May 23, 2019 Articles

Third-Party Arbitration Summonses: Some Helpful Practice Pointers

A court rebuffed a variety of attacks on summonses issued by an arbitration panel and on the court’s jurisdiction.

By Stephen P. Gilbert

In Washington National Insurance Co. v. Obex Group LLC, No. 18-CV-9693 (S.D.N.Y. Jan. 18, 2019), the petitioner, Washington National Insurance Company, asked the U.S. District Court for the Southern District of New York to enforce two summonses issued by an American Arbitration Association panel against the respondents, Obex Group and its principal (Randall Katzenstein), who are not parties in the underlying arbitration in which the petitioner is one of the claimants. The court rebuffed a variety of attacks on its jurisdiction and on the summonses themselves. The panel and court together provide useful guidance for arbitrators dealing with third-party summonses, which are sometimes referred to as “third‑party subpoenas,” although the Federal Arbitration Act in section 7 denominates them as “summonses” (e.g., “Said summons shall issue in the name of the arbitrator. . . .”).

Background

Earlier summonses requested by the petitioner and issued by the panel required the respondents to appear as witnesses at a hearing and to bring with them certain documents. The petitioner and the respondents twice agreed to narrow the scope of those summonses, and documents were then voluntarily produced in accordance with the narrowed scope without a hearing being needed. However, information from a third party led the petitioner to believe not all responsive documents had been produced. The petitioner so notified the respondents, who disagreed and said they had fully complied. The parties could not resolve their differences, and the panel then issued the instant summonses, which required the respondents to appear at a hearing in New York City and bring certain documents. Slip op. at 2.

“The panel proceeded with the . . . hearing, and was prepared to receive testimony and documentary evidence from respondents pursuant to the summonses,” but the respondents failed to appear. Id. at 3. The panel then issued an order stating:

The documents and information sought by the Arbitration Summonses are relevant to the issues raised in the Amended Arbitration Demand filed by Claimants.

. . . .

The Panel unanimously affirms that the Arbitration Summonses should be enforced by a Court of appropriate jurisdiction.

Id.

The panel “granted claimants leave to pursue judicial intervention to obtain respondents’ compliance,” and the petitioner sought enforcement in the Southern District of New York. The respondents moved to dismiss for lack of jurisdiction, and the court denied the motion. The respondents requested reconsideration or re-argument of their motion and also moved to quash the summonses. Id. at 3–4.

On January 18, 2019, the court rejected all of the respondents’ attacks and granted enforcement.

The Attack on the Court’s Subject Matter Jurisdiction
Is Rejected

The respondents advanced three arguments in support of their request for reconsideration of the motion to dismiss for lack of subject matter jurisdiction: (1) the court incorrectly determined diversity by looking at the parties in the instant proceeding rather than at the parties in the underlying arbitration; (2) the petitioner failed to allege an amount in controversy sufficient to meet the $75,000 statutory minimum for diversity jurisdiction; and (3) the court lacked power to adjudicate the petition to enforce because the panel was not sitting in the Southern District of New York.

Although it characterized the respondents’ motion for reconsideration as “a thinly-veiled attempt to relitigate the motion to dismiss” without “rais[ing] any controlling precedent or facts that the Court overlooked” and, therefore, was “groundless” (id. at 5), the court nevertheless dealt with the three arguments on the merits.

Lack of diversity. As to the alleged lack of diversity, the court noted that

[FAA] Section 7 actions—unlike those involving Section 4 or Section 10—involve different parties than those in the underlying arbitration. Respondents’ approach would have the Court ignore the citizenship of the parties to the controversy actually before the Court and rely on the citizenship of parties to a different controversy.

Id. at 6–7.

After distinguishing the cases cited by the respondents, the court “reject[ed] respondents’ argument that the Court must look through the Section 7 petition to determine whether it may exercise diversity jurisdiction.” Id. at 7–8.

Failure to meet the statutory amount. In its second attack on jurisdiction, the respondents said the petitioner had failed to allege the requisite statutory amount in controversy because it could not rely on the amount at issue in the underlying arbitration. Id. at 8.

The court first cited cases for the propositions that when seeking declaratory or injunctive relief, the amount in controversy is measured by the value of the object of the litigation; that the amount in controversy is not necessarily the money judgment sought or recovered, but rather the value of the consequences that may result from the litigation; that absolute certainty was not necessary to satisfy the amount-in-controversy requirement; and that what was required was a reasonable probability of the amount in controversy exceeding the jurisdictional amount. The court said that in the underlying arbitration, the petitioner was seeking at least $134 million in damages and that even if the documents responsive to the summonses concerned only a small fraction of that sum, the amount-in-controversy requirement would be satisfied. The court also pointed to the panel’s determination (as memorialized in its order) that the summonses sought relevant information, “thus [according to the court] increasing the responsive documents’ value.” Id. at 8–9.

The panel was not sitting in the Southern District of New York. In its third attack, the respondents said the court lacked authority to adjudicate the petition because a majority of the arbitrators were not sitting in the Southern District of New York. The court noted that the respondents had not raised that argument in their motion to dismiss, but the court nevertheless addressed it on the merits. Id. at 9.

FAA “Section 7 permits a party to petition a United States district court ‘for the district in which such arbitrators, or a majority of them, are sitting’ to compel compliance with a summons” and, “[t]herefore, only a district court in which the arbitrators are sitting has authority to enforce a Section 7 subpoena.” Id. Thus, the Southern District of New York was the proper court for enforcement because the summonses at issue were for “a hearing in New York City” (the court most likely meant Manhattan, which is in the Southern District of New York; several other areas within New York City are not). Id. at 10.

