Archive for December, 2013

Do Rule 45 Amendments Impact The Arbitral Subpoena Power?

Thursday, December 26th, 2013

Certain amendments to Rule 45 of the Federal Rules of Civil Procedure became effective December 1, 2013. This is the Rule governing all aspects of obtaining evidence from non-parties by subpoena in federal civil proceedings.  The amendments have potential relevance to arbitral practice for arbitrations that have their seat in the United States, as Section 7 of the Federal Arbitration Act (“FAA”) in certain respects equates arbitral subpoena power with judicial subpoena power, and in certain respects equates judicial power to compel compliance or punish non-compliance with an arbitral subpoena with the court’s powers in regard to judicial subpoenas. Most important for the present discussion, Rule 45(b)(2) has been amended to provide that a subpoena may be served anywhere in the United States, whereas before December 1, 2013 the subpoena could only be served within the judicial district of the issuing court, or within 100 miles of the courthouse of the issuing court, or statewide where the judicial district was within a state that provided for statewide service of process.

I consider here the implications of nationwide service of process for a subpoena issued by an arbitral tribunal to a witness located at a considerable distance from the seat of the arbitration.

If the witness does not indicate willingness to comply, the arbitral summons served in a far-flung corner of the country with the benefit of the new Rule 45 provision for nationwide service of process may need to enforced by the local federal court in the judicial district where the arbitrators are sitting. Section 7 states: “[T]he United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.”

The new statutory authorization for nationwide service of process clears one procedural hurdle to such enforcement: that there must be statutory authorization for the service of process as a precondition to personal jurisdiction. That was a problem under FAA Section 7 before the recent Rule 45 amendment, as we know from a Second Circuit decision, Dynegy Midstream Services, LP v. Trammochem, 451 F.3d 89 (2d Cir. 2006).  In Dynegy, an Arbitral Tribunal sitting in New York issued a subpoena to a Houston witness calling for the appearance of the witness at a hearing in Houston. When the witness failed to appear, a motion to compel compliance was made in the Southern District of New York, the motion was granted, and the Houston witness appealed on grounds that the New York federal district court lacked personal jurisdiction. The Second Circuit agreed, holding that personal jurisdiction over the Houston witness could not exist because FAA Section 7 in conformity with Rule 45 did not authorize a New York-based arbitral tribunal summons to be validly served on a Houston witness, just as Rule 45 would not allow a Southern District of New York trial subpoena to be validly served in Houston on a Houston witness.

A similar outcome occurred in Legion Insurance Co. v. John Hancock Mutual Life Insurance Co., 33 Fed. Appx. 26, 2002 WL 537652 (3d Cir. April 11, 2002). There, the Third Circuit held that the federal district court in the Eastern District of Pennsylvania did not have power to enforce a subpoena, issued by an arbitral tribunal sitting in Philadelphia, directed to a nonparty witness located in Florida, which required the witness to appear for deposition in Florida and to bring with him certain documents and papers. The Court relied on the language in Section 7 that arbitration subpoenas “shall be served in the same manner as subpoenas to appear and testify before the court,” stated that Rule 45 “governs the service of arbitration subpoenas,” proceeded to quote Rule 45(b)(2), and held: “In light of the territorial limits imposed by Rule 45 upon the service of subpoenas, we conclude that the District Court did not commit error in denying John Hancock’s motion to enforce the arbitration subpoena….”

Rule 45 (b) (2) as amended to permit nationwide service of a judicial subpoena, and by extension nationwide service of an arbitral summons to a non-party witness, solves the problem found to exist in Dynegy and in Legion Insurance. But this does not mean that the federal district court at the seat of the arbitration will always have personal jurisdiction over a witness upon whom valid personal service of the arbitral summons has been made. Statutory authorization for nationwide service of process is a necessary step to establish personal jurisdiction, but there is one more step: personal jurisdiction must comport with due process under the US Constitution. See Licci v. Lebanese Canadian Bank, 673 F.3d 50, 60 (2d Cir. 2012).

Assuming no constitutional obstacle to jurisdiction, the urgent new question presented in regard to enforcement of an arbitral witness summons is this: Do Rule 45’s geographic limitations on the places where witness compliance with a judicial trial or hearing subpoena may be required apply to the arbitral summons?  Amended Rule 45 does not fundamentally change the Rule’s geographic boundaries for the place of compliance, but merely consolidates them in amended Rule 45(c).  Rule 45(c)(1) now provides that “A subpoena may command a person to attend a trial, hearing, or deposition only as follows: (A) within 100 miles of where the person resides, is employed, or regularly transacts business in person; or (B) within the state where the person resides, is employed, or regularly transacts business in person, if the person (i) is a party or a party’s officer; or (ii) is commanded to attend a trial and would not incur substantial expense.”

