Update. Civil Litigation. Non-Party Discovery in Commercial Arbitration: Legal Hurdles and Practical Suggestions. Civil Litigation Section.

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1 Volume 10, No. 3 Civil Litigation Section Chair Janis L. Wilson Chair-elect Stanley J. Parker Vice Chair Malcolm L. MacGregor Secretary Robert E. Rosenthal Treasurer David R. Fine Immediate Past Chair Mark L. Tunnell Newsletter Editor Henry M. Sneath Associate Newsletter Editor Bridget M. Gillespie PBA Newsletter Liaison Patricia M. Graybill PBA Staff Liaison Michael Shatto Contents Message from the Chair...2 Message from the Editor...2 Recent Cases of Note...3 Pennsylvania Federal Business Decisions...6 Expert s Corner Visual Strategy: Optimizing the Evidence...9 Dates to Remember...15 Annual Civil Litigation Section Retreat...24 Civil Litigation The propriety and extent of discovery in complex commercial arbitration has been the subject of extensive debate. While the exchange of potential exhibits and identification of witnesses prior to the arbitration is required by the rules of most arbitral institutions, other aspects of discovery, including the extent of document exchange, the use of expert reports, the permissibility of depositions or interrogatories and the issuance of subpoenas compelling discovery from non-parties, are generally left to the discretion of the arbitrators. Update Non-Party Discovery in Legal Hurdles and Practical Suggestions By Albert Bates Jr. Albert Bates Jr. is a partner in the Litigation and Construction Services Groups of Reed Smith, and is the leader of Reed Smith s Commercial and International Arbitration Team. He is also a member of the Council of the Civil Litigation Section. Fall 2005 Since arbitration is a creature of contract, the parties are free to craft the procedures that will govern their arbitration, including the nature and extent of discovery among the Albert Bates Jr. parties. However, third parties are generally not bound by the terms of an agreement to arbitrate to which they are not signatories. Consequently, while an arbitrator can issue a subpoena duces tecum to require a non-party to appear for deposition and/or to produce documents in advance of the arbitration, the arbitrators cannot enforce the subpoena if a non-party fails to comply. In the court proceeding to enforce the arbitrator s subpoena, the central question is whether the arbitrator CONTINUED ON PAGE 10

2 Non-Party Discovery in Legal Hurdles and Practical Suggestions CONTINUED FROM PAGE 1 had the legal authority to compel the non-party to produce the documents in advance of the hearing and/or appear for the discovery deposition. Unfortunately, the answer to that question depends upon the law governing the arbitration proceeding. The two potential sources of governing arbitration law are the Federal Arbitration Act (FAA) and various state arbitration acts, including the Pennsylvania Arbitration Act (PAA). After addressing the issue of whether federal or state law governs the conduct of the arbitration and the enforcement of the arbitral award, this article will discuss the split of authority among the courts of appeals concerning non-party discovery under the FAA, and the divergence among state arbitration acts regarding non-party discovery in arbitration. Specifically, this article will address the extent of permissible non-party discovery under the Pennsylvania Arbitration Act (PAA), the Uniform Arbitration Act (UAA) and the Revised Uniform Arbitration Act (RUAA). This article will conclude by offering practical suggestions to assist in creating more certainty in the arbitration process. I. What Law Governs the Conduct of the Arbitration? Anne Devens, a partner in Reed Smith s Northern Virginia office, recently authored an article entitled, Federal Versus State Arbitration Laws: Whose Law Applies and Why Does it Matter? ( comm/fed%20v.%20state%20 Arbitration%20Final.pdf). In her article, Devens concludes the FAA generally governs the conduct of the arbitration unless the parties specifically agree that the arbitration shall be governed by the arbitration law of a particular state. For example, language such as the following demonstrates an objective intent that the agreement to arbitrate be subject to a state arbitration law rather than the FAA: This arbitration, and any subsequent proceeding to enforce, modify, vacate or confirm the arbitration award, shall be governed by the Pennsylvania Arbitration Act of An unequivocal expression of contractual intent to be bound by a state arbitration act will not be preempted by the FAA unless the state arbitration law conflicts with the purposes of the FAA. However, the majority of cases hold that a general choice of law provision determines the substantive law applicable to the underlying transaction, but is not sufficient to invoke the arbitration law of that state. Id. Consequently, in the absence of a specific agreement as to the law governing the arbitration, the FAA will generally apply so long as the arbitration agreement involves interstate or international commerce. 