In two decisions this week, courts consider whether arbitration awards can be vacated based on arbitrators’ decisions to exclude evidence.  In both cases, the courts affirm an arbitrator’s authority to make reasonable evidentiary decisions — excluding hearsay and denying tardy subpoena requests — as long as those decisions do not deny a party a fair hearing.

In LJL 33rd Street Assocs. LLC v Pitcairn Props. Inc., __ F.3d __, 2013 WL 3927615 (2d Cir. July 31, 2013), a dispute over the valuation of a luxury high-rise in NYC, the arbitrator excluded four exhibits.  All four contained valuations by entities or individuals who were not called as witnesses in the hearing.  The federal district court then vacated the arbitrator’s determination of value under Section 10(a)(3) of the FAA.  It reasoned that, while the exhibits were hearsay, they should have been admitted and the objections should have gone to their evidentiary weight.

The Second Circuit reversed the vacatur with instructions to confirm the award.  It noted that Section 10(a)(3) of the Federal Arbitration Act only allows vacatur of an award if arbitrators are “guilty of misconduct” in “refusing to hear evidence pertinent and material to the controversy.”  To violate that standard, excluded evidence must impair the “fundamental fairness” of the proceeding.  The court found this arbitration proceeding was fundamentally fair for two reasons.  First, there was nothing preventing the complaining party from bringing live witnesses to authenticate the documents.  And second, if the exhibits had been allowed, the other side would have been prejudiced by its inability to cross-examine the authors of those valuations.

In Doral Financial Corp. v. Garcia-Velez, __ F.3d __, 2013 WL 3927685 (1st Cir. July 31, 2013), the issue was the arbitrators’ decision not to issue subpoenas to a third party.  In that employment dispute, the employer did not seek any subpoenas (or document requests) before the deadline in the scheduling order.  Then, after the arbitration hearing had begun (but was on a recess), the employer requested the arbitrators issue subpoenas for documents and hearing testimony from a third party.  The arbitrators denied the request as untimely, and later awarded the employee almost $2.5 million.

The employer moved to vacate the award under Section 10(a)(3), arguing that the denial of its subpoena request deprived it of a fair hearing.  Both the district court and appellate court refused to vacate the award.  With colorful language reminiscent of earlier arbitration decisions, the First Circuit described the employer as “cling[ing] like a limpet in the heaviest sea to the ‘fair hearing’ requirement subsumed in [Section] 10(a)(3).”  The limpet’s ride was cut short by the fact that the employer had received both adequate notice of the schedule for requesting discovery and the opportunity to present relevant evidence and arguments (as well as continuances when requested).  The court also noted that the employer had nothing but a hunch that the documents and testimony it sought woudl have yielded relevant information, declaring “[w]e cannot vacate an arbitral award based on sheer speculation alone.”  [In confirming the arbitrator’s grant of pre-award interest, the court closed its discussion with “To say more on this front would be to carry coals to Newcastle.”  What does that even mean??!]

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This post is dedicated to a perennial favorite topic: subpoenas for documents in arbitration.  Why this topic and not something hot off the presses?  Because SCOTUS has not yet accepted or denied the cert petition in Sutter, and no cases have come out recently that meet my high standards for discussion on this blog (is it about arbitration?  does it lend itself to a fun title?  at least a fun photo?).

If the arbitration involves interstate commerce, the Federal Arbitration Act governs the issuance of subpoenas.  Section 7 authorizes an arbitrator to “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.”  9 U.S.C. § 7.  The section also specifies that if the recipient of the subpoena does not cooperate, the issuing party must bring a motion in the federal district court in “the district in which such arbitrators, or a majority of them, are sitting.”  (If your arbitration does not involve interstate commerce, then the applicable state arbitration act will govern the availability of subpoenas.)

The language of Section 7 has led to a circuit split on whether the FAA authorizes document discovery from third parties.  The plain text of the statute suggests that documents are only available if they are in the possession of a third-party witness who is testifying during the arbitration hearing (but not available in advance of the hearing without a testifying witness).  And, indeed, that is the interpretation that both the Second and Third Circuits have offered in recent years.  E.g., Life Receivables Trust v. Syndicate 102 of Lloyd’s of London, 549 F.3d 210 (2nd Cir. 2008); Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir.2004).   The Second Circuit characterized its decision as part of an “emerging rule” and a “growing consensus,” probably due in part to the fact that Justice Alito wrote the Hay Group opinion before joining the Supreme Court.

The only strong opposition comes from a  twelve year old decision from the Eighth Circuit, finding that if an arbitrator has the power to order a third-party to bring documents to a hearing, it must also have the power to order that the documents be produced in advance.  In re Arbitration Between Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir.2000).  The Fourth Circuit struck out a middle ground, without the benefit of any of the previously-cited decisions, noting that arbitrators have the power to order third parties to produce documents in advance of the hearing only in cases of special need.  COMSAT Corp. v. Nat’l Sci. Found., 190 F.3d 269, 275 (4th Cir.1999).

Of course, parties have found creative ways around the rule against pre-hearing discovery from third parties.  For example, arbitrators have conducted mini-hearings, in advance of the full hearing on the merits, for the sole purpose of hearing testimony and/or receiving documents from a third party.  See Alliance Healthcare Services, Inc. v. Argonaut Private Equity, LLC, 804 F. Supp. 2d 808 (N.D. Ill. 2011).   In addition, the rules of the forum may authorize third-party discovery before a hearing (FINRA does, for example).

Assuming the arbitrator has the power to subpoena a third party for documents in advance of the hearing, are there any limits on who those third parties can be?  In particular, can they be outside the state where the arbitration will occur, or more than 100 miles from the hearing site (the limitations in FRCP 45)?  Again, courts are split on whether the geographic limitations of Rule 45 apply in the arbitration context.  A number of courts find the limits do not apply.  E.g., In re Arbitration Between Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir.2000); Festus & Helen Stacy Fdn. v. Merrill Lynch, 432 F. Supp. 2d 1375, 1378 (N.D. Ga. 2006).  Other courts hold that the geographic limitations apply equally to arbitration and court subpoenas.  E.g., Legion Ins. Co. v. John Hancock Mutual Life Insurance Co., 2002 WL 537652, at *27–28 (3d Cir. April 11, 2002).   Finally, other courts get around the perceived unfairness of arbitration subpoenas being limited to third parties in a certain geographic radius by using FRCP 45(a)(3)(B) as a gap-filler of sorts, allowing for the issuance of third-party subpoenas outside the federal district where the arbitration hearing will proceed.  See Ferry Holding Corp. v. GIS Marine, LLC, 2012 WL 88196 (E.D. Mo. 2012).

In short, subpoenaing documents from third parties is an area where the law is in flux, so you want to reserve your requests for third parties whose documents are critical and merit the expense of fighting over whether they should be produced. The issuing party must check the precedent in the federal district where the arbitration hearing will take place to see if pre-hearing document discovery is allowed and whether it is restricted to the geographic limits of Rule 45.  If courts in the relevant district have limited the reach of subpoenas for documents, you will need to get creative to get your discovery.  For those who want to object to a subpoena for documents from an arbitrator, you can bring to bear all the usual objections under Rule 45, as well as the unique arbitration-related objections that document discovery from third parties is not available in arbitration.