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Back From The Beach: Did You Brush Up Your Bazzle?

Tuesday, September 2nd, 2014

Before the author of Arbitration Commentaries was deployed to the trenches and thus temporarily lost to his readers (some would say mercifully), it was written in this c-space that the “Next Cool Thing” in U.S. arbitration jurisprudence, after BG Group v. Argentina, would be the question of who decides — court or arbitrator — whether an arbitration clause permits class arbitration, when the parties have no agreement on the “who decides” question itself. See “Brush Up Your Bazzle,” Arbitration Commentaries, July 1, 2014.  A four-judge plurality of the Supreme Court in Bazzle was prepared to hold that the question of whether an arbitration clause permits class arbitration is ordinarily a procedural issue for the arbitrator to decide. But the Court in later class arbitration cases has taken pains to note that this was the position of four justices not five.

Behold. In the middle of my combat assignment — ended skillfully by a mediator just in time for Labor Day Weekend to assume its traditional Blog-N-BBQ format — a Third Circuit panel in Philadelphia, spurning the Jersey Shore, held that the “class arbitration” question involves “arbitrability” and thus must be decided by courts not arbitrators unless the parties clearly (and unmistakably) have otherwise agreed. Opalinski v. Robert Half Int’l, 2014 WL 3733685 (3d Cir. July 30, 2014).

The first premise of the Third Circuit panel’s decision is that “[t]he availability of class arbitration implicates whose claims the arbitrator may resolve.” And the decision cites the Supreme Court’s 1964 John Wiley decision in support of the assertion that “[t]he Supreme Court has long recognized that a district court must determine whose claims an arbitrator is authorized to decide.” The Court in John Wiley decided, precisely, that the court not the arbitrator should decide whether a successor by merger to a company that had a collective bargaining agreement with a union is bound by that agreement. For the Third Circuit panel to generalize that holding into one that “a district court must determine whose claims an arbitrator is authorized to decide” — and thus to suggest that it has bearing on who decides the class action question, amounts to putting apples and oranges together in a crate marked “fruit.”  The other cases cited by this Third Circuit panel involved whether non-signatories were bound by an agreement signed by someone connected to them. The obvious difference is that each class member in the proposed class arbitration has an identical agreement to arbitrate with the same Respondent. The “who decides class arbitration” question does not present an issue of “whose claims may be arbitrated (as opposed to litigated)” but only an issue of “whose claims may be arbitrated (in one arbitration rather than several).” The Third Circuit panel ignores rather than addresses this obvious distinction.

The other major premise of the Third Circuit panel decision is that the differences between class and individual arbitration are more “substantive” than procedural, so that the question deserves to be regarded as a “gateway” issue for judicial determination just as would an issue of whether the subject matter of the dispute was within the scope of the arbitration clause. Certainly there is merit to the notion that whether a clause permits class arbitration has great importance to the defendant, who may face huge potential damages if class arbitration is allowed, and negligible exposure if class arbitration is disallowed because individuals may find it un- economic to pursue only their own claims. But the Supreme Court’s jurisprudence has until now classified as “gateway” issues only issue that entail whether there was consent (1) to arbitrate at all, or (2) to arbitrate the subject matter of the proposed arbitration — and not whether an admitted consent to arbitrate embraced consent to arbitrate in a particular format. Class arbitration surely has larger economic implications than many other arbitration format issues ordinarily do, but it would seem to remain in the category of format questions, not consent questions, within existing Supreme Court jurisprudence, so long as the defendant has an agreement to arbitrate the subject matter with each member of the proposed class.

This critical view of the Third Circuit panel’s decision is surely not a prediction of what the Supreme Court might decide. The panel was clearly attuned to the discomfort expressed by several members of the Supreme Court, especially in Stolt-Nielsen and Concepcion, based evidently on the tendency of class proceedings to shift economic power away from corporations and toward individually powerless individuals joined together opportunistically to enlarge the litigation risks — and consequently the business behavioral risks — borne by corporations. There is an undercurrent in these cases that such power-shifting decisions are unsuitable for private-sector decision-makers appointed only by the parties or the arbitral institutions whose rules the parties have embraced. But if limits are to be imposed for such reasons on the availability of arbitration, perhaps it is a matter for Congress to decide, and not for the Supreme Court to resolve by stretching the notion of “gateway dispute” beyond its established borders.

More Difficulty With Arbitral Subpoenas

Tuesday, September 2nd, 2014

The use of subpoenas by arbitrators pursuant to Section 7 of the Federal Arbitration Act remains an evolving area of arbitral practice. There are several sources of difficulty. One is how to adapt the language of a 1925 statute to complex and multinational disputes. Another is that arbitral subpoenas shall be judicially enforced with reference to judicial rules of procedure governing compulsion of the attendance of witnesses. A third issue is how technology and especially video technology should affect the ability to secure evidence from an individual who resides very far from the seat of arbitration and sometimes overseas.

Suppose the Arbitral Tribunal, sitting in New York in an international case, issues a subpoena for a pre-merits hearing to receive evidence including oral testimony from a multinational firm with its global headquarters in New York, although it is understood that the individuals with hands-on knowledge work in an Asian office of the firm and are foreign nationals.

