In a decision that impacts a party’s ability to obtain discovery in arbitrations arising under the Federal Arbitration Act (“FAA”), the U.S. Court of Appeals for the Second Circuit recently held that Section 7 of the FAA does not provide arbitrators with the authority to compel pre-hearing document discovery from non-parties to the arbitration proceeding.  See Life Receivables Trust v. Syndicate 102 at Lloyd’s of London, No. 07-cv-1197 (2d Cir. Nov. 25, 2008).  The Second Circuit’s decision resolves an issue that previously had not been addressed by that court and essentially overrules precedent established in prior decisions by federal district courts in New York.

The case involved an underlying arbitration between Life Receivables Trust ("LRT") and Syndicate 102 at Lloyd's of London ("Syndicate 102").  Life Settlement Corporation d/b/a Peachtree Life Settlements ("Peachtree") is not a party to the arbitration but is a signatory to the arbitration agreement entered into between LRT and Syndicate 102 and had been involved in certain life insurance transactions that were at issue in the arbitration.

Syndicate 102 sought the production of certain documents from Peachtree, claiming that such documents were relevant to the central issues in the arbitration.  The arbitration panel issued a non-party subpoena requesting the production of these documents pursuant to Section 7 of the FAA, which provides that “arbitrators…or a majority of them, 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 this case.”  9 U.S.C. § 7.  Peachtree refused to comply and moved to quash the subpoena in the Southern District of New York.  Syndicate 102 cross-moved to compel compliance. The district court granted Syndicate 102's motion to compel, recognizing a split among federal district courts in New York as to whether an arbitrator has authority under Section 7 of the FAA to compel prehearing document discovery from a non-party to an arbitration.  The court noted that Peachtree, "while not a party to the specific arbitration at issue, is a party to the arbitration agreement."

On appeal, the Second Circuit reversed the district court’s order compelling production.  The Second Circuit began its analysis by noting that federal circuit courts are divided on whether Section 7 of the FAA empowers an arbitrator to compel non-party document production prior to a hearing.  The U.S. Court of Appeals for the Sixth and Eighth Circuits have held that the FAA empowers arbitrators to compel prehearing document discovery from non-parties.  See In re Life Receivables Trust, No. 07-cv-1197, at 8.  By contrast, the Third Circuit found, in Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 410 (3d Cir. 2004), that an arbitrator lacks authority under Section 7 of the FAA to compel prehearing discovery from non-parties.  Id. at 8-10.  Further, the Fourth Circuit has held that an arbitrator lacks authority to compel prehearing discovery “absent a showing of special need or hardship.”  Id. at 8.

Relying upon the Third Circuit’s decision in Hay Group, the Second Circuit held that “the arbitrator’s subpoena authority under FAA § 7 does not include the authority to subpoena nonparties or third parties or prehearing discovery even if a special need or hardship is shown.”  Id. at 10.  While the court recognized that several federal district courts in New York had followed the rule set forth by the Sixth and Eighth Circuits and found that arbitrators have authority under the FAA to compel prehearing document production from non-parties, it described Hay Group as the “emerging rule,” noting that it had been adopted by several recent district court decisions.

Last, the Second Circuit found that, based on the plain language of Section 7, the mere fact that Peachtree was a signatory to the arbitration agreement in the contract at issue did not provide the arbitrator with the authority to compel prehearing document production where Peachtree was not a party to the arbitration.

Click here to review the Second Circuit’s decision.