Until now, there has been no occasion for federal courts to consider whether Rule 45’s geographical limits on the place of compliance with a subpoena calling for the testimonial appearance of the witness apply to an arbitrator’s summons to appear and testify. As illustrated by the Dynegy and Legion Insurance cases, before the December 1, 2013 amendment, Rule 45’s territorial limitation on service of process answered the place-of-compliance question. But now that an arbitral summons, like a federal subpoena, may be served nationwide, the question is squarely presented whether there are territorial limits on where a witness served with an arbitral subpoena may be required to appear to give evidence in the arbitration.

The question does not seem to be answerable from the text of Section 7 alone. There is no mention in Section 7 of the place of compliance with an arbitral subpoena. But the final sentence of Section 7 does refer to the judicial enforcement power with respect to arbitral subpoenas, and states in part that a district court in the district where the arbitrators are sitting “may compel the attendance of such person or persons before said arbitrator or arbitrators … in the same manner provided by law for securing the attendance of witnesses … in the courts of the United States.” (I have removed, by ellipsis, the interspersed sections of the same sentence that deal with the power of the court to punish noncompliance with an arbitral subpoena by contempt.  The grammatical structure of the sentence and its punctuation are obstacles rather than guideposts to discernment of its meaning). This text is inconclusive. It might be strictly construed to refer only to the modalities of judicial compulsion. But it is also plausible to interpret this text broadly, i.e. to equate “in the same manner” with “in the same circumstances,” and thus to find that an order compelling compliance with an arbitral subpoena is available only in regard to an arbitral subpoena that respects the geographic limitations of Rule 45(c)(1).

This broader interpretation, which would maintain the territorial limits on an arbitral subpoena that have existed until now, fits well with the objectives of the FAA, and with the balance struck in the text of Section 7 between the search for truth in arbitration and privacy interests of non-parties.  The primary purpose of the FAA was to ensure enforcement of pre-dispute arbitration clauses. But the impetus to enforce those agreements, as the Supreme Court has stated, was that arbitration offered the prospect of more “streamlined proceedings” than were generally possible in the courts. Limits on the participation of non-parties, and upon the expense and burden associated with their participation — like limits on discovery, and like limits on the scope of judicial review of arbitral awards — fit with the notion of arbitration as a streamlined method to resolve disputes. It would undermine these values if, as an accidental by-product of the Rule 45 amendments, Section 7 were now understood to eliminate territorial limitations on the obligation of non-parties to comply with an arbitral subpoena. Moreover in the absence of any new expression of Congressional intent with respect to the impact of the Rule 45 amendments on arbitral subpoena practice under FAA Section 7, it would seem imprudent to find any fundamental change in the scope of the arbitral subpoena power based on a revision of Rule 45 that evolved — from the federal Judicial Conference, to formal issuance by the U.S. Supreme Court — essentially without reference to any impact on arbitration.

But this cautious approach need not mean that arbitral tribunals and courts asked to enforce or quash arbitral subpoenas must apply Section 7 without reference to the conveniences afforded by 21st century technology. Suppose that an arbitral tribunal sitting in New York does wish to hear from an unwilling nonparty witness residing in Seattle. Suppose the Tribunal issues a subpoena that calls for the witness to appear and give testimony by video conference at the offices of a Seattle law firm or in the Seattle regional office of the AAA, with a video link to a New York location where the arbitrators, or at least one of them, will be present. A judge in the Southern District of New York should have personal jurisdiction over the witness in a subpoena enforcement proceeding unless there is a constitutional due process obstacle. That judge should also find no offense to Rule 45 (c)’s explicit territorial limitations and their implicit arbitral application through FAA Section 7: the witness “attends” the proceeding in Seattle upon the command of the subpoena, and neither Rule 45 nor FAA Section 7 imposes any requirement that the arbitrator appear in the physical presence of the witness. While application of FAA Section 7 requires reference to Rule 45, it does not require reference to Rule 43, which expresses the judicial preference for testimony in open court but provides that “for good cause in compelling circumstances and with appropriate safeguards, the court may permit testimony in open court by contemporaneous transmission from a different location.” This language was added to Rule 43 in 1996, and prior to that time if a non-party witness could only “attend” a trial or hearing more than 100 miles from his residence or workplace by traveling to the physical location of the hearing, it was by virtue of Rule 43, not Rule 45.  Thus, arbitral tribunals should be able to avail themselves of the new Rule 45 provision for nationwide service of process to obtain evidence from a distant non-party, without imposing travel burdens on themselves or the witness and without deciding that there has been any change in Section 7’s limitations on the territorial boundaries of the place of compliance with an arbitral subpoena.

