The US Court of Appeals for the Second Circuit— which includes New York—has ruled that the Federal Arbitration Act (FAA) does not authorize an arbitrator to compel pre-hearing document discovery from nonparties to the arbitration. The decision in Life Receivables Trust v. Syndicate 102 at Lloyd’s of London,12 issued on November 25, 2008, is significant in that it is a definitive ruling by the Second Circuit on an issue which has divided other circuits.

The Life Receivables case arose out of what the Court described as the “somewhat macabre” market where companies take over the life insurance policies of elderly people in return for a cash payment. As a hedge against the possibility that an insured person might live past his or her life expectancy, the purchasers of these policies, such as Life Receivables Trust, buy contingent cost insurance policies from insurers like Syndicate 102. If the insured person lives more than two years beyond his or her life expectancy, Syndicate 102 would pay Life Receivables the net death benefit and assume the policy itself. A dispute arose over the purchase of a policy covering a Mr. Wang. Mr. Wang outlived his life expectancy by two years, but when Syndicate 102 was called on to pay the net death benefit, it refused and claimed that Life Receivables misrepresented the date on which it acquired the Wang policy and fraudulently calculated Mr. Wang’s life expectancy. During the ensuing American Arbitration Association (AAA) arbitration, Syndicate 102 sought discovery from both Life Receivables and a closely related entity, Peachtree Life Settlements, which bought life insurance policies on Life Receivables’ behalf. Life Receivables argued it did not control Peachtree and had no ability to compel the production of documents from it. The arbitration panel issued a subpoena requiring Peachtree to produce its responsive documents and Peachtree moved to quash the subpoena in federal court. The District Court upheld the subpoena and the appeal to the Second Circuit followed.

The case turned on the language of section 7 of the FAA, the only FAA provision to address discovery. This states that:

The arbitrators…may summon in writing any person to attend before them or any of 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….

The Eighth Circuit has previously ruled that although the FAA does not explicitly authorize the production of documents from entities not party to the arbitration proceedings, an arbitration tribunal has an implicit power to subpoena relevant documents from such third parties.13 The Fourth Circuit has said that arbitral tribunals have this power where a party can prove “special need or hardship” arising from the lack of evidence.14 However, the Third Circuit has held that section 7 of the FAA “unambiguously restricts an arbitrator’s subpoena power to situations in which the non-party has been called to appear in the physical presence of the arbitrator and to hand over the documents at that time.”15

Like the Third Circuit, the Second Circuit in Life Receivables held that the language of section 7 is “straightforward and unambiguous”. Documents are only discoverable in arbitration when brought before arbitrators by a testifying witness. The Court therefore joined the Third Circuit in holding that section 7 of the FAA does not authorize arbitrators to compel pre-hearing document discovery from entities not party to the arbitration proceedings. This is the case even where those third parties, like Peachtree, had signed the underlying arbitration agreements. In making this finding, the Second Circuit pointed out that this did not leave arbitrators powerless to order the production of documents from non-parties; in fact they have a variety of tools to do so. Arbitrators could, consistent with section 7, subpoena a party to appear before the panel and then order that person to produce documents (given the party would then be a testifying witness). Arbitrators could also compel a third-party witness to appear with documents before a single arbitrator, who can then adjourn the proceedings. Separately, where a non-party to the arbitration is a party to the arbitration agreement, formal joinder may be appropriate which would enable arbitrators to exercise their contractual jurisdiction to compel discovery from the parties before them. However, to the extent parties in the Second Circuit wish to rely on section 7 of the FAA, the decision in Life Receivables has made it clear that documents ordered to be produced must be documents held by a testifying witness.