1 II. Availability of Third-Party Discovery Under the Federal and State Arbitration Acts A. Federal Arbitration Law: Third-Party Discovery Under the FAA: Section 7 of the FAA grants arbitrators the authority to summon any person to attend before them or any of them as a witness and in the proper case to bring with him or them any book, record, document or paper which may be deemed material as the evidence indicates. 9 U.S.C. 7 (2000). Consequently, the FAA expressly permits an arbitrator to compel a non-party to attend the arbitration and/or to produce documents to the arbitrators at the arbitration. However, federal courts are split over whether Section 7 permits an arbitrator to order a non-party to produce documents in advance of the hearing or appear for a discovery deposition. In a recent case, the Court of Appeals for the Third Circuit held that an arbitrator s subpoena power under the FAA is limited to ordering a non-party to appear before the arbitrator to testify or produce documents. Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3rd Cir. 2004). See also Recent Developments, Hay Group Inc. v. E.B.S. Acquisition Corp., 20 J. Disp. Resol (2005). The Fourth Circuit has taken a more tempered approach, holding that the FAA does not grant an arbitrator the authority to demand that a non-party produce documents for pre-hearing discovery, but suggesting in dicta that an arbitrator may order discovery upon a non-party under special circumstances and upon a showing of special need or hardship. COMSAT Corp. v. Nat l Science Foundation, 190 F.3d 269, 276 (4th Cir. 1999). At the opposite end of the spectrum from Hay, the Eighth Circuit has held that the power to compel nonparties to produce documents prior to the arbitration hearing is implicit in the authority granted to arbitrators in Section 7 of the FAA, and that the efficient resolution of disputes through arbitration is furthered by permitting limited third party discovery. Arbitration between Security Life Insurance Company and Duncanson & Holt, Inc., 228 F.3d 865, (8th Cir. 2000). The Sixth Circuit, in a case arising under Section 301 of the Labor Management Act of 1947 and decided prior to Duncanson, also commented that the FAA has been held to implicitly include the authority to compel the production of documents for inspection by a party prior to the hearing. Am. Fed n of Television & Radio Artists v. WJBK-TV, 164 F.3d 1004, 1009 (6th Cir. 1999). 10 Civil Litigation Update

3 While several district courts have also addressed this issue, the remaining federal courts of appeals have not ruled upon the availability of thirdparty discovery in arbitration proceedings. While the federal law is not settled, two general points can be gleaned from these cases. First, the location of the arbitration may determine the extent to which thirdparty discovery requests are enforceable under Section 7 of the FAA. Under current law, permissible discovery upon non-parties under the FAA is far broader in an arbitration conducted in St. Louis than in one conducted in Pittsburgh or Philadelphia. The extent of permissible third-party discovery in arbitrations conducted under the FAA in venues such as Chicago, California, Florida or Texas remains an open issue, at least at the appellate level. Second, while the availability of document discovery from non-parties in advance of an arbitration hearing is an open issue in many federal circuits, relatively few federal courts have interpreted Section 7 of the FAA as authorizing a discovery deposition of a nonparty. In a practical sense, the logic seems to be the more intrusive the third-party discovery sought, the less likely a court will find that the arbitrator had the authority under Section 7 of the FAA to order that non-party discovery. While the rules invoked in Hay and COMSAT may appear impractical in today s world of complex commercial arbitration, legislative change to Section 7 of the FAA does not appear likely. The issue will remain unresolved on the national level until the United States Supreme Court addresses the issue. See Recent Dev., 20 J. Disp. Resol. at B. State Arbitration Law: 1. Third-Party Discovery Under the UAA The Uniform Arbitration Act (UAA), promulgated in 1955, has been adopted with varying