December 05, 2018

Third-Party Document Discovery in Arbitration? Do Not Count On It.

By Heather L. Heindel, Perkins Coie, LLP, Seattle, WA, Division 1 (Litigation and Dispute Resolution)

You know a third party has documents essential to proving your claim or defense in arbitration, maybe the proverbial smoking gun – you just need a subpoena from the arbitrator to compel production.  That’s the good news.  The bad news is that a majority of Federal Circuits say that under the Federal Arbitration Act (“FAA”) an arbitrator does not have the power to compel third-party document discovery before the actual hearing.  You may have a big problem.

Arbitration is a dominant forum for construction disputes, and documents are generally critical to the resolution of those disputes.  With the number of parties on construction projects (owner, suppliers, subcontractors, designers, lenders, and others), third parties to an arbitration often have critical documents relevant to the dispute.  Through its decision in CVS Health Corp. v. Vividus,[1] the U.S. Court of Appeals for the Ninth Circuit reinforced the risk that you may not be able to get those critical documents held by a third party.  The Ninth Circuit joined two other Circuits in concluding that under the FAA an arbitrator has no power to compel production of documents from a third party prior to an actual arbitration hearing.  With Vividus, the split in the circuits now favors no third-party document discovery under the FAA by a 3 to 2 margin.

This article will discuss the key cases from the federal circuits that reflect the current circuit spilt, notable state arbitration law that may grant more power to arbitrators than Vividus found in the FAA with respect to third-party discovery, and  some practical considerations for the construction law practitioner.

The FAA Defines the Arbitrator’s Powers to Compel Third Parties

The FAA empowers arbitrators to “summon in writing any person to attend before 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.”[2]  The US district court for the district in which the arbitrators sit is empowered to “compel the attendance of such person” before the arbitrators.  Under the FAA, arbitrators do not have the authority to force a third-party to attend a deposition.  

Vividus and the New Majority: No Pre-Hearing Third-party Documents (Second, Third and Ninth Circuits)

With the Ninth Circuit’s decision in Vividus, the inability to compel pre-hearing production of third-party documents through subpoena has now become the majority position of what had been a 2-2 split between the circuits.  In Vividus, the Ninth Circuit explained that “[t]he text of section 7 grants an arbitrator no freestanding power to order third parties to produce documents other than in the context of a hearing.” 

In Vividus, a pharmaceutical company filed suit in 2014 in New York state court against various pharmacy benefit managers, alleging antitrust law violations.  The claims were served against the various defendants and the New York court ordered arbitration or litigation in separate proceedings based on the dispute resolution and forum selection clauses in the parties’ preexisting agreements.  The pharmaceutical company’s claims against one of the pharmacies were transferred to the United States District Court for the Eastern District of Missouri (“Missouri Litigation”) - while the claims against another pharmacy were submitted to arbitration in Arizona (“Arizona Arbitration”). 

The pharmacy involved in the Missouri Litigation produced documents to the pharmaceutical company pursuant to a protective order.  The pharmaceutical company wanted to use those documents in the Arizona Arbitration, so it requested that the arbitrators issue a subpoena.  Id.  The arbitrators in the Arizona Arbitration then issued a subpoena directing the pharmacy involved in the Missouri Litigation to produce documents in advance of the actual date of the arbitration hearings, but for use in the Arizona Arbitration.  The documents subpoenaed had been produced in the Missouri Litigation.

The pharmacy did not respond to the subpoena and the pharmaceutical company filed a motion to enforce the subpoena in the United States District Court for the District of Arizona.  The district court concluded that the arbitrators did not have such authority under the FAA and the pharmaceutical company appealed to the Ninth Circuit.  The Ninth Circuit agreed, citing the plain language of the FAA.  The Ninth Circuit analyzed the decisions of its sister circuits, and the pharmaceutical company’s argument that the Eighth Circuit’s interpretation of the FAA, allowing third-party discovery of documents prior to hearings should be adopted.  The Ninth Circuit found that “under the FAA an arbitrator is not necessarily vested with the full range of discovery powers that the courts possess.”  Ultimately, the Ninth Circuit was most persuaded by what it called the “clear statutory language” of the FAA. 

