ADR

Editor's note: This article describes a hypothetical situation.

Charles Forer

Bob knows arbitrators and courts are often squeamish about allowing arbitrating parties to subpoena documents and things from third parties. Perhaps "squeamish" is not a strong enough word. "No way" probably is more accurate.

These arbitrators and courts have followed Section 7 of the Federal Arbitration Act (FAA) to a T. Section 7 says an arbitrator can "summon in writing any person to attend before them … as a witness and in a proper case to bring with him … any book, record, document or paper that may be deemed as material in the case." Many years ago, the U.S. Court of Appeals for the Third Circuit held that Section 7 "unambiguously restricts an arbitrator's subpoena power to situations in which the nonparty has been called to appear in the physical presence of the arbitrator and to hand over documents at that time." as in Hay Group v. E.B.S. Acquisition, 360 F.3d 404, 407 (3d Cir. 2004).

Under Hay Group, an arbitrating party cannot force a third party to hand over documents the way litigating parties do all the time. Instead, the arbitrator(s) must be present during the handover. This means the arbitrator(s) must preside over a "mini" arbitration hearing whose sole purpose is document production. Put another way: no prehearing depositions and no discovery from third parties.

Does this mini-hearing process increase the complexity of arbitration? Yes. Can this process delay an arbitration proceeding? You bet. Does this process increase the costs and expenses of arbitration, especially when the arbitrator(s) must travel to the place—possibly hundreds or even thousands of miles away from where the merits hearing will take place—where the document production will take place? Probably.

Lawyers have used all kinds of workarounds to avoid mini hearings. These solutions range from the simple to the complex:

• The arbitrator(s) can schedule a mini hearing, before the merits hearing, to allow for the document production. The arbitrator(s) then "adjourns" the hearing until the real hearing on the merits begins. Expensive and unwieldy? But at least the document production does not turn the merits hearing into a boring and lengthy proceeding consumed by document production. (Um, what does the arbitrator do during the mini hearing?) So much for a cost-effective dispute resolution procedure.

• In a three-arbitrator case, have only one arbitrator at the mini hearing. At least the arbitrating parties do not have to pay for all three arbitrators to be there. Still expensive and unwieldy?

• Tell the third party it has two choices: voluntarily produce the requested documents without physically showing up anywhere; or spend a lot of time appearing at a mini hearing while the attorneys examine the requested documents. Many third parties will recognize the embedded threat here—that they will spend time and money (and may have to pay their lawyer to appear at the mini hearing as well) at a wasteful and expensive mini hearing. Better to produce the requested documents voluntarily.

• Use modern technology such as videoconferencing. Everyone—the producing party, the lawyers, and the arbitrator(s)—participates in the mini hearing from their home locations. Still expensive and unwieldy? Less expensive and less unwieldy than a faraway mini hearing at the producing party's location where everyone is physically present? Yes.

Bob was aware of these options and had successfully used many of them before. So he was not particularly concerned, in a recent arbitration, when he desperately faced the need to get documents from third parties in order to prove the fraud scheme that was at the heart of his client's claim.

Bob decided to play it by the book—or at least by the book he had successfully used in the past. Over the objection of his adversary, Bob persuaded the arbitrator to issue a subpoena calling for a mini hearing for the document production. The mini hearing would take place in Philadelphia; the producing parties would be in California; and videoconferencing would allow everyone to hear and see each other during the hearing.

It was an elegant solution until the third party marched into federal court and successfully convinced the court to grant its motion to quash the proposed video-conferenced mini hearing. It was now too late to get the documents—the merits hearing started a few weeks later—and Bob had no choice but to withdraw the case altogether because he could not prove the fraud scheme.

This would be a bad dream for Bob but for the text of Section 7 of the FAA, which supported the third party's motion to quash. In Managed Care Advisory Group v. CIGNA Healthcare, (11th Cir. Sept. 18, 2019), the Eleventh Circuit refused to buy the notion that a mini hearing conducted by video conferencing comports with Section 7. Relying on the plain language of Section 7, the court held that "Section 7 does not give arbitrators the authority to compel third parties to produce documents outside the presence of the arbitrator." The court really meant it when it said, "outside the presence of the arbitrator." The third party physically must bring its documents to a hearing before the arbitrator.

What about the inefficiency of having a mini hearing where everyone is present merely so document production can take place? The court did not try to justify its holding on policy grounds, "because the policy argument does not supersede the text of the statute."

Requiring arbitrators and nonparties to be in the same physical space during a mini document-production hearing will increase the costs and expenses of arbitration, right? Not so fast. In Hay Group, the Third Circuit suggested that a no-discovery-in-arbitration rule may well lead to increased efficiencies and reduced costs in arbitration. Reason: this convoluted procedure will force the parties "to consider whether the documents are important enough to justify the time, money and effort that the subpoenaing parties will be required to expend if an actual appearance before an arbitrator is needed." Plus, inconveniencing the arbitrator—after all, he or she must travel to the mini hearing—may force him or her "to weigh whether the production of documents is necessary."

Back to Bob. Could he have saved his client's fraud case? Yes—he had several options:

• Because the third party's documents were so crucial, he could have reluctantly insisted on a mini hearing where the parties, the subpoenaed party and the arbitrator all were physically present. By following the letter of Section 7, Bob might even have forced the producing party to blink and agree to an old-fashioned document production.
• He could have avoided this crazy workaround if the arbitration were governed by a state arbitration procedure that allows for third party discovery. That would require some long-range thinking, however.
• He could have put the other side and the arbitrator on notice that, at the end of the arbitration proceeding, he would seek to recover the costs and expenses, including the substantial attorney fees, that his client will incur by going through with the mini hearing process. It will be next to impossible to recover these costs if the producing party—and not an arbitration party—is the fly in the ointment that insists on the mini hearing process. On the other hand, Bob's chances of recovering these costs could well increase if another arbitration party insisted on the mini hearing; and the attendees left the mini hearing asking themselves, "Why was the arbitrator here?" By the way, why was the arbitrator there?

Charles F. Forer independently provides arbitration, mediation and all other neutral services. He is the current co-chair of the Philadelphia Bar Association's alternative dispute resolution committee. He is a former chair of the association's fee disputes committee. He is a frequent lecturer and writer on the use of ADR in a variety of settings. Contact  him at 610-999-5764 and c[email protected].