The Duty to Disclose Friendship

Sunday, December 1st, 2013

Little actual intelligence is available about the decisions of arbitral institutions on challenges to arbitrators. Arbitral institutions tend not to elaborate their procedures for ruling on challenges in their Rules or their publications. And the great majority of the more prominent institutions, probably accounting for a majority of international commercial arbitrations by volume of commerce if not sheer number of cases, do not issue reasoned decisions on challenges and do not publish summaries of their decisions for consumption by practitioners. These features of the arbitration landscape regularly draw criticism, but attract little reform.  The London Court of International Arbitration has been a pioneer; it has for many years issued reasoned decisions on challenges, and has published digests of those decisions for the period 1996 to 2010 (Arbitration International, Vol.  27, No. 3, 2011). A project has been afoot recently to create a database of decisions on arbitrator challenges. (See James H. Carter, Reaching Consensus on Arbitrator Conflicts: The Way Forward, Dispute Resolution International, Vol. 6, No. 1 at p 17 (2012)).

One limitation on the reliability of information in such a database would be that arbitral institutions rather than the counsel or arbitrators involved in a challenge would be the primary sources of information. Where a challenge has been unsuccessful, and the case proceeds, the challenge process is itself a confidential aspect of the proceedings (by custom if not by rule or by law) and neither counsel nor the arbitrators will be inclined to expose to one another their impressions of the matter while the case or any post-award litigation remains open. But the successful challenge stands in a somewhat different posture, at least for the rejected arbitrator who takes no part in the proceedings. Perhaps the larger portion of such successful challenges occur when the parties discover a matter that the arbitrator has failed to disclose. In such cases we would not expect to see public commentary by the arbitrator for the obvious reasons. But on those occasions when the successful challenge is based on a matter that the challenged arbitrator did disclose, completely and candidly, the arbitrator will not inevitably have a self-protective reason to keep the matter out of public view.

Today I report on such a case. All names, except my own, are omitted. But to escape the awkwardness of using the first person pronoun, your Commentator herein assumes the mantle “Arbitrator X.”

Arbitrator X was nominated as a co-arbitrator by the Respondent, in an international case administered by a major arbitral institution (having its seat outside the U.S.) under its rules. The seat of the arbitration was within the United States, and the law governing the contract was the law of an American state. Claimant was an American company represented by American counsel.

Arbitrator X made the following initial disclosures concerning his relationship with an attorney who was acting as co-counsel for the Respondent: (1) that they had been acquainted professionally for about ten years through an international bar association of which both were members, and in which they had functioned collaboratively in leadership roles on one of that bar association’s committees, (2) that during that ten year span they had had lunch or dinner when visiting the other’s home city on perhaps six to eight occasions, of which three were dinner engagements that also included the spouse of one or the life partner of the other,  (3) that in 2010, Arbitrator X upon the invitation of another professional acquaintance in the home city of the counsel in question, had joined a group of approximately ten lawyers and businessmen, collectors and aficionados of fine wines, including the counsel in question, who gathered in a restaurant for wine-tasting dinners four times per year, and (4) that Arbitrator X and the counsel in question were regular attendees at these dinners.

After the institution had issued its unreasoned decision accepting the challenge and refusing to confirm the nomination, Arbitrator X had occasion to review the decision with a number of thoughtful observers. One remark made or confirmed by a number of persons was that experienced European arbitrators would not have made the disclosures of social contact with Respondent’s counsel that were made in this instance by Arbitrator X.

If indeed that is the case, then one question for examination is why arbitrators from Europe would view as inconsequential a degree of social contact between the nominating counsel and the party-appointed arbitrator that an American arbitrator considered appropriate to disclose and that the institution considered sufficient to deny Respondent its first choice of an arbitrator.  Perhaps European arbitrators more pervasively than their American colleagues believe that their duty to act impartially even where they have some degree of personal affinity with the appointing counsel is so fundamental that it would be unjustifiable for the other party to have any doubts about the arbitrator’s impartiality .  Perhaps American arbitrators remain strongly influenced by the legacy of explicitly biased party-appointed arbitrators in domestic commercial arbitration prior to the 2004 amendments to the ABA-AAA Code of Ethics for Arbitrators, and perhaps it is that legacy that impels them to make fulsome disclosures so that the parties may be more fully satisfied that arbitrator conduct is not influenced by undisclosed bias.

