June 16, 2014 Articles

Arbitration Panels May Limit Discovery and Evidence

By Sheila J. Carpenter

In Doral Financial Corp. v. Garcia-Velez, 725 F.3d 27 (1st Cir. 2013), LJL 33rd Street Associates v. Pitcairn Associates Properties, 725 F.3d 184 (2d Cir. 2013), and Bain Cotton Co. v. Chesnutt Cotton Co., 531 F. App'x 500, Appeal 12-11138 (5th Cir. June 24, 2013), the appeals each involved a losing party attempting to vacate an arbitration award by arguing that when the arbitrator(s) refused to give the parties free rein in seeking discovery or offering evidence, the arbitrators' decisions were "misconduct" or "evident partiality or corruption," thus warranting vacatur pursuant to § 10 of the Federal Arbitration Act (FAA) (9 U.S.C. § 10). None prevailed.

May Arbitrators Deny a Party's Untimely Request for Third-Party Subpoenas?
InDoral Financial, the First Circuit considered an arbitration panel's authority to refuse to issue third-party subpoenas on the panel's determination that the subpoenas requested were both untimely and overly broad. Doral fired García-Vélez from his position as president of its consumer banking division. He filed for arbitration, claiming to be entitled to a large severance package pursuant to his employment agreement with Doral; Doral asserted that he had been dismissed for cause. When García-Vélez notified Doral that he had accepted a senior position at a bank in Miami that competed with Doral in Puerto Rico, it asserted an alleged breach of the noncompetition clause in their agreement as an additional defense. It also sued García-Vélez's new employer in state court.  

At a preliminary arbitration conference on March 23, 2009, the parties agreed that May 15, 2009, and August 7, 2009, should be the final deadlines for requests for information and submission of witness lists, respectively. The arbitration panel also incorporated into its scheduling order a requirement that any party wishing to issue a subpoena to a third party first confer with the other party to determine if there were any disagreements about the date or contents of the subpoena; the panel would then resolve any dispute. Five days before the hearing was to begin, Doral filed an "Urgent Motion to Stay the Arbitration Proceedings," stating that the Miami branch of the bank where García-Vélez worked had merged with Doral's Puerto Rico holding company and arguing that the merger proved the falsity of García-Vélez's assertion that he worked only for the Miami branch. The panel denied the motion and commenced the hearings as scheduled. A few days into the hearing, Doral's counsel had medical problems that caused a two-month recess in the proceedings. During the recess, Doral notified opposing counsel that it intended to request prehearing third-party subpoenas directed to García-Vélez's employer. Doral then filed its request, García-Vélez opposed, and the panel determined that the subpoenas were untimely and would delay the arbitration further. Undaunted, shortly before the hearing was to resume, Doral filed an application for hearing subpoenas. It also asked the panel to reconsider its decision on the prehearing subpoenas. The panel denied Doral's request and found that the subpoenas proffered were broader than it would have permitted, even if the request had been timely. Shortly thereafter, the panel issued a written decision further explaining its reasoning. It said that Doral's claims had not changed during the course of the proceedings, that the information Doral sought should have been requested earlier, and that it was seeking information via arbitration subpoenas to assist it in its litigation with García-Vélez's employer. When the hearing resumed, Doral had the opportunity to cross-examine the claimant—who had testified at length prior to the recess—to present its own evidence and to submit posthearing filings. The panel awarded García-Vélez about $2.4 million, including pre-award interest, for breach of his employment agreement. It specifically found that he had not breached the noncompetition clause.

