May 02, 2018

International Arbitration in the California Style

If you have no desire to participate in international arbitrations seated in California; if you systematically shun cases involving the life sciences industry; if you dodge arbitrations that raise persistent and difficult issues about U.S.-style pre-hearing discovery and state arbitration law; then this post is not for you.  Everyone else, please read on.

To summarize: A New York State trial court judge last week enforced a deposition subpoena issued by a New York attorney based upon a California Superior Court commission to take the New York non-party witness deposition, where the California court had issued the commission upon an application made by a party to the California-seated arbitration after securing express permission from the arbitral tribunal. Matter of Roche Molecular Systems, Inc., 2018 WL 1938327 (NY Supreme Court, Westchester County, April 24, 2018). [Foreign readers: a “commission” as between US state judiciaries serves the same function as a letter rogatory internationally. But whereas the laws of most states permit attorneys to issue subpoenas as “officers of the court” without prior judicial action, the courts generally only become involved if there is an objection from the witness].

Relentless readers of Arbitration Commentaries will understand why the deposition-seeking party, Roche Molecular, sought a New York deposition based on a California Superior Court commission. The arbitral subpoena power under the Federal Arbitration Act (FAA) Section 7, as construed by the US Courts of Appeals in the Ninth Circuit (where the arbitration is seated) and in the Second Circuit (where the witness resides) have held that Section 7 does not permit enforcement of an arbitral subpoena for a pre-hearing deposition (or pre-hearing document production) but only allows a subpoena to compel an appearance of a non-party witness to give testimony (and bring along records) in the presence of one or more of the arbitrators. For a party like Roche Molecular, who is eager to take a discovery deposition of a key former employee of the adverse party, and to pick and choose what excerpts of the deposition transcript to enter in the arbitration record, the arbitral subpoena permitted by FAA Section 7 just will not do.

Readers already clamoring to know how the New York trial judge analyzed the issue of potential FAA pre-emption of California law, please forebear. We must cover a bit more procedural background.

First, the arbitral tribunal’s permission, and the California Superior Court commission, were obtained upon the authority of a provision of the California Code of Civil Procedure (CCP) expressly applicable to California-seated international arbitrations. This is CCP § 1297.271: “The arbitral tribunal, or a party with the approval of the arbitral tribunal, may request from the superior court assistance in taking evidence and the court may execute the request within its competence and according to its rules on taking evidence.

Second, California law, CCP §2026.010 authorizes that a commission to take an out-of-state deposition may be issued by the clerk of the court, or, if the foreign jurisdiction requires it, by order of the court. New York evidently did not require a judicial order, so the proponent was able to fill out a one-page form and have it signed and sealed by the Clerk of the California Superior Court. Thus, there was no judicial proceeding in California before issuance of the commission – a proceeding in which, had it been required, the adverse party (assuming it opposed the discovery, which is unclear) might have argued (1) that “taking evidence” under CCP § 1297.271 does not pertain to discovery, and (2) that “taking evidence” and “within its competence” should be construed to exclude the out-of-state procurement via the commission process. (What say you, Californians?) In such a proceeding, the adverse party might also have argued that CCP § 1297.271 is pre-empted by the FAA to the extent it empowers a party to the arbitration to gather information in ways that an arbitrator may not employ under FAA Section 7. (On this question, there is no definitive answer, but the New York trial court has given one for purposes of this case).

Third, New York has adopted in § 3119 of its Civil Practice Law & Rules (CPLR) a version of the Uniform Interstate Depositions and Discovery Act  (“UIDDA”)– essentially a procedural vehicle to enforce in New York exactly the kind of out-of-state discovery commission received from California in this case. This was critical, because in order for this bypass of the FAA arbitral subpoena power to work, there needed to be two states’ judicial systems willing to tango. We learn in the course of the New York court’s opinion that Roche Molecular could not use the same process to get pre-hearing document discovery from a non-party witness in Massachusetts, because Massachusetts had not signed on to the UIDDA or its equivalent. So for the Massachusetts witness an arbitral subpoena was obtained – perhaps upon informing the arbitrators that the US First Circuit Court of Appeals unlike the Ninth and Second Circuits has not committed to a position on pre-hearing discovery under FAA Section 7. But the Massachusetts state court in which the enforcement issue was presented adopted the Ninth/Second Circuit view, and denied enforcement.