modifications in 49 states, including Pennsylvania. Section 7 of the UAA, which addresses witnesses, subpoenas and depositions, is similar in most respects to Section 7 of the FAA. Like the federal courts of appeals, state courts are split on whether Section 7 of the UAA permits an arbitrator to order a nonparty to produce documents or appear for a discovery deposition. While the majority of courts have allowed discovery at the discretion of the arbitrator and enforced subpoenas accordingly, some courts have interpreted Section 7 as not permitting any pre-trial discovery, and other courts have required a showing of extraordinary circumstances before allowing discovery in an arbitration proceeding. See Official Comment to Section 17 of RUAA (collecting cases). 2. Non-Party Discovery Pursuant to the Pennsylvania Arbitration Act The provisions of 42 Pa. C.S.A are applicable to statutory arbitration pursuant to the Pennsylvania Arbitration Act of 1927, the Pennsylvania Arbitration Act of 1980 and Pennsylvania common-law arbitration. See 42 Pa. C.S.A. 7342(a). 42 Pa. C.S.A generally mirrors the language of Section 7 of the FAA. Section 7309 provides that arbitrators may issue subpoenas for the attendance of witnesses and for production of books, records or other evidence. 7309(a). The act is silent as to whether the production must occur before the arbitrators at the time of hearing. The statute also provides that the arbitrators may permit a deposition for use as evidence if the witness is unavailable for the hearing. While other courts have interpreted language similar to that contained in 42 Pa. C.S.A. 7309(a) as conferring the authority upon an arbitrator to compel witnesses to attend the hearings or produce documents to the arbitrators, the Hay court took a different view, stating: [S]ome states have recently adopted versions of the Uniform Arbitration Act, which differ from the Federal Arbitration Act. Some of these state statutes explicitly grant arbitrators the power to issue pre-hearing document production subpoenas upon third parties. See, e.g. 42 Pa. C.S.A ( The arbitrators may issue subpoenas in the form prescribed by general rules for the attendance of witnesses and for production of books, records, documents and other evidence. ) The language of these state statutes clearly shows how a law can give authority to an arbitrator to issue pre-hearing document production orders on third parties. Hay, 360 F.3d at 407 n.1. While the issue has not been finally resolved, and Pennsylvania case law is not nearly as strong as this footnote from Hay suggests, several Pennsylvania cases indicate that the decision on whether to allow a discovery deposition or to issue a document subpoena falls squarely within the discretion of the arbitrators. See Cotterman v. Allstate Ins. Co., 446 Pa. Super 202, (1995) (whether to order a discovery deposition is within discretion of arbitrators because PAA does not mandate that arbitrators provide for discovery. ); Savage v. Comm. Union Ins. Co., 326 Pa. Super. 204, (1984) (decisions on permissible discovery should be considered by CONTINUED ON PAGE 12 PBA Civil Litigation Section Newsletter Fall

4 Non-Party Discovery in Legal Hurdles and Practical Suggestions CONTINUED FROM PAGE 11 the arbitrators as part and parcel of the dispute resolution process ). 3. Unlike the FAA, PAA or UAA, the RUAA Expressly Authorizes the Arbitrator to Permit Such Discovery as the Arbitrator Determines is Appropriate The RUAA, promulgated in 2000, provides that, unless the agreement to arbitrate specifies to the contrary, discretion rests with the arbitrators as to the nature and extent of permissible discovery, if any. See RUAA at 17(c). Specifically, the arbitrator may permit 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. RUAA at 17(c) (emphasis added). Section 17(d) explicitly states that an arbitrator has the authority to issue a subpoena for a discovery proceeding such as a document request or deposition. The RUAA also attempts to address the need for depositions and document productions in states other than the locale of the pending arbitration. In Section 17(g), the RUAA expressly authorizes a court to enforce a subpoena or discoveryrelated order issued by an arbitrator in state B compelling the attendance of a witness or production of documents or records in state A, so long as state A has adopted the RUAA. This provision is intended to eliminate duplicative and unnecessary court proceedings to obtain evidence for use in a complex commercial arbitration. As of July 2005, the RUAA has been adopted in 11 jurisdictions: Alaska, Colorado, Hawaii, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Oregon, Utah