Client Alert

Second Circuit Refuses to Grant Pre-Hearing Discovery from Non-Parties to an Arbitration Proceeding

Client Alert

December 8, 2008

After deferring twice on this issue in prior decisions, the Second Circuit finally addressed the question of whether Section 7 of the Federal Arbitration Act ("FAA") authorizes arbitrators to compel pre-hearing document discovery from entities that are not parties to the arbitration proceeding. Recognizing a split among the circuits with respect to this question, on November 25, 2008, the Second Circuit joined the Third Circuit in holding that Section 7 of the FAA does not authorize arbitrators to compel such pre-hearing discovery from non-parties. Life Settlements Corp., d/b/a Peachtree Life Settlements v. Syndicate 102 at Lloyd's of London, 07-1197-cv, 2nd Cir. (November 25, 2008). Nonetheless, the Second Circuit noted that there are still other tools available to compel discovery from non-parties, including the power of the arbitrators to compel a non-party to appear with documents before a single arbitrator at a preliminary hearing, and not solely before the full arbitration panel during the hearing on the merits.

Background

This decision relates to an arbitration between Lloyd's Syndicate 102 and Life Receivables Trust who were parties to an insurance contract containing an arbitration clause. Peachtree Life Settlements ("Peachtree") was also a party to the contract, but it had not been joined as a party to the arbitration. In December 2006, the arbitration panel issued a formal subpoena to Peachtree requiring production of certain documents. In response, Peachtree filed an action in the Southern District of New York seeking to quash the subpoena, primarily on the grounds that an arbitration panel has no authority to compel pre-hearing discovery from a non-party.

After a full hearing, Judge Richard Owen enforced the subpoena stating that there was "no reason to disturb the arbitration panel's issuance of such a subpoena to an entity that, while not a party to the specific arbitration at issue, is a party to the arbitration agreement." Judge Owen further noted that a district court did not have the authority to review interlocutory rulings by an arbitration panel. Peachtree then appealed the decision.

The Decision of the Second Circuit

On appeal, the Second Circuit reversed the decision of Judge Owen. The Second Circuit began by analyzing the decisions previously rendered by three other circuits (the Third, Fourth and Eighth Circuits) regarding this issue. After analysis of the reasoning by the other three circuits, the Second Circuit stated that it was in agreement with the reasoning of the Third Circuit in its decision in Hay Group Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (2004). In Hay Group, then-Judge Alito wrote that the plain language of Section 7 "unambiguously restricts an arbitrator's subpoena power to situations in which the non-party has been called to appear in the physical presence of the arbitrator to hand over the documents at that time." Hay Group, 360 F. 3d at 407. The Second Circuit noted that there has been a growing trend of lower courts to adopt the Hay Group analysis and agreed with the Third Circuit's reasoning that Section 7 unambiguously states that documents are "only discoverable in arbitration when brought before the arbitrators by a testifying witness." In so holding, the Second Circuit noted that "[W]hen a statute's language is clear, our only role is to enforce that language according to its terms" (citing Archiniaga v. Gen. Motors Corp., 460 F.3d 231, 236 (2d Cir. 2006)). Thus, concluded the Second Circuit, "we join the Third Circuit in holding that Section 7 of the FAA does not authorize arbitrators to compel pre-hearing document discovery from entities not party to the arbitration proceedings."

The Second Circuit went on to explain that its holding did not preclude both parties and arbitrators from seeking other means to obtain production of documents within the confines of the FAA. For example, the Second Circuit noted that "arbitrators may, consistent with section 7, order 'any person' to produce documents so long as that person is called as a witness at a hearing." The Second Circuit noted that in its previous decision in Stolt-Nielson, it held that Section 7 authority is not limited to witnesses at merits hearings, but also extends to hearings covering a variety of matters. 430 F.3d at 577-79. Relying on the concurring opinion in Hay Group, the Second Circuit also noted that arbitrators "can compel a third-party witness to appear with documents before a single arbitrator, who can then adjourn the proceedings." The Second Circuit additionally suggested the possibility of formal joinder of a non-party to the arbitration where the entity is also a party to the arbitration agreement thereby enabling arbitrators to exercise their contractual jurisdiction over the parties before them.

Conclusion

In light of the prominence of the Second Circuit with respect to both commercial and insurance/reinsurance litigation, this decision by the Second Circuit may signal a growing trend by courts to refuse to compel pre-hearing document discovery from third parties. Accordingly, parties should educate themselves on alternative methods of obtaining discovery from non-parties, e.g., convening a panel hearing for the sole purpose of document discovery, or formal joinder when possible, rather than simply requesting third-party subpoenas from arbitration panels. However, in light of the burden associated with such alternate methods, primarily in the form of additional expense, parties should evaluate whether the third-party discovery that they are seeking is necessary and carefully weigh all options available.