Non-Party Discovery in Arbitration: The Second Circuit Weighs In
By Marc J. Goldstein
It is an often-overlooked fact that the Federal Arbitration Act (“FAA”) is now a very “old” statute. Enacted in 1925, and not notably amended since then (except to add Chapters 2 and 3, governing matters under the New York and Panama Conventions, respectively), the FAA is 13 years older than the Federal Rules of Civil Procedure.
The 83-year-old first chapter of the FAA says either nothing or very little – depending on one’s reading of Section 7 — about pre-hearing discovery in arbitrations subject to the Act. That is understandable, because the FAA was motivated mainly by a concern about the enforceability of arbitration agreements and the enforcement of arbitral awards, and not by a desire to establish procedures to be followed by arbitrators.
Section 7 is the singular exception to this. It is concerned with the subpoena power of the arbitrator. It was and is a special provision vesting in arbitrators some of the powers to secure evidence by compulsory process that were vested in federal district judges under rules governing subpoenas that predated Rule 45 of the Federal Rules of Civil Procedure.
Section 7 provides in relevant part that the arbitrators may subpoena persons to “appear before them to give testimony” and “to bring with them” relevant documents. Over the years, arbitrators have acted with varying degrees of adherence to these seemingly unambiguous words, and courts have drawn conflicting conclusions on whether Section 7 permits subpoenas for pre-hearing discovery. In November 2008, the U. S. Court of Appeals for the Second Circuit, embracing a Third Circuit decision in 2004 (written by a notable strict statutory constructionist, then-Circuit Judge now-Justice Samuel Alito) , held that Section 7 does not permit issuance of arbitral subpoenas for pre-hearing discovery from non-parties. Life Receivables Trust v. Lloyd’s of London Syndicate 102, 549 F.3d 210 (2d Cir. Nov. 25, 2008).
The Life Receivables Trust Decision
The Life Receivables decision arose from arbitration over an obscure insurance product. Claimant (“Trust”) and an affiliate (“Peartree”) had a business buying life insurance policies from the elderly, for cash payments at a discount to policy values. Peartree would buy the policies and transferred them to Trust. Trust then paid the premiums to keep the policies in force until the insureds died. Trust elected to insure with Respondent, a Lloyd’s of London Syndicate (“Syndicate”), the risk that the named insured on the purchased life policy would outlive his or her calculated life expectancy. Trust thus paid Syndicate premiums, in exchange for Syndicate’s commitment to pay Trust the net death benefit of the underlying life policy if the insured outlived his or her life expectancy by two years or more.
Arbitration ensued when Syndicate denied payment on a Trust claim. Syndicate sought documents from Trust, including Peartree documents. Trust said it had no “control” over Peartree, and could not produce Peartree documents. Syndicate responded by having the arbitral tribunal issue a subpoena to Peartree for pre-hearing documents discovery, which Trust did not oppose. Peartree moved in District Court to quash the subpoena; Syndicate cross-moved to compel compliance; and the District Court granted the motion to compel. Peartree complied with the subpoena, but nevertheless appealed from the District Court order. The Second Circuit concluded that the dispute was not mooted by the compliance, and proceeded to decision.
The holding of the Second Circuit is in fact quite narrow, although some effort is required to discern the holding and its limitations. And, as if often the case, even what the Court states to be the “holding” cannot be understood without reference to other amplifying remarks. At one point, the Court states that, under the clear language of Section 7 , “[d]ocuments are only discoverable in an arbitration when brought before arbitrators by a testifying witness.” 549 F.3d at __. This is in fact quite close to being what the case holds, even though at another point a few sentences later the Court purports to “join the Third Circuit in holding . . . that section 7 of the FAA does not authorize arbitrators to compel pre-hearing document discovery from entities not party to the arbitration proceedings. “ Id. at __.
But the Court was careful to avoid having its decision interpreted as prohibiting all document disclosure from non-parties that occurs at a stage of the proceedings earlier than the “hearing on the merits,” i.e. the hearings scheduled, normally after submission of documentary exhibits and legal briefs, for the presentation of oral testimony, upon direct and cross-examination and under questioning by the Tribunal. Noting that Section 7 “’does not leave arbitrators powerless’” to order document production from non-parties, the Court stated that “arbitrators may, consistent with Section 7, order ‘any person’ to produce documents so long as that person is called as a witness at a hearing.” (Id. at __, emphasis supplied). And, referring to a 2005 Second Circuit decision — in which this Section 7 issue was raised, but not decided — the Court noted that “section 7 authority is not limited to witnesses at merits hearings, but extends to hearings covering a variety of preliminary matters.” Id. Essentially, according to the Second Circuit, section 7 imposes “a presence requirement. . .forc[ing] the party seeking the non-party discovery – and the arbitrators authorizing it – to consider whether production is truly necessary.” Id.
Implications for Practice
What are the practical consequences for practitioners and arbitrators conducting arbitrations in New York after the Second Circuit’s decision?