With the Vividus decision, the Ninth Circuit joined the Second and Third Circuits on this issue.  In Life Receivables Tr. v. Syndicate 102 at Lloyd’s of London,[3] the Second Circuit noted an “emerging rule” in favor of the rule that the FAA does not grant an arbitrator power to order third parties to produced documents outside of a hearing.  The Third Circuit decision, in Hay Group, Inc. v. E.B.S. Acquisition Corp.,[4] then-Judge Samuel Alito, now Supreme Court Justice, writing for the majority, opined that FAA § 7 “speaks unambiguously to the issue.”  In Hay Group, , the Third Circuit concluded that the “power to require a non-party ‘to bring’ items ‘with him’ clearly applies only to situations in which a non-party accompanies the items to the arbitration proceedings, not to the situations in which items are simply sent or brought by a courier.”  Despite what the Second, Third, and Ninth Circuits considered to be clear statutory language, not all circuits agree.

Arbitrators Have the Power (Fourth and Eighth Circuits[5])

In its decision in re Security Life Ins. Co. of America,[6] the Eighth Circuit admitted that the FAA does not explicitly authorize arbitrators to subpoena documents to be produced pre-hearing, but 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.” 

The Fourth Circuit has opined that under “unusual circumstances” it will allow pre-arbitration discovery “upon a showing of special need or hardship.” COMSAT Corp. v. Nat’l Sci. Found.[7]  In COMSAT, the Fourth Circuit allowed third-party document subpoenas pre-hearing pursuant to the FAA upon a showing of “special need or hardship”.  However, the Fourth Circuit did not define “special need,” and instead left an open-ended question as to what “special need or hardship" may need to be shown to compel pre-hearing document production.

Some State Arbitration Acts that Offer Some Leeway

Not all statutes are created equal, and the various arbitration acts are no exception.  In general, state arbitration acts are largely modelled after the FAA, with some notable variations relevant here to arbitrator’s third-party discovery powers.

California

A New York court recently analyzed the powers of arbitrators to issue third-party subpoenas in California - when it was presented with a petition to enforce a commission from a Superior Court of California to take a deposition outside of California in Matter of Roche Molecular Systems, Inc.[8]  Roche was involved in arbitration in California related to a patent license and the related royalty payments.  Roche sought the permission of the arbitration panel to seek a commission from the Superior Court of California to take the deposition of a former employee of the opposing party in New York where the non-party lived.  The non-party relied on the FAA and the Second Circuit’s interpretation of the FAA in Life Receivables and objected to the subpoena.  The non-party agreed to appear in front of the arbitral tribunal in New York for an early hearing but refused to appear for a pre-hearing deposition.  The non-party argued that the California Code of Civil Procedure (“Cal CCP”) does not authorize arbitrators to issues third-party subpoenas for domestic arbitrations.  Roche countered, successfully arguing that Cal CCP Title 9.3, Arbitration and Conciliation of International Commercial Disputes, applied to this dispute, because the subject matter of the dispute related to commercial interests in more than one state and qualified as an “international agreement” under Cal CCP §1297.13.[9]  For an arbitration over an international agreement, Cal CCP §1297.271 expressly allows arbitral tribunals to seek the assistance of a California Court to grant a subpoena to take a deposition.  As a New York court opining on California law, its precedential value may be limited, but Roche is worth a closer read for California practitioners. 

Hawai’i

The Arbitration Act of Hawai’i, offers arbitrators some additional powers to promote “fair, expeditious, and cost effective” arbitration, including the power to order depositions of any witness under  Haw. Rev. Stat. § 658A-17(b).  Further, arbitrators may:

[P]ermit such discovery as the arbitrator decides is appropriate in the circumstances, taking into account the needs of the parties to the arbitration proceeding and other affected persons and the desirability of making the proceeding fair, expeditious, and cost effective.[10]

In an unreported case, the Supreme Court of Hawai’i, upheld the right to third-party discovery, citing the Sixth and Eighth Circuit federal cases and a district court case out of the Eleventh Circuit.  Jas. W. Glover, Ltd. v. Derrick Concrete Cutting & Const., Ltd.[11]  While this case is not citable, it gives some insight into how Hawaiian courts may interpret the statute.

New York

The First Department of Appeals of New York noted that, “in the absence of a decision of the United States Supreme Court or unanimity among the lower federal courts,” it is “not precluded from exercising [its] own judgement”  and affirmatively subscribed to the view of Fourth Circuit, at least with respect to deposition of nonparties when there is a showing of “special need or hardship.” ImClone Systems Inc. v. Waksal.[12]  In New York at least, with respect to third-party discovery in arbitration, a “special need or hardship” includes information that is “otherwise unavailable,” taking into “consideration the realities and complexities of modern arbitration.” 