The court rejected the respondents’ proposed “rule that looks to the arbitrators’ business addresses to determine where the arbitrators are sitting,” noting that the respondents had cited no authority in support and that the proposed rule was contrary to Second Circuit jurisprudence. Id.

Another attack: The panel issued third-party summonses for more than one judicial district. The respondents said the summonses were improper because the panel was not permitted to issue nonparty summonses for more than one district and it had previously issued a third‑party summons for a hearing in Philadelphia (which is in the Eastern District of Pennsylvania). “Nothing in Section 7 requires an arbitration panel to sit in only one location” and the contrary would “greatly circumscribe an arbitration panel’s ability to decide a case,” particularly where there were nonparty witnesses in multiple districts, and thereby “contradict ‘the strong federal policy in favor of arbitration’” (citation omitted). Id. at 10–11. The court held the panel was authorized under section 7 to issue the summonses in question. Id. at 11.

The Motion to Quash Gets Squashed

The respondents asserted several reasons to quash the summonses: (1) the summonses were defective because they sought pretrial discovery, which is impermissible; (2) the summonses were defective (e.g., duplicative, overbroad, burdensome) but the respondents had no mechanism for challenging them before the panel and, therefore, the court should review the summonses, and if it did, it would agree they are defective; (3) the petitioner is not entitled to relief because it did not move to compel enforcement and did not submit supporting evidence. Id. at 11–13.

The summonses seek impermissible pre-hearing discovery.

Three factors are relevant in deciding whether a summons seeks impermissible pre-hearing discovery: whether (i) the witnesses were ordered to appear for depositions, which occur outside the presence of the arbitrators and allow parties to prepare for the eventual presentation of evidence at the hearing; (ii) the arbitrators heard testimony directly from the witness and ruled on evidentiary issues; and (iii) the testimony became part of the arbitration record, “to be used by the arbitrators in their determination of the dispute before them.”

Id. at 11 (citing Stolt-Nielsen SA v. Celanese AG, 430 F.3d 567, 578 (2d Cir. 2005)).

The court held the summonses were proper under section 7 because “[t]he panel summoned respondents to a hearing before the arbitrators—not to a deposition” and “[t]he panel’s . . . order stated the panel was prepared to receive testimony and documentary evidence from [respondents] . . . and the panel was prepared to rule on evidentiary issues” (internal quotations omitted). The court noted that a court reporter had been present and “was ready to record the hearing so the hearing would become part of the arbitration record for the Panel to use in its ultimate determination of this dispute.”  Id. at 12 (internal quotations omitted).

The court rejected the respondents’ suggestion that the petitioner’s willingness to waive the hearing if the respondents agreed to voluntarily produce the documents evidenced “a subterfuge to circumvent the prohibition against pre-hearing discovery.” The court held that the issue was the enforceability of the summonses, not the enforceability of terms negotiated by the parties, and it would not penalize the petitioner for its willingness to negotiate with the respondents. Id. at 12.

The summonses are objectionable and the court should so hold. The respondents complained that the summonses were objectionable (duplicative, overbroad, sought privileged information, etc.) and stated that the court should so hold (and quash them) because it had the power to rule on the merits of such objections—there was no mechanism in section 7 for the respondents to so challenge the summonses. The court said, whether or not it had the authority to consider such objections to the summonses, it did not have sufficient information to do so, and it also noted that courts in the Second Circuit generally declined to exercise such authority and deferred to the arbitrators, who were better positioned to rule on such objections. Furthermore, even if it had such authority, it declined to exercise it: The panel had stated “the evidence was relevant and that the summonses should be enforced by a court of appropriate jurisdiction.” Accordingly, the court declined to address the merits of the respondents’ objections. Id. at 12–13.

The petitioner failed to move to compel or to submit supporting evidence. The respondents’ last argument for quashing was that the petitioner “did not move to compel enforcement of the summonses” (apparently arguing that there is a material difference between moving to compel and petitioning and that the petitioner should have moved to compel) and that the petitioner did not submit supporting evidence. The court said the plain language of section 7 contradicted the first half of that argument (“upon petition the . . . [court] may compel . . .”), and as to the second half of the argument, both sides had submitted declarations with exhibits. Id. at 13.

The court refused to quash the summonses and granted the petition to enforce them. Id. at 14.

Arbitrators Dealing with Third-Party Summonses Should Keep This in Mind

The panel made it relatively easy for the court to rule in the petitioner’s favor and enforce the summonses for the following reasons:

  • At the hearing that the respondents failed to attend, the panel had a court reporter present to transcribe the proceedings and made a record of the fact that the respondents were absent, that the panel was ready to take evidence and rule on evidentiary issues, and that the court reporter was ready to record the hearing so that it would become part of the arbitration record for the panel to use in its ultimate determination of the arbitral dispute—in other words, the panel made sure the proceedings presented the indicia of an arbitral hearing and not of a deposition (see also Stolt-Nielsen SA, cited above).
  • In its order following the respondents’ nonappearance at the hearing, the panel said the documents and information sought by the summonses are relevant to the issues raised in the demand filed by the claimants (one of whom was the petitioner), and the panel unanimously affirmed that the summonses should be enforced by a court of appropriate jurisdiction.

Armed with what the panel had said and done, the petitioner was in a good position when it sought to enforce the summonses in court.

Stephen P. Gilbert practices at the Law Office of Stephen P. Gilbert, Larchmont, New York.


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