Certainly in many cases a party to the arbitration will be mainly interested in obtaining documents from a non-party, reviewing those documents in advance of merits hearings, and deciding whether any oral testimony from the producing party or person is needed. The Second and Third Circuit decisions do not interpret the word “witness” in Section 7 in a limiting fashion. Further neither Section 7 nor these decisions imposes a requirement that the non-party appear as a witness at a particular
stage of the case. Therefore the arbitrator seeking accommodate a party’s desire to obtain a third party’s documents before the hearings on the merits could lawfully issue a subpoena to a records custodian directing the custodian to appear to give testimony on a particular date and to bring the documents on that date. Nothing in the Act prevents the testimony from being confined to an examination of the custodian concerning, for example, the efforts made to search for documents, and document retention policies. This is not a circumvention of Section 7, which creates only a modest requirement for the presence of a witness and an arbitrator at the time of document production, and arguably requires that the testimony and the documents be made part of the arbitral record.
But perhaps this does not mean that Section 7 always satisfied when at least one of the arbitrators is present, and perfunctory testimony is presented, at the time of a non-party document production. Section 7 states that the documents obtainable are those that “may be deemed material as evidence in the case.” These words appear to define a scope more narrow than the Federal Rule of Civil Procedure standard of “might lead to discovery of admissible evidence.” It would appear that the requesting party must show with specificity that the documents requested could be material evidence. Thus, while arbitrators sitting in the United States would have discretion to apply the Federal Rules standard to document production by the parties — unless the parties have otherwise agreed — in considering a non-party subpoena the arbitrator are required to consider whether the requested information “may be deemed material as evidence.” There is little if any guidance from the courts on the meaning of this standard, but there does appear to be more room than in federal litigation for a party opposing the subpoena, or the non-party, to protest a “fishing expedition.”
In some cases, arbitrators may wish to streamline proceedings and limit the involvement of non-parties by issuing a non-party subpoena for the appearance of the witness during the same hearings on the merits at which other testimony will be heard. This substantially eliminates any “pre-hearing discovery” element of obtaining the non-party’s evidence. Such limitations are not required by Section 7, as the Second Circuit made clear in the Stolt-Nielsen case , but an arbitrator acts well within her discretion in imposing such limits (bearing in mind that Section 7 creates no right of a party to obtain the issuance of an arbitral subpoena).
Further, even if the Section 7 non-party “witness” might be a records custodian, the arbitrator might elect to permit a subpoena for records only in connection with material fact testimony of a non-party fact witness. Section 7 certainly supports, even if does not require, an approach that gives primacy to the testimony of the non-party witness and warrants issuance of a document subpoena only “in a proper case” – which the arbitrator might limit to a case where the party cannot effectively present its case without the documents known to be or reasonably believed to be in the non-party’s possession.
Unlike a subpoena issued in litigation by a party’s attorney, compliance with the arbitral subpoena cannot be waived or compromised by fewer than all the parties to the arbitration. If all parties agree with the subpoenaed non-party to waive appearance as a witness if the documents are produced in advance of hearings, Section 7 is not violated. Section 7 addresses only what the arbitrators may compel, not what the parties might agree with the witness under the influence of that compulsion. But what should happen if the witness contacts the arbitrator to ask that pre-hearing production without testimony be accepted, and all parties do not agree? Nothing in the FAA empowers the arbitrator to accept such a request; this in effect modifies the subpoena to require only pre-hearing disclosure outside the presence of any arbitrator, and thus violates Section 7 according to the construction given by the Second and Third Circuits.
Arbitrators should also apply Section 7 in a fashion the respects the parties’ ability to cross-examine the witness. Several measures may be taken. One step would be to require by procedural order that if one party receives documents from the subpoenaed non-party in advance of the return date of the subpoena, those documents must be disclosed immediately to all parties. Another feasible measure is to treat the non-party as a witness under the control of a party, if this relationship is considered to exist based upon facts presented to the arbitrators. In that case, any general requirement that witnesses provide witness statements in advance of hearings, and that parties disclose their exhibits prior to the hearings, may be extended to the testimony and documents of a non-party. This approach prevents a party from manipulating Section 7 to shield a cooperating non-party witness from the rules imposed by the arbitrator concerning voluntary witnesses. A related point is that, especially in the case of a non-party that might be more friendly to one side than the other, the arbitrator in setting limits on the scope of the subpoena for records should afford both sides reasonable scope for obtaining documents useful as direct evidence and as impeachment. Finally, where records are in fact brought to the hearing at which the non-party’s fact testimony is given, and the documents cannot be assimilated by the parties quickly enough for them to prepare questions immediately, reasonable regulation of the timing of the testimony (e.g. asking the witness to return on a later date in a multi-day hearing) should not offend Section 7 by making the subpoena for “pre-hearing” discovery.
In complex cases, where the challenge of digesting large volumes of non-party documents before testimony is foreseeable, the scheduling of appearances by non-party custodial witnesses as a separate, relatively early procedural phase of the case, should meet the needs of the parties and the requirement of Section 7.
Arbitral practice has varied widely on the involvement of non-parties through the compulsion of arbitral subpoenas. The Second Circuit’s decision holding that all disclosure by non-parties pursuant to subpoena must, to comply with the FAA, take place in the presence of one or more arbitrators in connection with testimony by the witness, is faithful to the text of the FAA and the context in which it was enacted. The decision is evidence of a growing consensus that under existing federal law there are distinctive differences between litigation and arbitration in the ability to obtain and present evidence from non-parties.