and Washington. Bills to enact the RUAA are currently pending in seven other jurisdictions: Connecticut, Indiana, Iowa, Massachusetts, Oklahoma, Vermont and West Virginia. In sum, the RUAA expressly permits such discovery as the arbitrator decides is appropriate in the circumstances, with the intent of safeguarding the rights of third parties while ensuring that there is sufficient disclosure of information to provide a full and fair hearing. III. Practical Suggestions to Create More Certainty in the Arbitration Process There are practical ways to address the uncertainty surrounding non-party discovery in arbitration. When planning for the resolution of potential future disputes, or when agreeing to submit an existing dispute to arbitration, strategic consideration must be given to the applicable arbitration law. However, even in the absence of a governing arbitration law provision, there are ways to reconcile the need for important information in the possession of third parties with the arbitral authority granted in Section 7 of the FAA. 1. Contractually Agree that the RUAA is the Governing Arbitration Law Arbitration is a creature of contract. Consequently, the parties may specifically agree that the arbitration shall be governed by and conducted pursuant to the New Jersey Revised Uniform Arbitration Act, N.J. Stat.Ann. 2A: 23B-1 et seq., or the arbitration law of another state that has adopted the RUAA. The contractual election to proceed under state law instead of the FAA will be honored unless that specified state law is antithetical to the pro-arbitration public policy of the FAA. See Prefatory Note to RUAA. Since the RUAA supports the pro-arbitration policy of the FAA, the parties express choice of governing arbitration law should be honored by a state or federal court. In other words, in drafting the arbitration agreement, the parties can agree that the RUAA will be the governing arbitration law, thereby granting the arbitrator the authority to permit that discovery that is appropriate in his or her judgment under the circumstances of the case. By including a specific choice of arbitration law provision, the court would apply the RUAA in determining whether to enforce the arbitrator s subpoena. While agreeing to conduct the arbitration under the rules of an arbitral institution vests with the arbitrator the authority to direct the exchange of information among the parties, institutional rules do not bind a nonparty that is an outsider to the agreement to arbitrate. Consequently, selection of the governing arbitration law defines the authority of the arbitrator to permit third-party discovery. 2. Conduct Discovery Proceedings Before A Single Arbitrator Section 7 of the FAA authorizes the arbitrator to subpoena witnesses to attend the hearing and to provide documents at the hearing. Conventional wisdom has been that hearing means the final evidentiary hearings conducted before the arbitration panel. In a complex commercial arbitration, such authority obviously has its limitations, as arbitrators become impatient watching attorneys and paralegals review boxes of documents or conduct uninformed discovery depositions. The conduct of discovery is generally not an effective use of the time set aside for arbitration hearings. Further, non-parties that possess relevant and material information may not reside within the subpoena power of the arbitrators, further complicating matters. 12 Civil Litigation Update

5 One way to avoid this problem is for one of the arbitrators to conduct a limited scope hearing for the purpose of allowing the parties to take evidence for later use at the arbitration hearings. Pursuant to Section 7 of the FAA, one arbitrator may convene hearings at the location of the third party, rather than the venue of the hearing, solely for the purpose of taking that evidence. The leading case is Odfjell ASA v. Celanese, 2004 WL (S.D.N.Y. Dec. 18, 2004). There are a series of opinions in the Celanese saga addressing non-party discovery issues under Section 7 of the FAA. In earlier opinions, the court held that Section 7 of the FAA only confers upon the arbitrators the power to compel non-parties to appear before the arbitrators, not the power to compel non-parties to participate in depositions or other forms of pre-hearing discovery outside the presence of the arbitrators. Id. at 2. Taking their cue from the court s prior decisions, the arbitrators issued new subpoenas requiring custodians of records from several non-parties to appear and testify in an arbitration proceeding and to produce large volumes of documents. The primary response to the motion to compel was that the subpoenas