Focus on Fairness
In unsuccessfully seeking vacatur of the award in district court, Doral argued that the denial of its subpoena requests was "misconduct in refusing to hear evidence" pertinent and material to the noncompetition issue. Citing several of its own precedents in affirming the district court, the First Circuit noted that the court's review of arbitration awards is extremely narrow and deferential and that arbitrators are not required to hear every bit of relevant evidence tendered. When arbitrators refuse to hear relevant evidence, the key question is whether that refusal deprives a party of a fair hearing. Doral Financial, 725 F.3d at 31–32. A "fair hearing" requires both notice and the opportunity to present relevant evidence and arguments. Doral received a fair hearing because: (1) it had three different opportunities to present its position on the proposed subpoenas, even though the deadline had passed, and it received a written explanation of the panel's decision, although the panel was not obligated to explain its reasoning in writing; (2) there were many procedural safeguards, including input into the scheduling order and a long continuance due to its counsel's health problems; and (3) Doral had the opportunity to cross-examine García-Vélez, introduce its own evidence, and file a posthearing memorandum and proposed award. 725 F.3d at 32. Because Doral had adequate notice and an opportunity to present evidence and arguments, it lost the arbitration "fairly and squarely, after the arbitration afforded it more than adequate process to present its side of the dispute." 725 F.3d at 33.

Hearsay Expert Reports Without Opportunity to Cross-Examine May Be Excluded
LJL 33rd Street involved a dispute between two joint owners over the value of a luxury high-rise in New York City when one owner (LJL) asserted its right to buy out the other (Pitcairn). Their contract called for an expedited arbitration if they could not agree on a buyout price. Pursuant to the contract, the parties selected an arbitrator who then selected a neutral appraiser. At the hearing, Pitcairn offered four exhibits containing opinions as to the value of the building without offering the authors as witnesses; the arbitrator sustained LJL's hearsay objection and excluded the exhibits from the appraiser's consideration. The arbitration resulted in a value for the building closer to LJL's position than Pitcairn's.

Pitcairn asked the district court to vacate the award because the refusal to admit the four exhibits was "misconduct" within the meaning of FAA § 10(a)(3) (9 U.S.C. § 10(a)(3)), allowing vacatur if the arbitrators are "guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy." The district court held that the exclusion of the hearsay evidence had deprived Pitcairn of a meaningful opportunity to present its valuation evidence, which made the arbitration fundamentally unfair and thus constituted misconduct within the parameters of § 10(a)(3). In reversing and remanding this decision, the Second Circuit agreed with the "general proposition that an arbitrator's unreasonable exclusion of pertinent evidence, which effectively deprives a party of the opportunity to support its contentions, can justify vacating an award" and agreed with the district court that "it is indisputably correct that arbitrators are not bound by the rules of evidence and may consider hearsay." LJL 33rd Street, 725 F.3d at 194. However, "it does not follow that arbitrators are prohibited from excluding hearsay evidence, especially when (a) the evidence could be presented without reliance on hearsay and (b) its hearsay nature is unfairly prejudicial to the adversary." 725 F.3d at 194. The Court was particularly concerned that LJL had had no opportunity to cross-examine the experts on the bases for their opinions. While the exclusion of the opinions might have prejudiced Pitcairn, it could have solved that problem by calling the authors of the reports. Thus, the exclusion of the reports was not fundamentally unfair.

Thus, pursuant to both Doral Financial and LJL 33rd Street, arbitrators and counsel can expect that arbitration rulings reasonably limiting discovery and evidence will not result in vacatur if they do not make a proceeding fundamentally unfair.

Fifth Circuit: Denial of Discovery Not Grounds for Vacatur
Bain Cotton is a postscript, as it is a very short per curiam opinion from the Fifth Circuit's summary calendar. Bain Cotton Company appealed the district court's denial of its motion to vacate an arbitration award, arguing that the arbitrators engaged in misconduct by denying Bain discovery, and by denying its motion to reopen the case and vacate the award in order to allow discovery. Bain also argued that their refusal to allow discovery evidenced partiality or corruption on the panel's part. The Fifth Circuit described Bain's appeal as presenting "a quintessential example of a principal distinction between arbitration and litigation, especially in the scope of review." Bain Cotton, 521 F. App'x at 500. The court said that if the discovery dispute had arisen in the district court, it was not unlikely that the appeals court would have reversed the decision to deny discovery. However, given the narrow grounds for review of arbitration awards, any disagreement the court had with the arbitrators' decisions concerning Bain's discovery requests did not rise to the level required for vacating an award under any of the FAA's narrow grounds.

Keywords: ADR, litigation, arbitration, arbitrator, misconduct, partiality, Federal Arbitration Act