A related question is why American arbitrators might find inadequate, as a guide to disclosure in such circumstances, the relevant guideline in the IBA Rules on Conflicts of Interest in International Arbitration. In the IBA Orange List, disclosure is required, and justifiable doubts about an arbitrator’s impartiality may possibly be found t0 exist, if a “close personal friendship” exists between the arbitrator and counsel, “as demonstrated by the fact that they regularly spend considerable time together unrelated to professional work commitments or the activities of professional associations or social organizations.” (Guideline 3.36).

Arbitrator X might well have been persuaded that these circumstances were outside Guideline 3.36.  In regard to the oenophile dinners mentioned in the disclosure, even a one-on-one dinner four times per year for a total of 10 hours spent together per year is arguably not what the Guideline means by “considerable time.”  And if the time were spent substantially by one international arbitration lawyer catching up with another about developments in their respective practices, and each hopes that the relationship will lead to professional opportunities, how could this be “unrelated to professional work commitments”? As the gatherings were in fact group dinners for ten, the contact between Arbitrator X and counsel, when both attended, was generally much more diluted than what Guideline 3.36 seems to mean by time spent “together.”

But there were good reasons to regard Guideline 3.36 as inadequate to decide whether disclosure was required. Time spent together is unlikely to be a reliable indicator of whether a friendship is “close” or “personal” in the wide professional circle of an international arbitrator. The friends one considers “close” and “personal” may live so far away, or have such busy and complicated lives, that regular visits are not even possible. And yet such friendships may be “close” and “personal” as evidenced by the fact that there are exchanges on a daily basis of e-mails or text messages about their families, pets, spouses, ex-spouses, recently attended concerts and sporting events, holiday celebrations, etc.

Arbitrator X did not have such a relationship with the counsel in question. If he did, he would have turned down the appointment. But if there was no such relationship, and IBA Guideline 3.36 did not fit, what was the rationale for disclosure? The answer, I believe, is that personal affinity, sympathy, and affection are derivatives of exposure. It is logical to believe that such feelings may intensify with frequency of exposure, and so it makes sense for arbitrators to make disclosure of the nature and frequency of their exposure to an appointing counsel when the exposure has been more than occasional and random. Such exposure can be objectively quantified and reported, whereas it is more difficult to provide subjective assessments of  the arbitrator’s feelings toward an appointing counsel. Disclosure of the frequency of contact permits counsel to inquire further if they care to do so, and allows the arbitrator to avoid the negative inferences that could arise if the frequency of contact were later discovered rather than initially disclosed.

But what about the institution’s decision to accept the challenge and reject Arbitrator X? The institution did not seek any additional facts about the relationship, from Arbitrator X or the counsel in question. The disclosure itself was the entire factual record for the challenge. If the regular contact between arbitrator and counsel had instead occurred at monthly lunches of the New York International Arbitration Club, is it fair to assume that the challenge would have been rejected, irrespective of the content of their communications on those occasions? If the arbitrator and counsel had been fellow members of the Board of Trustees of a non-profit organization, seeing one another regularly at Board meetings and fund-raisers for the organization, would the result have been different? And is it in fact the unstated position of the institution (at least in regard to pre-appointment challenges) to treat the hybrid social/business context of the regular contact between counsel and arbitrator as a proxy for the closeness of their personal relationship, in substantial part because the institution prefers not to invest the resources needed to develop the relevant facts further, but instead prefers to invite the affected party to make another nomination? That could be a defensible position for the institution to adopt — if indeed that is the position, and if it were adopted explicitly so that arbitrators and counsel might make more informed assessments of the risks attendant upon social contact with professional colleagues, and their obligations to disclose such contact.

I submit that this case illustrates several shortcomings in the disclosure and challenge system. One, certainly, is that the IBA Guidelines while enormously useful threaten to function as a Code of Conduct for arbitrators who prefer not to analyze disclosure issues thoroughly and/or prefer to avoid disclosure where it is avoidable. Another is that institutions, while quite properly setting their own standards for what might be viewed as justifiable doubts about impartiality, do a disservice to their own credibility by issuing unreasoned decisions and delaying if not avoiding entirely the publication of summaries of decision or explanatory notes. The consequence is that challenge decisions lack predictive value from one case to the next, may appear to be arbitrary, and leave counsel and arbitrators to speculate (as has been done here) about the reasons a particular position was adopted in a particular case.