The survey of the case law indicates there may still be some flexibility in the arbitrator’s power to compel third-party production, but practitioners should still consider the potential implications of these recent decisions.

Practical Implications to Consider

It is worth noting that regardless of the wording of the FAA, none of these cases on either side of the circuit split address the practical implications of bringing “documents” to a hearing with you in this digital age.  The authors of the FAA surely did not contemplate cloud computing, ediscovery, or the plethora of software on the market for designing and managing your construction project.  With the current state of the decisions, if a third party is required to bring documents to the hearing, is it also required to bring computers and software to view those documents?  Is it required to bring the documents in a format that is ingestible into commercially available ediscovery software?  There are many unanswered questions, particularly as it relates to the impact of this decision on construction disputes.

Anecdotally, sympathetic arbitrators have been known to commence a hearing simply to facilitate document production.  And the Second Circuit even acknowledged this practice in Life Receivables.[13]  This can be a costly method of getting documents (think travel time, hourly rates, room charges, etc.).  However, given the choice between appearing at a hearing for the sole purpose of producing documents at a time and place dictated by the arbitrator versus producing the documents at a mutually agreeable time, location and format, third parties may choose to go the cooperation route. 

If there is parallel lien or bond litigation related to the disputed project, you may be able to secure documents from a third party via your subpoena powers in that case.  However, in order to use them in a related arbitration, you will need to negotiate an agreement with the third party producing documents to allow you to use them - recall in Vividus, the party had the documents in their possession from the Missouri Litigation that it wanted to use in the Arizona Arbitration, but could not due to a protective order.  Cooperation is key to getting this method to work as well.

If you are in a position that you need to seek the court’s intervention to compel compliance with a subpoena, you will still need to consider whether the court has jurisdiction over the third party and the related procedural requirements.

When choosing between arbitration or litigation or drafting an arbitration clause, consideration should be given to what level of discovery may be needed if disputes arise.  Litigation offers the full availability and burden of relatively open-ended discovery, including the power of the court to pursue third party discovery.  If arbitration is the choice, agreeing in advance to limited discovery is one way to avoid the disappointment of not being able to reach third-party documents in an arbitration.

A potential option to secure access to at least some third parties’ documents is to require flow-down of the arbitration clause and consent to consolidation.  However to assert a claim in arbitration and add an additional party to the arbitration may be a fairly steep price to pay just to get documents.  If your client has the contracting power (for example is the owner or contractor), another possibility is to require subcontracts and supplier agreements the right to access and copy documents relevant to the project – like audit rights.  In addition to the tough sell of such a provision on lump sum agreements on private projects, there is the additional challenge of recourse if a party still refuses to make the documents available.

The ability of arbitrators to compel third party document discovery appears to be a serious, but largely below the radar issue that can be a very unpleasant surprise.  Depending on what Federal Circuit you are in or what state arbitration law governs, there may be little you can do about such a limitation short of an appeal to the US Supreme Court, and amendment to the FAA.  If your arbitrator’s powers to compel third-party discovery are limited, careful planning during contract drafting can prevent surprises down the road in the event an arbitrable dispute arises.

Endnotes

1.  LLC, 878 F.3d 703 (9th Cir. 2017)

2. 9 U.S.C.A. §7 (emphasis added)

3. 549 F.3d 210, 216 (2d Cir. 2008)

4. 360 F.3d 404, 407 (3d Cir. 2004)

5. Some commentators have also grouped the Sixth Circuit in this category, however the Sixth Circuit’s opinion is only applicable to labor disputes under §301 of the Labor Management Relations Act and not FAA §7See Am. Fed. of Television & Radio Artists, AFL-CIO v. WJBK-TV (New World Commc’ns of Detroit, Inc.), 164 F.3d 1004, 1007 (6th Cir. 1999). 

6. 228 F.3d 865 (8th Cir. 2000)

7. 190 F.3d 269, 276 (4th Cir. 1999)

8. 60 Misc.3d 222, 226, 76 N.Y.S.3d 752,755 (N.Y. Sup. Ct. 2018)

9. See Roche at 755-56 

10. Haw. Rev. Stat. § 658A-17(c) 

11. No. 25462, 2003 WL 22970975 (Haw. Dec. 18, 2003)

12. 22 A.D.3d 387, 388, 802 N.Y.S.2d 653, 654 (1st Dept. 2005)

13. Life Receivables, 549 F.3d at 218