These procedural provisions of California and New York law enabled a New York subpoena to be issued by a New York attorney and served on the New York witness without prior judicial involvement. The matter came before the court when the witness moved to quash the subpoena on grounds, among others, that the FAA pre-empted the California-New York process used here. The New York court rejected the pre-emption argument, citing Southland Corp. v. Keating, 465 U.S. 1 (1974) – which was perhaps the first, but far from the only, pronouncement of the U.S. Supreme Court on FAA pre-emption of state law. Said the New York court about Southland: “[W]hile the substantive rules of the FAA apply in state court as well as federal court, [in Southland] the U.S. Supreme Court explained that the purpose of the pre-emption of state substantive rules regarding arbitration was ‘to foreclose state legislative attempts to undercut the enforceability of arbitration agreements…but it went on to clarify that it did not intend such pre-emption to extend to state rules of civil procedure that are applicable in state proceedings.

This distinction between “substantive” and arguably “procedural” elements of the FAA figures prominently in discussions within the US arbitration community about the pre-emptive force, if any, of FAA Section 7 concerning arbitral subpoenas. On one view, with many adherents including a notable contingent in California, state courts are only obligated to apply those portions of FAA Chapter One that the Supreme Court has held to constitute the “substantive” provisions, and this has been stated by the Supreme Court with certainty only as to Section 2 – requiring the enforcement of agreements to arbitrate save upon such grounds as exist at law or in equity for the revocation of any contract.  On another view, also having many adherents, state courts are obligated by the Supremacy Clause in the US Constitution to give effect to the FAA over conflicting provisions of state law if the application of state law would meaningfully interfere with the purposes and objectives of Congress as reflected in the FAA. But even under this second view, giving pre-emptive effect to FAA Section 7 concerning arbitral subpoenas is controversial. Is that Section best viewed as giving arbitrators a useful evidence-gathering tool, but one which may be supplemented by the arbitration law of the state? Or do the limitations on evidence-gathering under Section 7 reflect a fundamental federal policy to circumscribe the participation of non-parties in a private commercial dispute that the parties have agreed to remove from the judicial system?

We cannot say with confidence whether the New York court’s answer in Roche Molecular Systems is the correct one. It will be championed in some quarters, decried in others.

Two further comments are in order, one legal (and mainly for New Yorkers) and one practical (and perhaps mainly for Californians).

  • The New York judge devoted more attention in her opinion to an issue that was not necessary to the outcome, although it had been argued: i.e. what is the correct position on whether FAA Section 7 allows an arbitral discovery subpoena? The New York court takes note of a New York appellate decision in 2005 called ImClone in which the Court adopted the view expressed by the US Fourth Circuit Court of Appeals nearly 20 years ago that FAA Section 7 permits a discovery subpoena, exceptionally, in case of special need or hardship. The New York court states that it considers itself bound by ImClone notwithstanding the intervening decision of the US Second Circuit Court of Appeals in 2008 in the Life Receivables case, and that on the facts of this Roche Molecular Systems case it would find the special need condition to be satisfied. Discovery proponents in the arbitration advocacy community will take note of the favorable reception they may get in New York state courts.
  • California aspires to be a growth market for hosting international arbitrations, and it may achieve a measure of success without moving its state international arbitration law toward the international standard of more limited pre-hearing evidence gathering. The tremendous economic power of California’s info-tech and bio-tech sectors may enable California shamelessly to export a very “American,” litigation-like, brand of international arbitration, even while other international arbitration centers like New York and Miami trumpet their arbitration laws’ and their arbitrators’ alleged sensitivity to international norms.

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