ABA Section of Business Law
Business Law Today
March/April 2001 (Volume 10, Number 4)
Business Law Today
Discovery in arbitration?
Well, it depends . . .
By SEAN T. CARNATHAN
T he disagreement is moving to arbitration. Discovery sure would make things easier. Can you open that door?
Whether and to what extent discovery is available in an arbitration remains unsettled, particularly when discovery is sought from third parties.You must anticipate potential obstacles to discovery requests from the opposing party (or parties) in the arbitration, from the arbitrators, and from the party from whom discovery is sought (the third party).
The extent to which you can obtain discovery will depend on your arbitration agreement, any applicable arbitration rules, and the temperament of your arbitrators. When seeking third-party discovery, your fortunes will also depend on the jurisdiction in which your arbitration is held and in which the third party is located.
An arbitration is a contractual proceeding undertaken by the parties to a dispute. Because an arbitration is a creature of contract, the parties are free to define in their agreement the extent of discovery in the proceeding. One frequent reason to choose arbitration over conventional litigation is to avoid the time and expense required for traditional litigation discovery. Accordingly, a partys right to discovery will depend in large part on the terms of the arbitration agreement itself.
Because many arbitrations take place in accordance with institutional rules referred to in the arbitration agreement or agreed to by the parties, you are likely to have rules governing discovery in your proceeding. Together, the arbitration rules and the arbitration agreement go a long way toward defining what discovery is possible. Rules and agreements, however, can only affect the parties rights with regard to each other, not concerning third parties. Third parties may resist your discovery requests on other grounds.
The Federal Arbitration Act (FAA), which applies to commercial arbitrations in this country and in certain foreign countries, is the primary source of authority to compel discovery from third parties during an arbitration. The act applies to any arbitration involving a transaction in interstate commerce. Many states also have their own arbitration statutes.
FAA Section 7 expressly provides arbitrators with the authority to issue subpoenas to compel the attendance of witnesses and the production of documents at an arbitration hearing. Section 7 does not expressly provide that arbitrators may compel pre-hearing discovery from third-party witnesses, but the weight of authority interprets the section to authorize subpoenas to compel pre-hearing document production. See, for example, American Federation of Television and Radio Artists AFL-CIO v. WJBK-TV , 164 F.3d 1004, 1009 (6th Cir. 1999).
The primary authority to the contrary is found in two recent opinions by the Fourth Circuit. Deiulemar v. Compagnia Di Navigazione, 198 F.3d 473 (4th Cir. 2000); Comsat Corp. v. National Science Foundation 190 F.3d 269, 278 (4th Cir. 1999). According to these cases, "a federal court may not compel a third party to comply with an arbitrators subpoena for pre-hearing discovery, absent a showing of special need or hardship."
The Comsat court reasoned that "[p]arties to a private arbitration agreement forgo certain procedural rights attendant to formal litigation in return for a more efficient and cost-effective resolution of their disputes." 190 F.3d at 276. The Fourth Circuit has not developed a clear definition of "special need or hardship." It has said only that "[a]t minimum, a party must demonstrate that the information it seeks is not otherwise available." Id.
There is a substantial body of somewhat analogous case law interpreting the term in the context of discovery of trial preparation materials under Fed. R. Civ. P. 26(b)(3), which permits discovery of these materials "upon a showing that the party seeking discovery has substantial need of the materials . . . and is unable without undue hardship to obtain the substantial equivalent of the materials by other means." Most cases that consider substantial need under Rule 26(b)(3), however, also fail to provide a clear definition of the standard.
The best articulation explains that "[a] finding of substantial need involves consideration of two factors. The first is the nature of the documents (that is, their relevance and importance), and the second is the ability to obtain the facts (or the substantial equivalent) from other sources." Suggs v. Whitaker 152 F.R.D. 501, 507 (M.D.N.C. 1993).
Other cases, which do not articulate a clear definition of substantial need, nevertheless examine the degree of relevance of the materials and the importance of the issue to which they relate. These cases also consider whether the information sought can be obtained from other sources (conflating the substantial need requirement with the undue hardship requirement).
