In Kenney, Becker LLP, et al. v. Kenney, 2008 U.S. Dist. LEXIS 1995 (S.D.N.Y. 2008), the United States District Court for the Southern District of New York held that a party that issued a nonparty subpoena in an arbitration arising under the Federal Arbitration Act (“FAA”) in bad faith and without the panel’s approval was subject to sanctions under both Rule 45 of the Federal Rules of Civil Procedure and the court’s inherent authority to impose attorneys’ fees.
The case involved a dispute between parties to a partnership agreement that contained an enforceable arbitration clause. The plaintiffs originally commenced an action against the defendant in the district court, but were ordered by the court to arbitrate pursuant to the partnership agreement’s arbitration clause. Plaintiffs then commenced a second action in the district court based upon slightly different grounds from the first action, which was also dismissed by the court.
Thereafter, in the context of the arbitration, plaintiffs issued a nonparty subpoena under the purported authority of the court without providing notice to or receiving approval from the defendant, the arbitrator or the court. The defendant and arbitrator ultimately received notice of the nonparty subpoena on the first day of the arbitration hearing and a dispute arose concerning the subpoena’s enforcement. After the parties agreed to suspend the hearing and proceed before the district court, the defendant moved for sanctions and to enjoin plaintiffs from commencing any further litigation.
The court found the nonparty subpoena improper for several reasons and awarded the defendant its attorneys’ fees and costs related to its motion for injunctive relief and sanctions. First, the court found that because it had suspended or dismissed the prior litigations in favor of arbitration, it was inappropriate for the plaintiffs to take any action under the purported authority of the court while the arbitration was pending. Second, the court noted that under Section 7 of the FAA, only arbitrators have the authority to issue subpoenas, not the parties to an arbitration. Third, the court found that even if the nonparty subpoena had been properly issued under Rule 45, sanctions were warranted because the plaintiffs failed to provide prior notice of the subpoena to the defendant, as required by that rule. Last, the court indicated that at least some of the documents sought by the nonparty subpoena were already ruled inadmissible by the arbitrator. Accordingly, the court held that the nonparty subpoena was issued in bad faith and with an improper purpose, warranting sanctions under both Fed. R. Civ. P. 45 and the court’s inherent power to award attorneys’ fees.