September 26, 2022

Third-Party Evidence in Arbitration: A Fix for a Flaw in the FAA

Posted on September 26, 2022 by John M. Barkett

Environmental disputes are frequently arbitrated.  In buyer-seller cases, for example, arbitration is often the preferred means of dispute resolution.  At the time of contract formation, parties focus on a successful business relationship or a successful transfer of assets or stock, not on disputes that might arise.  As a result, they often choose a standard, pithy arbitration clause from the website of whatever organization’s rules that they intend to utilize should a dispute arise.  And they give little thought to adding details about the arbitration process, much less evidence gathering in arbitration.

Section 7 of the Federal Arbitration Act (FAA) provides that an arbitrator or an arbitration panel majority may issue a summons to a witness.  However, “if any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators . . ..  In other words, if the arbitral venue is in City X, and a witness is not within the jurisdiction of City X, obtaining the testimony or documents of the witness may be problematic since the arbitrators are “sitting” in City X. 

With the FAA’s 100th Anniversary approaching in just three years, Congress should reconcile Section 7 and Sections 203 and 204 of the FAA with respect to third-party evidence.

Section 7 falls within Chapter 1 of the FAA.  It addresses domestic arbitration.  Chapter 2 of the FAA addresses international arbitrations, those that are embraced, according to Section 201 of the FAA, by “The Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958.”  This treaty is most often referred to as the “New York Convention.”  (It is the treaty that caused international arbitration to “take off” because it provides for enforcement of an arbitral award in any treaty-signatory country (there are now 170 of them) where assets of the award-debtor can be found.)

Unlike Chapter 1, which does not provide for jurisdiction in a federal court, Section 203 of the FAA provides that “[a]n action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States.”  It further provides that, “[t]he district courts of the United States . . . shall have original jurisdiction over such an action or proceeding, regardless of the amount in controversy.”

Suppose that a party in an international commercial arbitration is seeking information from a party located outside the jurisdiction of the place where the arbitration hearing is venued.  Does Section 7 of the FAA apply?  Or does the party seeking the issuance of a summons from the arbitration panel enjoy nationwide service of the summons and, if needed, enforcement of the subpoena in the district court where the witness is located?

This question was answered on by the Ninth Circuit in Day v. Orrick Herrington & Sutcliffe LLP, 42 F. 4th 1131 (9th Cir. 2022).  The arbitration was between Jones Day and a former partner, a German national, who left Jones Day and joined Orrick’s office in Paris.  The governing partnership agreement required arbitration of disputes between a partner and the firm in Washington D.C. 

Jones Day obtained a summons from the tribunal to obtain information from Orrick.  Orrick refused to comply.  So, Jones Day sought to enforce the summons in the Superior Court of the District of Columbia.  However, that court held it lacked jurisdiction over Orrick, whose principal place of business is in San Francisco.

Anticipating the need to comply with Section 7 of the FAA, Jones Day then requested that the tribunal hold a hearing in San Francisco to receive the testimony and documents of Orrick.  The tribunal complied and a summons was again issued to Orrick.  Orrick again chose not to comply.  Because the tribunal was now “sitting” in Northern District of California, Jones Day sought to enforce the subpoena in that court.

The district court, however, denied Jones Day’s petition.  It construed Section 7 as “providing that the district where the arbitrator sits is the only district in which a district court may compel attendance.”  Since Washington D.C. was the seat of the underlying arbitration, the district court concluded it could not compel attendance at a hearing to take place within the Northern District of California.

The Ninth Circuit reversed.  It held that a petition to enforce a subpoena in an international arbitration embraced by the New York Convention is an “action or proceeding” under Section 203: “[W]e hold that a federal court has original jurisdiction over an action or proceeding if two requirements are met: (1) there is an underlying arbitration agreement or award that falls under the Convention, and (2) the action or proceeding relates to that arbitration agreement or award.”  There was no dispute that the arbitration agreement fell under the Convention.  And the Court held that a petition to enforce the summons “relates” to the arbitration because “the arbitrator determined that evidence adduced from the participation may be material to resolving the dispute.” Thus, the district court had subject matter jurisdiction to hear the petition. 

But did the district court have the authority to enforce the summons?

It did.  Rather that apply Section 7 as the district court did, the Court of Appeals applied Section 204 of the FAA.  It provides in pertinent part that “[an] action or proceeding over which the district courts have jurisdiction pursuant to section 203 of this title may be brought in any such court in which . . .  an action or proceeding with respect to the controversy between the parties could be brought, or in such court for the district and division which embraces the place designated in the agreement as the place of arbitration if such place is within the United States.” 

The Court of Appeals concluded that this venue provision is “a permissive, supplemental venue provision in addition to the general venue provision, 28 U.S.C. § 1391.”  There was no dispute that the Northern District of California was a proper venue under § 1391 since the Northern District of California is Orrick’s principal place of business. As a result, “it was error to dismiss the petitions on venue grounds. Because the district court had subject matter jurisdiction and no other challenges were raised to the petitions, the district court should have granted Jones Day’s petitions to enforce the summonses.”

The bottom line?  The place where the tribunal sits in an international commercial arbitration does not control the place of enforcement of an arbitration summons issued by that tribunal to a witness in the United States.  If the tribunal determines that a summons may produce information material to the matter, a petition to enforce the summons “relates” to the arbitration agreement or award under Section 203.  And if the summons is issued in a place where venue lies under Section 1391 (generally, where the court has personal jurisdiction over a defendant), the district court serving that jurisdiction is a proper enforcement court under Sections 203 and 204.  In effect, that means there is nationwide service of process available in international arbitrations governed by Chapter 2 of the FAA. There may have been a reason in 1925 for Section 7 to read the way it reads (I doubt there was much, if any, third-party discovery in domestic arbitration in 1925 that required travel outside the venue where the arbitrators were sitting).  But there is no principled reason today for a distinction between a domestic and an international arbitration when it comes to third-party evidence gathering.  In anticipation of the 100th Anniversary of the FAA, now is a good time for Congress to amend the FAA to eliminate the distinction and to provide for comparable information-gathering authority under Chapter 1 for domestic arbitrations as now exists under Chapter 2 for international arbitrations.