were nothing more than a thinly-veiled attempt to obtain prehearing discovery, authority that the arbitrators lack Section 7 of the FAA. The court held that the arbitrators, or any of them, may call for the non-party to appear before them to testify and produce documents at any time in the case. Nothing in the language of the FAA limits the point in time in the arbitration process when this power can be involved or says that the arbitrators may only involve this power under Section 7 at the time of the trial-like final hearing. Id. at 3. In the court s view, the necessity of appearing before at least one arbitrator will prevent the parties from engaging in extensive and costly discovery, and will focus the discovery on essential information. The court noted that preliminary evidentiary hearings can proceed expeditiously before a single arbitrator authorized to rule upon issues of privilege, admissibility, relevance and the like during the discovery proceeding, with the full panel to hear the more central issues during the arbitration hearings. This practical approach balances the need for the information and limitations on arbitral authority under Section 7. Among the unanswered questions are whether telephonic appearance, video conferencing or some other live and interactive appearance before one arbitrator would be authorized by Section 7 of the FAA. While the Celanese approach has its drawbacks in terms of cost, transparency and efficiency, it permits necessary discovery and inherently causes the parties to limit their requests for non-party discovery to the truly significant issues in the case. 3. Select the Right Arbitrator The nature and extent of permissible discovery in commercial arbitration matters lies, at least in the first instance, with the arbitrators. If the non-party witnesses fail to voluntarily comply with a subpoena, the court is then presented with the question of whether the arbitrator had the legal authority to compel the nonparty to produce documents in advance of the hearing and/or appear for deposition under the applicable law. However, enforcement does not become an issue unless you have convinced the arbitrator of the need for the requested non-party discovery. Arbitrator s views and biases concerning discovery in arbitration vary widely. Some arbitrators view their role as a protector of the arbitration system, placing a premium on speed, efficiency and cost-effectiveness. These arbitrators actively manage the case, and tend to allow only minimal discovery beyond document exchange among the parties, even if the parties jointly request more extensive discovery. On the other extreme, some arbitrators view their role passively, allowing the parties to set their own rules and time frames, and only become involved in managing the process if one of the parties refuses to abide by the rules to which they have agreed. These passive arbitrators give great deference to the wishes of the parties because arbitration is a consensual, contractual forum. They view their roles as limited to taking the evidence submitted by the parties and reaching decisions based on the information presented. If the parties agree to a lengthy prehearing period to permit litigationstyle discovery, that is their prerogative. Most arbitrators lie somewhere between the two extremes, but recognize that each brings certain views, biases and experiences to their service as arbitrators. These biases can be influenced by the arbitrator s professional and educational background, as well as his or her training, experience, culture, personality and a variety of other factors. Selecting the right arbitrator for a given case is a critical strategic decision, second in importance only to hiring a lawyer that thoroughly understands the arbitration process. Litigators that primarily handle commercial matters in federal and state court often lack an understanding of the fundamental differences between litigation an inherently rulesdriven forum and arbitration a flexible and creative process in which the parties and the arbitrators craft the specific rules governing that case. One of the key defining differences between the processes is that you cannot select your judge in court, but in arbitration the parties select or strongly influence the selection of CONTINUED ON PAGE 14 PBA Civil Litigation Section Newsletter Fall

