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Charles Schwab & Co., Inc. v. Highwater Wealth Management, LLC

United States District Court, D. Colorado

August 16, 2017

CHARLES SCHWAB & CO., INC., Plaintiff,



         This matter is before the court on Defendant Highwater Wealth Management, LLC's (“Defendant” or “Highwater”) Motion for Stay of Discovery (the “Motion”). [#31, filed July 28, 2017]. The undersigned considers the Motion pursuant to 28 U.S.C. § 636(b), the Order Referring Case dated March 31, 2017 [#6], the Case Reassignment dated April 3, 2017 [#8], and the Memorandum dated July 31, 2017 [#33]. This court concludes that oral argument will not materially assist in the resolution of this matter. Accordingly, upon careful review of the Motion and related briefing, the applicable case law, and the entire case file, the Motion is DENIED for the reasons stated herein.


         Plaintiff Charles Schwab & Company, Inc. (“Plaintiff” or “Charles Schwab”) initiated this action by filing its Complaint on March 30, 2017. [#1]. Plaintiff, a securities broker/dealer, entered into a custodial relationship with Highwater, a Registered Investment Advisory firm (“RIA”), wherein Highwater could offer its clients the option of having their assets custodied with Charles Schwab. [Id. at ¶¶ 6-9]. However, Plaintiff alleges that its former employee Gregory Giuffra resigned from Charles Schwab and joined Highwater, and in doing so, illicitly solicited business from Plaintiff's clients in violation of a non-solicitation agreement with Charles Schwab. [#1]. Plaintiff alleges that Highwater was implicit in Mr. Giuffra's illicit acts and even encouraged them. [#1]. Accordingly, Plaintiff asserts the following claims against Defendant: (1) tortious interference with contract (“Claim I”); (2) misappropriation of trade secrets pursuant to the Defend Trade Secrets Act, 18 U.S.C. § 1831 et seq. (“Claim II”); (3) misappropriation of trade secrets pursuant to the Colorado Uniform Trade Secrets Act (“CUTSA”), Colo. Rev. Stat. § 7-74-101 et seq. (“Claim III”); (4) unfair competition (“Claim IV”); and (5) civil conspiracy (“Claim V”). [#1]. In addition, Plaintiff and Mr. Giuffra are currently engaged in arbitration before the Financial Industry Regulatory Authority, Inc. (the “FINRA Action”). [#3]. Highwater is not a party to that proceeding. [Id.].

         On May 1, 2017, Highwater filed its Answer and asserted counterclaims for: (1) declaratory relief that the Charles Schwab agreement not to solicit is a void agreement not to compete; and (2) tortious interference with contract and prospective financial advantage. [#16]. Highwater then filed its Amended Counterclaims, amending its second counterclaim to tortious interference with prospective business relations on May 19, 2017. [#19].

         The undersigned then held a Scheduling Conference on May 30, 2017, setting a pre-trial schedule for this matter that included September 1 and November 30, 2017, as the deadlines for fact discovery and expert discovery, respectively. [#22]. On July 28, 2017, Highwater filed the instant Motion, requesting a stay of discovery through November 2017, pending the resolution of the arbitration proceedings between Plaintiff and Mr. Giuffra. [#31]. Defendant also requested an expedited briefing schedule on the Motion given that fact discovery is set to close on September 1, 2017. [#32]. The undersigned granted Highwater's request for an expedited briefing schedule [#35], and the Motion is currently ripe for resolution. See [#36; #37]. This court turns to the Parties' arguments below.


         “The Federal Rules of Civil Procedure do not provide for the stay of proceedings[.] . . . Instead, Rule 1 instructs that the rules of procedure ‘shall be construed and administered to secure the just, speedy, and inexpensive determination of every action.'” Sutton v. Everest Nat'l Ins. Co., No. 07 CV 00425 WYD BNB, 2007 WL 1395309, at *1 (D. Colo. May 9, 2007). Nonetheless, when ruling on a motion to stay, courts weigh the following factors: (1) the plaintiff's interests in expeditiously litigating this action and the potential prejudice to plaintiff of a delay; (2) the burden on the defendants; (3) the convenience to the court; (4) the interests of persons not parties to the civil litigation; and (5) the public interest. String Cheese Incident, LLC v. Stylus Shows, Inc., No. 1:02-CV-01934-LTB-PAC, 2006 WL 894955, at *2 (D. Colo. Mar. 30, 2006). However, “stays of the normal proceedings of a court matter should be the exception rather than the rule, ” Christou v. Beatport, LLC, No. 10-CV-02912-CMA-KMT, 2011 WL 650377, at *1 (D. Colo. Feb. 10, 2011), and stays in this District are generally disfavored, see, e.g., Chavez v. Young Am. Ins. Co., No. CIVA 06CV02419PSFBNB, 2007 WL 683973, at *2 (D. Colo. Mar. 2, 2007).


