrations litigated by Fidelity's counsel showing that the average length of arbitrations she was involved in was eighteen months- twice as long as the estimate she provided-and that many actions extended up to two or three years. Ex. B to Resp. at 2, ECF No. 119-2.8 Given the substantial likelihood that a stay would be in place for 18 months or more, the Court assesses that a delay of that magnitude would prejudice Fairhaven and Taylor's ability to prosecute their claims. For her part, Taylor has described one key witness, a former client, who now lives in a memory home. Mot to Compel 12-13, ECF No. 112. 

at Page 15 of the NDIL Opinion

After a thoughtful exposition of the facts and the law, NDIL explains that:

The Court notes as well that staying this action is unlikely to result in conservation of judicial resources. Were the Court to stay this action, the delay that follows would be compounded by having to conduct discovery twice. The parties would have the limited discovery authorized by FINRA, and after that matter is adjudicated and the stay is lifted, would likely want to conduct more discovery using the broader tools available under the federal rules. That approach made some sense in the context of limited and expedited discovery, but less so when considered with a view to the more expansive discovery the counterclaimants are likely to seek. 

In sum, it was Fidelity that sued Fairhaven in federal court, and now it is Fidelity who wants to stay this litigation, potentially for years, thwarting both Taylor and Fairhaven from pursuing discovery in this forum while Fidelity pursues one-way discovery against Fairhaven in its preferred forum and indefinitely delays Taylor from prosecuting her claims of sex discrimination. Moreover, Fidelity seeks to bind Taylor with respect to her non-arbitrable Title VII claim, as well as Fairhaven, who has not agreed to arbitrate anything. Granting Fidelity's motion would thus entail significant prejudice to Fairhaven and Taylor, without any benefits in judicial efficiency. 

at Page 16 of the NDIL Opinion


NDIL denied Fidelity's Motion to Stay; and the also denied as moot Fairhaven and Taylor's Motion to Compel (because Fidelity's resistance was predicated upon its efforts to seek a Stay). Finally, Fidelity is granted leave to amend its Motion to Dismiss Counterclaims in light of the changed procedural posture of the underlying case. 

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