Proper service of the subpoena is not a difficulty, assuming the firm is a “person” under FAA Section 7 who may be summoned — and there is no reason to think that it is not (see the definition of “person” in the Dictionary Act. 1 U.S.C. § 1). Section 7 provides that the subpoena (technically, a “summons”) “shall be served in the same manner as subpoenas to appear and testify before the court….” And under FRCP 45 as amended December 1, 2013, a federal judicial subpoena may be served anywhere in the United States. Territorial limitations in Rule 45 inhibit how far from home an individual may be required to travel for a witness appearance, but this is no longer implemented by limiting the geographic range of effective service.

If the corporate non-party witness so served resists making its knowledgeable foreign employee available to testify, what level of judicial compulsion does Section 7 permit? It is clear at least that the foreign employee cannot be required to appear in New York. But the relevant knowledge legally is possessed by the firm. May a federal court under Section 7 compel the summoned firm to identify and educate a person who could have been individually compelled to appear, offering the firm the option of producing the already-knowledgeable foreign employee by video conference if desired to avoid the burden of educating a witness?

The question just posed triggers two separate lines of analysis. And neither is well-developed in precedent. The clear judicial analogue for requiring a corporate witness to identify (and sometimes educate) an individual to testify is Rule 30(b)(6). It is settled in federal discovery practice that Rule 30(b)(6) applies to the deposition of a non-party corporate witness. It is controversial, on the other hand, whether under Rule 45 a trial subpoena to a corporation may be enforced by an order that compels the firm to designate a knowledgeable individual.

FAA Section 7 permits the federal district court where the arbitrators “are sitting” (an issue for another day and another post) to “compel the attendance of such person…in the same manner provided by law for securing the attendance of witnesses…in the courts of the United States.” If that language is held to mean an arbitral summons may only be enforced in the same manner as a judicial trial subpoena, then a court lacks power to enforce an arbitral summons to a corporation if the court considers that a Rule 45 trial subpoena to a corporation, calling for designation of an testifying representative with knowledge, is not enforceable.

And indeed this was the holding by a federal district judge in the Southern District of New York two weeks ago in Progenics Pharmaceuticals, Inc. v. IMS Consulting Group,  No. 14 Misc. 00245  (S.D.N.Y., Aug. 14, 2014) (unpublished order, on file with this writer). The arbitral summons, to the extent it required testimony of a corporate-designee witness with substantive knowledge of the subject matter identified in the summons, was held to be unenforceable because the Court lacked power under FAA Section 7 to require a 30(b)(6)-type witness designation by the summoned firm.

I make no claim of objectivity, having acted as counsel for the proponent of the arbitral subpoena in this case. And so I merely report here the line of argument that left this particular judge unconvinced: (1) that the enforcement provision of Section 7 should be read liberally, not restrictively, as its main purpose is to provide support for the evidence-gathering efforts of arbitrators not to inhibit them, (2) read liberally, the words of the statute do not appear to limit enforcement to those powers associated with a judicial subpoena to testify at a trial, as “attendance of witnesses…in the courts of the United States” can easily be read to include all proceedings involving the attendance of witnesses in cases before the courts, (3) the reading that limits enforcement to judicial powers to enforce a trial subpoena is flawed because the text FAA Section 7 clearly provides that there may be a pre-merits arbitral hearing before just one of three arbitrators, and such proceedings are more akin to depositions for the perpetuation of testimony than they are to trials, (4) at the time FAA Section 7 was enacted (1925) the conducting of non-party depositions for the perpetuation of trial testimony from witnesses who would not or might not be available to testify in person at trial was common, and specifically provided for in sections of the Judiciary Act (28 U.S.C.),  (5) Rule 30(b)(6) is not only a rule for taking discovery from entity (“legal person”) witnesses, but is also the method of perpetuating trial testimony of witnesses who would not or might not be available at trial, and thus is the post-1938 counterpart to the former Judiciary Act provisions just mentioned, and (6) given this longstanding non-discovery application of Rule 30(b)(6), cases holding that Section 7 does not empower arbitrators to issue subpoenas for discovery depositions do not foreclose the conclusion that an arbitral subpoena may require a legal person to identify a natural person to testify as its representative.

None of this was convincing, mainly I believe because there are no reported cases deciding this question one way or the other, and in that sense the enforcement sought was “unprecedented.” (But perhaps there were 10 unpublished orders reaching the opposite result, and in reality the denial of enforcement was unprecedented. This Order, published only in the hearing transcript, will be found mainly due to the loquacious nature of the author of Arbitration Commentaries).

What was not included in my argument, of course, was the obvious: FAA Section 7 is broken and antiquated. It is a crooked unpaved 1925 country road desperately in need of replacement by a modern superhighway. Lawyers trying to make Section 7 work sensibly in modern complex arbitration should not have to engage in the legal gymnastics of proving that a procedure that makes sense for gathering evidence in 21st Century arbitration is akin to a judicial litigation practice that existed in 1925.

But there is no reasonable prospect for legislative clarification, and so we count on judges to have some sense of the arbitral process and to recognize its distinctive character and to appreciate the needs of litigants within that process. Unfortunately from the perspective of arbitration, there are perhaps just as many federal district judges who have never struggled with FAA interpretive issues as there are those who have done so on many occasions. The organized arbitration bar needs to do a better job of providing our judges with authoritative guidance.