         I. Whether the FINRA Action May Have Preclusive Effect

         “Collateral estoppel, or issue preclusion, is designed to prevent needless relitigation and bring about some finality to litigation[, ]” and “bars a party from relitigating an issue once it has suffered an adverse determination on the issue, even if the issue arises when the party is pursuing or defending against a different claim.” Moss v. Kopp, 559 F.3d 1155, 1161 (10th Cir. 2009) (internal citations and footnote omitted). In according preclusive effect to the issue(s) adjudicated in a state proceeding, a federal court must look to the preclusion doctrines of the state where the adjudication occurred-Colorado in this case. See Salguero v. City of Clovis, 366 F.3d 1168, 1173 (10th Cir. 2004) (quoting Univ. of Tenn. v. Elliot, 478 U.S. 788, 798 (1986)). Under Colorado law, issue preclusion applies when four elements are met: “(1) the issue is identical to an issue actually litigated and necessarily adjudicated in the prior action; (2) the party against whom estoppel is sought was either a party to the prior action or in privity with a previous party; (3) a final judgment was entered on the merits in the prior proceeding; and (4) the party against whom estoppel is sought had a full and fair opportunity to litigate the issues in the prior proceeding.” Concerning Application for Water Rights of Sedalia Water & Sanitation Dist. in Douglas Cty., 343 P.3d 16, 22 (Colo. 2015). If these elements are satisfied, a non-party to the underlying action may still raise issue preclusion-offensive nonmutual issue preclusion applies when a nonmutual plaintiff seeks to preclude the defendant from relitigating an unsuccessful issue from a prior proceeding; defensive nonmutual issue preclusion applies when a nonmutual defendant raises the doctrine against a plaintiff that unsuccessfully litigated an issue in a prior proceeding. See Cent. Bank Denver, N.A. v. Mehaffy, Rider, Windholz & Wilson, 940 P.2d 1097, 1101-03 (Colo.App. 1997); see also Dodge v. Cotter Corp., 203 F.3d 1190, 1198 (10th Cir. 2000). Issue preclusion may also apply to an arbitration award. See Union Ins. Co. v. Hottenstein, 83 P.3d 1196, 1202 (Colo.App. 2003).

         Highwater first argues for a stay because the arbitrators' decision in the FINRA Action may dispose of Plaintiff's claims in this matter. [#31 at 5]. Highwater contends that Plaintiff's claims in the FINRA Action are nearly identical to its claims against Highwater. [Id. at 5-6]. For example, Plaintiff asserts the following claims against Mr. Giuffra in the FINRA Action: (1) breach of contract; (2) misappropriation of trade secrets; (3) breach of duty of loyalty; and (4) unfair competition. [#31-1 at 2]. According to Highwater, should the arbitrators rule in favor of Mr. Giuffra, Plaintiff's identical claims against Highwater must similarly fail. [#31 at 5-6; #37 at 3-6]. Specifically, if the arbitrators find that Mr. Giuffra either did not violate the non-solicitation agreement with Plaintiff or that the non-solicitation agreement is unenforceable, “then Highwater cannot be liable for tortious interference with that Agreement or a conspiracy to injure [Charles] Schwab.” [#31 at 5]. Similarly, if the arbitrators find that Mr. Giuffra did not misappropriate trade secrets, “then Highwater is absolved of any wrongdoing, ” including any injunctive relief against Highwater that Plaintiff also seeks against Mr. Giuffra in the FINRA Action. [Id.].

         In response, Charles Schwab asserts that the FINRA Action will carry no preclusive effect on this matter, because Highwater is not a party to the FINRA Action. [#36 at 8]. Relatedly, Highwater's counterclaim for tortious interference is not at issue in the FINRA Action. [Id. at 10-11]. And, as to narrowing any issues in this matter, Plaintiff asserts that the FINRA Action award will contain no reasoned explanation of the arbitrators' decision pursuant to FINRA Rule 13904(g); thus, the Parties will have no basis for determining how and/or why the arbitrators reached their ultimate decision. [Id. at 12].

         It appears undisputed that that the FINRA Action may have preclusive effect on this matter. First, the FINRA Action will necessarily adjudicate whether: (1) Mr. Giuffra violated the non-solicitation agreement; (2) the non-solicitation agreement is enforceable; (3) Mr. Giuffra misappropriated trade secrets; and (4) Mr. Giuffra's acts constituted unfair competition. See generally [#31-1]. Here, Plaintiff's claims assert liability against Highwater on the basis that it conspired with Mr. Giuffra and was implicit in Mr. Giuffra's illicit actions-the basis for the FINRA Action. Compare [#1] with [#31-1]. Nor is it fatal that the arbitrators will provide no explanation of their award, as they will still be required to actually and necessarily adjudicate the issues just identified in order to issue the arbitration award. See In re: Larry Ivan Behrends, Debtor. Virginia Cooley-Linder, Cooley-Linder's Retail ...

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