Of course, the underlying policy of the cases under Rule 26(b)(3) defining "substantial need" distinguishes them from the arbitration discovery context. Some cases describe the rule as an "anti-freeloader" provision, "designed to prohibit one adverse party from riding to the court on the enterprise of another." See, for example, Duck v. Warren, 160 F.R.D. 80, 82 (E.E. Va. 1995). These cases also impose a higher level of scrutiny on requests for work product that reflects the thoughts and the impressions of counsel.
Nevertheless, it seems likely that if your court demands a showing of substantial need to compel third-party discovery in an arbitration, you will need to explain with some particularity how the discovery you seek is relevant to an issue in the arbitration. The inability to obtain the material from another source could be a factor as well, although the distinction between the work-product context and the arbitration context makes that element of the Rule 26(b)(3) cases seem less applicable to arbitration discovery.
More problematic in any jurisdiction is whether an arbitrator can subpoena a third party for a deposition. The leading case holding that an arbitrator cannot was decided by the Southern District of New York. Integrity Ins. Co. v. American Centennial Ins. Co., 805 F. Supp. 69 (S.D.N.Y. 1995).
According to the Integrity Ins. court, the "burden placed on the nonparty" is more onerous for depositions than for documents. "Documents are only produced once, whether it is at the arbitration or prior to it. Common sense encourages the production of documents prior to the hearing so that parties can familiarize themselves with the content of the documents." The court also expressed concern that a nonparty might be subject to harassment in an arbitration deposition, where the arbitrator would not be present and the court would be unavailable for intervention.
The Second Circuit Court of Appeals, however, has explicitly noted that the issue remains an "open question," which to some extent undermines the persuasive force of the Integrity Ins. decision. At least two other decisions, one in Florida and one in Illinois, also support the right of a party to an arbitration to enforce subpoenas to witnesses for depositions, when issued by the arbitrator. Stanton v. Paine Webber Jackson & Curtis Inc., 685 F. Supp. 1241, 1242 (S.D. Fla. 1988); Amgen, Inc. v. Kidney Center of Delaware County Ltd., 885 F. Supp. 878, 882 (N.D. Ill. 1995).
Given the unsettled state of the law, you cannot be confident of your right to enforce a deposition subpoena during an arbitration proceeding. As a policy matter, a rule declining to enforce such subpoenas seems unwise. It is easy for a court to recite the generalized bromide that an arbitration is designed for faster, less expensive dispute resolution and, therefore, refuse to enforce a subpoena. But not all arbitrations lend themselves to such a rule. Better judicial policy is to leave to the arbitrators the decision whether to issue the subpoena, then stand behind them once issued.
Assuming that the arbitrator has the power to issue an enforceable subpoena, the party seeking discovery must petition the arbitrator to do so. The parties to the arbitration do not independently possess the power to issue subpoenas.
The federal courts will only enforce a subpoena if it seeks to compel attendance within 100 miles of the place where the subject is served. The party seeking discovery will therefore require a local address as the place for production or for a deposition. If the third party resists (or ignores) the subpoena, the process for enforcement is less than clear.
Amgen is the only reported case addressing the problem head on. 885 F. Supp. at 878. In Amgen, an arbitrator in Chicago issued a deposition subpoena to a third party in Pennsylvania, which refused to honor the subpoena. The party seeking to compel compliance (Amgen) initially moved to compel in the federal court in Pennsylvania where the deposition was to take place. Amgen was rebuffed, because the FAA explicitly directs that an action to compel compliance be brought in the district where the arbitration is located.
Amgen then brought a motion to compel compliance in the federal court in Illinois. After holding that the arbitrator had authority to issue the subpoena, the court considered the procedure to secure compliance. It noted that trial subpoenas issue from the court where the trial is to be held, and deposition subpoenas issue from the court where the deposition is to be held.
The court reasoned that because the FAA applies only to actions involving interstate commerce, it was likely that any arbitration to which the FAA applied would involve witnesses in more than one state. Because Congress intended the FAA to embody a national policy favoring arbitration, it must have intended that there be a mechanism to enforce subpoenas to witnesses in other states. The court therefore fashioned a procedural mechanism to permit the deposition to go forward.
