Sunday, November 30, 2008

No Third Party Discovery In Arbitration - 2nd Cir.

Every so often in arbitrations the issue arises when a party wants to subpoena a non-party for documents, and they want to do it before the hearing. In other words, they want to obtain discovery from a non-party to the arbitration.

The problem is, you cannot do it under the Federal Arbitration Act, although judging from the arguments that go on during some arbitrations about it, you would never know that there really was an answer to the question.

Oversimplifying the issue - there are only two types of subpoenas - deposition and trial. Attorneys and arbitrators obtain their authority to issue subpoenas (if at all) from the statutes that govern the proceeding they are in. If you are doing a trial in New York State court, the statute that governs the issuance of subpoenas is the New York Civil Practice Law and Rules. In arbitration it is either the Federal Arbitration Act, or the state's arbitration code.

Under the Federal Arbitration Act, the ONLY time a subpoena can be issued is governed by Section 7 of the Act:

The arbitrators selected either as prescribed in this title or otherwise, or a majority of them, may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record,document, or paper which may be deemed material as evidence in the case


That's it, the only time an arbitrator can issue a subpoena is for the hearing, ie, a trial subpoena.

Now, that argument is contrary to one of the purposes of arbitration - expediency. If a non-party cannot be compelled to produce documents before the hearing, the first time anyone is going to see the documents is at the hearing, and that will, in some cases, cause a party to request an adjournment, to give the attorneys time to digest and review the documents that have just been produced.

And arguments and motions ensue. The United States Court of Appeals just handed down a decision that confirms this position, ruling that under the Federal Arbitration Act, there is no prehearing discovery from third parties.

In Life Receivables Trust v. Syndicate 102 at Lloyd's of London, the court addressed the issue, posing the question:

Does section 7 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 7, authorize arbitrators to compel pre-hearing document discovery from entities not parties to the arbitration proceeding?


And the Court's answer:

The Eighth Circuit has held that it does, see In re Arbitration Between Sec. Life Ins. Co. of Am., 228 17 F.3d 865, 870-71 (8th Cir. 2000); the Third Circuit has determined that it does not, see Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3d Cir. 2004); and the Fourth Circuit has concluded that it may – where there is a special need for the documents, see Comsat Corp. v. Nat’l Sci. Found., 190 F.3d 269, 275 (4th Cir. 1999). Like the Third Circuit, we hold that section 7 does not enable arbitrators to issue pre-hearing document subpoenas to entities not parties to the arbitration proceeding

Now there is a clear split in the Circuits, and I suppose that one day there will be a Supreme Court decision on the issue, but in the interim, wouldn't it make a whole lot more sense for Congress to amend Section 7 and give arbitrators and attorneys the authority to issue subpoenas at any point in the hearing process?

Of course, FINRA doesn't think so, since it decided that attorneys can never issue subpoenas, despite the law of the jurisdiction where the arbitration is being held, but that is another story.
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