6 Non-Party Discovery in Legal Hurdles and Practical Suggestions CONTINUED FROM PAGE 13 arbitrators that will manage and decide their case. Parties have the ability to screen potential arbitrators based on a wide variety of criteria. As a general rule, arbitrators whose practice was/is primarily federal and state court litigation tend to permit more discovery than seasoned arbitration lawyers, in-house counsel, transactional lawyers or non-lawyer arbitrators. In today s information age, specific information may also be available about the potential arbitrators, including written opinions, articles, anecdotal experience, jointly conducted interviews, references or word-of-mouth. Selecting the right arbitrator for your case is imperative to your success in that arbitration. 4. Maximize the Benefit of the Pre-Hearing Conference Prior to the pre-hearing conference or initial meeting with the arbitrators, the parties and their counsel should develop a detailed case management plan. If the parties can jointly agree to a case management plan, many arbitrators will accept that plan, including the nature and extent of discovery agreed between the parties. Often the parties do not agree on a case management plan, leaving the plan to be developed with the arbitrators during the initial meeting or conference call. At the time of the initial meeting or conference call, you will be required to demonstrate for the arbitrators why the discovery that you seek is important to their decisionmaking process. Many arbitrators use as touchstones that the information sought is relevant and material to significant issues in dispute among the parties. Most arbitrators carefully consider the need for the information, the burden upon the third-party from whom discovery is sought, the availability of the information from another source, the relationship of the non-party to the dispute and various other criteria in deciding whether to permit non-party discovery. It is imperative that the party seeking non-party discovery demonstrate the necessity for the information sought. The focus needs to be on why the arbitrators need the information in their decision-making process, not that the information could have some bearing on a minor issue in the case, or that it may lead to admissible evidence. Counsel who do not fully understand the arbitration process often fail to take advantage of the prehearing conference or initial meeting with the arbitrators. The parties have an opportunity to educate the arbitrators about their case, to present their theory of the case, outline the difficult factual and legal issues to be resolved and explain why certain information is relevant and material to significant issues in dispute, or conversely why discovery on certain issues would be a waste of everyone s time and money. If the prehearing conference is properly utilized, it is invaluable for defining the information exchange process and streamlining the arbitration proceedings. Conclusion Arbitration is a flexible and creative process in which the parties and the arbitrators craft the rules governing the resolution of that particular dispute. While an arbitrator has the authority to order non-party discovery under the RUAA, the availability of non-party discovery under the PAA, the FAA and the UAA is less certain. One of the key strategic issues that parties should consider in drafting agreements to arbitrate is a choice of arbitration law provision. However, even in the absence of an express choice of law provision, there are practical ways to reconcile the need for information in the possession of third parties with the arbitral authority granted by the appropriate arbitration law. Footnotes 1 In Trombetta v. Raymond James Financial Services et al., 153 P.L.J. 167 (March 2, 2005) (published July 8, 2005), Judge Wettick reviewed the standards for vacatur under the FAA and PAA. In that case, the arbitration provision did not specify the law to govern the review of the arbital award. Judge Wettick stated, The Pennsylvania appellate courts have never addressed the issue of whether federal or state standards of review govern a petition filed in the Pennsylvania state courts to enforce or vacate an arbitration award entered in an arbitration proceeding governed by the [FAA]. Id. at 168. In a footnote, Judge Wettick concludes, until the United States Supreme Court addresses this issue, it is for state courts to decide whether to apply state legislation or 10 of the FAA. State courts are divided. Id. at 172. n.1. Consequently, while most courts have concluded that the FAA will govern the conduct of the arbitration proceedings unless the parties specifically agree that the law of a particular state is to be applied, the Trombetta opinion creates some uncertainty as to whether the PAA or the FAA provides the standard of review of arbitration awards in the courts of common pleas of this commonwealth when the underlying agreement involves interstate commerce. 14 Civil Litigation Update