It ordered Amgens lawyer to issue the subpoena under the case name and number for the enforcement proceeding. Rule 45 would then permit Amgen to seek enforcement of the subpoena in Pennsylvania, if necessary, even though the Pennsylvania court had declined to enforce the arbitrators subpoena. Amgen, 879 F. Supp. at 883. Although under the FAA the Pennsylvania district court could not directly enforce a subpoena issued by the arbitrator, under the Federal Rules of Civil Procedure, the court could enforce a subpoena issued by a lawyer based on an FAA enforcement action in Illinois.
There is at least one major flaw in this reasoning. The "problem" the Amgen court identifies a conflict between the procedure under FAA Section 7 and the procedure under Rule 45 disappears if the court interprets the FAA to authorize an arbitrator to issue subpoenas for hearings only. If arbitration subpoenas are available only for hearings, the 100-mile enforcement limitation in Rule 45 harmonizes with the FAA provision that enforcement actions must be brought in the same district as the arbitration.
Only by interpreting the FAA to authorize discovery subpoenas in arbitrations does the court create a situation requiring procedural gymnastics. In fact, in an old decision by the Southern District of New York, In re Commercial Solvents Corp., 20 F.R.D. 359 (S.D. N.Y. 1957), the court held that there was no provision for discovery in an arbitration proceeding and vacated several deposition notices served on one partys employees. In dicta, the court suggested that an arbitrator cannot compel the attendance of a witness at a hearing outside of the 100-mile radius from the place where the hearing is held.
On the other hand, the modern trend clearly permits at least some discovery in an arbitration. When the Second Circuit noted in 1999 that the availability of deposition subpoenas in an arbitration is an open question, it did not even cite Commercial Solvents . Because the modern view permits document discovery and possibly depositions as well, a return to the Commercial Solvents approach would constitute a major reversal of the recent approach to arbitration discovery. The courts seem obligated at a minimum to develop a mechanism to enforce arbitration subpoenas seeking documents from third parties in other states.
One commentator has suggested that the solution is to move the arbitration temporarily to the district where the discovery is sought. See Teresa Snider, "The Discovery Powers of Arbitrators and Federal Courts Under the Federal Arbitration Act," 34 Tort & Ins. L.J.101 (1998) The writer, however, does not really explain how this maneuver would be performed. Presumably, it would require the consent of all parties and arbitrators. This approach, therefore, seems less attractive than the procedure crafted by the Amgen court. On balance, the Amgen approach is likely the best alternative presented, and Amgen remains the leading case.
The cases also reflect a potential jurisdictional issue regarding enforcement in the federal courts. The Fourth Circuit has held that FAA Section 7 provides jurisdiction to the federal court in the district where the arbitration is located. Comsat, 190 F.ed at 274; accord National Broadcasting Co. v. Bear Stearns 7 Co., 165 F.3d 184, 187 (2d Cir. 1999).
The Sixth Circuit, however, in reviewing a motion to compel compliance with a subpoena duces tecum in a labor arbitration, held that it had jurisdiction under Section 301 of the Labor Management Relations Act, not under FAA Section 7. According to the Sixth Circuit, "it is well established that the Federal Arbitration Act does not create any independent federal question jurisdiction under 28 U.S.C. § 1331 . Likewise, the federal nature of the underlying claims submitted to arbitration does not confer federal question jurisdiction over a suit to confirm an arbitration award ." American Federation of Television and Radio Artists , 164 F.3d at 1007-08.
Indeed, the dissent in American Federation of Television and Radio Artists agreed that the subpoena was enforceable, but stated that the action to enforce it should have been brought in the state court. According to the dissent, the prior cases enforcing third-party subpoenas did so without addressing the jurisdiction issue.
The Fourth and Second Circuits likely have the right of this issue. FAA Section 7 expressly provides that "if any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the U.S. 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." That provision certainly appears to confer jurisdiction on the federal court.
In sum, a party seeking third-party discovery in an arbitration may encounter initial objections from the opposing party. The force of these objections will be largely determined by the arbitration agreement and any applicable arbitration institutions rules. Assuming the arbitrators agree to issue subpoenas as requested, the case law shows that document subpoenas are generally enforceable but the enforceability of deposition subpoenas remains an open question.
If forced to seek judicial intervention to enforce subpoenas issued to third parties, you should turn to the federal court where the arbitration is located if the arbitration is subject to the FAA, and potentially to a competent state court in other cases.
Carnathan is a partner at Hale and Dorr in Boston. His e-mail is email@example.com.