Locke Lord QuickStudy: Section 7 of the FAA: Compelling Evidence from the Recalcitrant Non-party Witness
Section 7 of the Federal Arbitration Act (“FAA”) grants arbitrators the authority to “summon in writing any person to attend before 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.”1 It is generally accepted that § 7 does not empower an arbitrator to issue pre-hearing discovery summonses seeking to compel the depositions of non-parties or to compel pre-hearing document discovery.2 Consequently, when testimony or documents is needed from a non-party, a tribunal typically summons the non-party to appear at a hearing and at the hearing, takes and rules on the evidence adduced by the non-party.
If a non-party properly summoned by a tribunal fails to obey the summons, a party to the arbitration may seek court assistance pursuant to § 7 of the FAA which further provides:
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, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.3
The recent case of Washington National Insurance Company v. OBEX Group LLC,4 demonstrates not only a court’s willingness to enforce summonses but also its unwillingness to insert itself into the arbitral process by ruling on objections to the production of documents requested in the summonses.
Seeking $143 million in damages, Washington National Insurance Company (“WNIC”) and its affiliate Bankers Conseco Life Insurance Company (“BCLIC”) instituted an arbitration based on reinsurance claims. The arbitration tribunal summoned non-parties OBEX Group LLC and Randall Katzenstein (collectively “OBEX”) to testify at an arbitration hearing in the Southern District of New York and to bring documents with them. Although OBEX is domiciled in New York, it failed to appear. When OBEX failed to appear at the hearing, WNIC sought permission from the tribunal to petition for judicial assistance to obtain OBEX’s compliance with the summonses, and receiving that permission, filed a petition based on § 7 (“Petition”) and invoked the court’s diversity jurisdiction based on its domicile being Indiana and OBEX’s being New York.
In response to the Petition, OBEX filed a motion to dismiss which was denied by the district court. Thereafter, OBEX filed a motion for reconsideration and a motion to quash the summonses. These were also denied.
On appeal, OBEX raised a number of issues. OBEX’s initial contention was that the district court lacked subject matter jurisdiction based on three arguments: (1) the court was required to “look through” the Petition to the parties of the underlying arbitration to determine whether there was diversity of citizenship; (2) even if diversity were to be determined solely by the Petition, diversity was nevertheless lacking because WNIC had failed to name BCLIC, which OBEX contended was a necessary and indispensable party domiciled in the same state as OBEX; and, (3) WNIC had failed to meet the $75,000 amount in controversy requirement.
In addition to challenging diversity jurisdiction, OBEX made three further arguments. First, OBEX attacked the validly of the summonses under §7, alleging they did not comply with the requirements of § 7. Second, OBEX contended the district court erred in denying the motion to quash and granting the Petition without considering OBEX’s objections to the documents requested in the summonses. Finally, OBEX asserted that the district court lacked authority to grant the Petition because the tribunal was not sitting in the Southern District of New York for purposes of § 7.
Diversity Jurisdiction
The Court of Appeals, relying on its previous decision of Hermès of Paris, Inc. v. Swain,5 held that a court in assessing its jurisdiction over a § 7 petition looks to the citizenship of the parties in the action before it, as well as any indispensable parties that are required to be joined pursuant to Federal Rule of Civil Procedure 19. The citizenship of the parties to the underlying arbitration is irrelevant for determining diversity jurisdiction. In this instance, the parties to the Petition, WNIC and OBEX were diverse. The Court rejected the contention that BCLIC was a necessary party pursuant to Rule 19 because (1) the district court could afford complete relief without BCLIC’s presence and (2) BCLIC never claimed an interest in the subject matter of the Petition.
As for the amount in controversy, OBEX argued that even if the parties were diverse, the court still lacked subject matter jurisdiction “because the value of ‘obtaining Appellants’ testimony and documents’ does not exceed $75,000.” The Court noted that in actions for declaratory relief or injunctive relief, the amount in controversy is measured by the object of the litigation, so dismissal is appropriate only if it appears to a legal certainty that the claim is really less than $75,000.
