Article from USCIB News

At the inaugural meeting of the USICB Young Arbitrators Forum, we announced that we would be accepting article submissions from participants for inclusion in our USCIB Arbitration Newsletter. We are pleased to include this inaugural submission from Dana C. MacGrath, Esq., Counsel in the New York offices of O’Melveny & Myers LLP.

In a unanimous three-judge decision, the United States Court of Appeals for the Third Circuit ruled on March 12, 2004 that the Federal Arbitration Act did not confer authority on arbitrators to subpoena a non-party to produce documents in advance of an arbitration hearing. See Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3rd Cir. 2004).

The Court’s decision turned on its interpretation of Section 7 of the Federal Arbitration Act (“FAA”). That section provides that arbitrators “may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document or paper which may be deemed material as evidence in the case.” The Third Circuit interpreted this language to limit an arbitrator’s subpoena power to situations where the non-party has been called to appear in the physical presence of the arbitrator and to hand over the documents at that time. The Court reasoned that the power to require a non-party “to bring” items “with him” applies only to situations in which the non-party accompanies the items to the arbitration proceeding, not to situations in which the items are simply sent or brought by a courier.

In reaching its decision, the Third Circuit disagreed with the analysis of other courts that have read the language of Section 7 to imply that arbitrators have the power to require pre-hearing production of documents by a non-party. See In re Security Life Insurance Co. of America, 228 F.3d 865, 870-71 (8th Cir. 2000) (“We thus hold that implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.”); COMSAT Corp. v. National Science Foundation, 190 F.3d at 269, 278 (4th Cir. 1999) (stating that “a federal court may not compel a third party to comply with an arbitrator’s subpoena for prehearing discovery, absent a showing of special need or hardship.”); Meadows Indemnity Co., Ltd. v. Nutmeg Insurance Co., 157 F.R.D. 42, 45 (M.D. Tenn. 1994) (“The power of the panel to compel production of documents from third-parties for the purposes of a hearing implicitly authorizes the lesser power to compel such documents for arbitration purposes prior to a hearing.”).

The Third Circuit reasoned that by conferring the power to compel a non-party witness to bring items to an arbitration while saying nothing about the power simply to compel production of items without summoning the custodian to testify, the FAA implicitly withholds the latter power. The Court wrote, “If the FAA had been meant to confer the latter, broader power, we believe that the drafters would have said so, and they would have then had no need to spell out the more limited power to compel a non-party witness to bring items with him to an arbitration proceeding.”

The Third Circuit explained that the policy interest in arbitration efficiency that may be furthered by permitting a party to review documents before the hearing cannot supersede the statutory text of the FAA. The Court observed that ignoring the literal meaning of the FAA in the name of efficiency seems to cut against Supreme Court precedent. While efficiency is an objective of parties who favor arbitration over litigation, the central purpose of the FAA is to give effect to private agreements. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218-19, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) (“The legislative history of the Act establishes that the purpose behind its passage was to ensure judicial enforcement of privately made agreements to arbitrate. We therefore reject the suggestion that the overriding goal of the Arbitration Act was to promote the expeditious resolution of claims.”).

Finding the text of Section 7 of the FAA straightforward, the Third Circuit turned to whether the result of a literal reading of Section 7 is absurd and concluded it is not. Until 1991, the Federal Rules of Civil Procedure did not permit a federal court to compel pre-hearing document production by non-parties. “That the federal courts were left for decades to operate with this limitation of their subpoena power strongly suggests that the result produced by interpreting Section 7 of the FAA as embodying a similar limitation is not absurd.” In addition, the Third Circuit observed that it is not absurd to read the FAA as circumscribing an arbitration panel’s power to affect those who did not agree to its jurisdiction. Moreover, the Court noted that requiring documents to be produced at an actual hearing may discourage the issuance of large-scale subpoenas to non-parties. In this respect, a literal reading of Section 7 of the FAA furthers arbitration’s goal of resolving disputes in a timely and cost efficient manner.

The fact that federal courts in different parts of the United States interpret differently the power of arbitrators to issue document subpoenas to third parties under the FAA highlights the importance of the arbitration situs. The extent to which parties to an arbitration can seek discovery from non-parties will be governed by judicial interpretation of the FAA at the place of arbitration.