Texas Court Refuses To Enforce Arbitrator’s Subpoena Requiring Pre-hearing Discovery From Non-parties

by mwetzel on March 16th, 2010
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A federal district court from Texas joins the U.S. Courts of Appeals for the Second and Third Circuits in ruling that the U.S. Federal Arbitration Act (”FAA”) does not authorize courts to enforce arbitrator-issued subpoenas requiring non-parties to submit to pre-hearing discovery, but only permits such subpoenas to require the non-party to appear at, and bring the described evidence to, the arbitration hearing itself.  The court believed that this result was required by the clear language of FAA Section 7  (9 U.S.C. § 7).

CASE NAMEEmpire Financial Group, Inc. v. Penson Financial Services, Inc., case no. 3:09-CV-2155-D  (N.D. Tex. 03-03- 2010)

BACKGROUND:  A Financial Industry Regulatory Authority (“FINRA”) arbitration panel, on Empire’s request, issued a subpoena for FINRA to produce documents at a time certain, prior to any date set for the arbitration.  Empire filed a motion to compel the production in a federal district court after FINRA objected to the subpoena and refused to produce the documents.

The federal court phrased the issue as “whether it has the authority to grant a motion to enforce an order of an arbitration panel of the  . . . (“FINRA”) compelling the production of documents by a non-party who has not been subpoenaed to testify at an arbitration hearing.  Concluding that it lacks this authority, the court denies the instant motion to enforce the order, and it dismisses this proceeding with prejudice.

HOLDING:  “. . . § 7 of the FAA does not authorize arbitrators to compel production of documents from a non-party, unless they are doing so in connection with the non-party’s attendance at an arbitration hearing.”

The Court “declines to read greater powers in to the text of Section 7 despite policy preferences favoring arbitration efficiency, because the court’s policy preferences cannot override the clear text of the statute.”

OBSERVATION:  Section 7 of the FAA  empowers arbitrators to “. . .summon in writing any person to attend before them or any of them as a witness and in proper case to bring with him or them any book, record, document or paper which may be deemed material as evidence in this case.”  Similarly, the Georgia Arbitration Act (O.C.G.A. § 9-9-9 (a)) authorizes arbitrators to “issue subpoenas for the attendance of witnesses and for the production of books, records, documents, and other evidence.  These subpoenas shall be served and, upon application to the court by a party or the arbitrators, enforced in the same manner provided by law for the service and enforcement of subpoenas in a civil action.”

This language is clear that arbitrators have authority to require non-parties to appear and produce documents at an arbitration hearing.  Courts have struggled over whether arbitrators have authority to compel pre-hearing discovery from non-parties because one of the goals of arbitration is to avoid the burden, expenses, harassment, and lack of efficiency commonly associated with discovery in litigation.

The Empire court observed:  “The Third Circuit . . . held that , under § 7, ‘a non-party witness may be compelled to bring documents to an arbitration proceeding but may not simply be subpoenaed to produce documents.’  [Cit.]  The Second Circuit has likewise concluded that ‘ section 7 of the FAA does not authorize arbitrators to compel pre-hearing document discovery from entities not party to the arbitration proceedings.’  [Cit.]  The Fourth Circuit has take n a similar position, although carving out an exception in dicta for subpoenas of non-parties in ‘unusual circumstances’ ‘upon a showing of special need or hardship.’  [Cit]”

By contrast, “. . . the Eighth Circuit has held that the policy of promoting efficiency through arbitration ‘is furthered by permitting a party to review and digest relevant documentary evidence prior to the arbitration . . . .  We thus hold that implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.’  [Cit.]”  The Empire  court also cited a 6th Circuit case which  noted that two district courts had reached the same conclusion as the Eighth Circuit, one of which is a district court sitting in Georgia:  Festus & Helen Stacy Foundation, Inc. v. Merrill Lynch Pierce Fenner, & Smith, Inc., 432 F. Supp.2d 1375 (N.D. Ga. 2006).

RECOMMENDATION
:  The U. S. Supreme Court recently signaled that the FAA is to be applied literally, and not expanded by judicial fiat.  Hall Street Assoc., LLC v. Mattel, Inc., 552 U.S. 576 (2008).  If that interpretation is correct, the likelihood is that courts will not enforce arbitrator-issued subpoenas to non-parties to produce documents or give testimony prior to the arbitration hearing itself – i.e., no pre-hearing discovery from non-parties.

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