The Court looked to the amount in controversy in the arbitration, $134 million, to determine that the $75,000 threshold was satisfied. In reaching this conclusion the Court stated:
It does not appear to a legal certainty that the amount is really for less because even if the documents required by the summonses pertain to only a small fraction of [the award sought], the amount in controversy requirement would still be satisfied.6
Validity of the Summonses
OBEX attacked the validity of the summonses on the basis that they sought pre-hearing discovery and immaterial documents. The court made short shrift of this argument finding the summonses were in accord with § 7 because they required OBEX to appear at a hearing in New York City and to bring with it documents identified in the instructions annexed to the summonses. OBEX further argued that the summonses were a subterfuge because WNIC had previously communicated to OBEX that OBEX could comply with the summonses by producing documents without appearing at the hearing. The Court rejected this argument and noted that the prior offer did not limit the power inherent in the statute:
A properly issued summons is not rendered invalid by a claimant's offer, a respondent's offer, or a joint agreement to produce documents without a hearing. And we, like the district court, ‘will not prejudice petitioner for its sensible willingness to negotiate with respondents.’ (citations omitted)
Rule 45 Objections
The district court had declined to rule on OBEX’s numerous Rule 45 objections, finding that even if it had the power to do so, it did not have the obligation. The district court also noted that in the Second Circuit, the courts generally defer objections to the arbitrators who must “construe the law the parties cite and evaluate the evidence the parties adduce.”7
On appeal, OBEX argued that § 7 summonses are to be issued and enforced as federal court subpoenas. OBEX maintained that a court, therefore, was required to impose Rule 45 obligations on a § 7 arbitration summons and rule on the objections. To bolster this argument, OBEX relied on that portion of § 7 that states: “in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.”8
The Court disagreed. Finding that the text of § 7 did not support OBEX’s interpretation, the Court noted that §7 provides that summonses are to be enforced in the same manner as a subpoena – compulsion or contempt. Rule 45, however, does not cover these processes. Going further, the Court remarked that adopting a policy to frustrate the purpose of § 7 would also frustrate the strong policy favoring arbitration:
The respondents’ interpretation also does not square with the strong federal policy favoring arbitration as an alternative means of dispute resolution that is embedded in and furthered by the FAA. Adopting the respondents’ view would frustrate this policy by turning a district court into a full-bore legal and evidentiary appeals body, where arbitration would become merely a prelude to a more cumbersome and time-consuming judicial review process.9
Venue for Enforcement
OBEX’s final argument hinged on the fact that the arbitrators had previously held a hearing in Pennsylvania. Thus, argued OBEX, the tribunal was not sitting in in the Southern District of New York because § 7 did not permit the tribunal to sit in more than one district. The Court rejected that argument:
We agree with WNIC that “[t]he fact that the [arbitration panel] once also sat in the Eastern District of Pennsylvania, in connection with another summons, is of no moment.”10
The Court observed that the parties’ agreement stipulated that the arbitration would take place in New York, OBEX was summoned to appear in New York, and the hearing proceeded in New York without OBEX’s attending, at which time the arbitration tribunal granted WNIC leave to seek enforcement of the summonses. Therefore, for the purpose of the summonses in issue, the arbitrators were sitting in the Southern District of New York and the summonses were properly issued.
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1 9 U.S.C. § 7.
2 See Life Receivables Trust. v. Syndicate 102 at Lloyd’s of London, 549 F.3d 210, 215-16 (2d Cir. 2008) (recognizing the “growing consensus” that “the arbitrator’s subpoena authority under FAA §7 does not include the authority to subpoena nonparties or third parties for prehearing discovery even if a special need or hardship is shown.”). But see In re Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir. 2000) (holding 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).
3 9 U.S.C. § 7.
4 No. 19-225-CV, 2020 WL 2092597 (2d Cir. May 1, 2020).
5 867 F.3d 321 (2d Cir. 2017).
6 Washington Nat’l Ins. Co., 2020 WL 2092597, at *7 (quoting Washington Nat’l Ins. Co. v. Obex Grp. LLC, No. 18 CV 9693 (VB), 2019 WL 266681, at *5 (S.D.N.Y. Jan. 18, 2019)).
7 Washington Nat’l Ins. Co. v. Obex Grp. LLC, No. 18 CV 9693 (VB), 2019 WL 266681, at *5 (S.D.N.Y. Jan. 18, 2019) (quoting Shasha for Violet Shuker Shasha Living Trust. v. Malkin, No. 14-cv-9989 (AT) (RWL), 2018 WL 3323818, at *5-6 (S.D.N.Y. July 5, 2018)).
8 Washington Nat'l Ins. Co., 2020 WL 2092597, at *7 (quoting 9 U.S.C. §7).
9 Id. at *10 (internal quotations and citations omitted).
10 Id.
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