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Arbitrators do not have the power under the Federal Arbitration Act to issue pre-hearing discovery subpoenas to non-parties, but instead must subpoena the non-parties to attend the hearing and bring any documents with them, the 3rd U.S. Circuit Court of Appeals has ruled. In Hay Group Inc. v. EBS Acquisition Corp., et al., a unanimous three-judge panel reversed a decision by U.S. District Judge Mary A. McLaughlin that enforced subpoenas issued to EBS and PriceWater-houseCoopers. In doing so, the 3rd Circuit rejected the views of the 8th Circuit, which allows pre-hearing discovery subpoenas to non-parties, and the 4th Circuit, which refused to enforce a such a subpoena but said it might do so in the future if the arbitrators could show a “special need.” The subpoena dispute stemmed from arbitration in which the Hay Group, a management-consulting firm, is suing a former employee for allegedly violating the terms of a separation agreement in which he promised not to solicit any former clients for one year. David A. Hoffrichter left Hay’s employment and joined PriceWaterhouse in September 1999. In early 2002, PriceWaterhouse sold the division employing Hoffrichter to EBS. In February 2000, Hay commenced an arbitration proceeding in Philadelphia against Hoffrichter, claiming that he had violated the non-solicitation clause. Hay served subpoenas on Price-Waterhouse and EBS, seeking to have the documents produced prior to the panel’s arbitration hearing. Both companies resisted but were ordered to comply by the arbitrators. When they refused to comply, Hay filed suit in U.S. District Court seeking enforcement. PriceWaterhouse and EBS again objected, claiming that the FAA did not authorize the arbitration panel to issue subpoenas to non-parties for pre-hearing document production. McLaughlin sided with Hay and enforced the subpoenas, saying she agreed with the 8th Circuit’s 2000 decision in Re: Security Life Insurance Co. of America, which held that the FAA authorizes arbitration panels to issue subpoenas on non-parties for pre-hearing document production. McLaughlin refused to stay her order pending appeal, but the 3rd Circuit granted an emergency motion for a stay. On appeal, PriceWaterhouse and EBS argued that under Section 7 of the FAA, a non-party witness may be compelled to bring documents to an arbitration proceeding but may not simply be subpoenaed to produce documents. The 3rd Circuit agreed, finding that the statutory text of the FAA clearly limits the subpoena power of arbitrators to require production of documents by non-parties only at an actual arbitration hearing. “The only power conferred on arbitrators with respect to the production of documents by a non-party is the power to summon a nonparty ‘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,’” U.S. Circuit Judge Samuel A. Alito Jr. wrote. “The power to require a non-party ‘to bring’ items ‘with him’ clearly applies only to situations in which the non-party accompanies the items to the arbitration proceeding, not to situations in which the items are simply sent or brought by a courier,” Alito wrote in an opinion joined by Circuit Judges Thomas L. Ambro and Michael Chertoff. Alito found that the language 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.” The 8th Circuit and some district courts, Alito said, have held that the FAA “implies the power to issue such pre-hearing subpoenas.” But Alito said, “We disagree with this power-by-implication analysis.” Instead, Alito said, “By conferring the power to compel a non-party witness to bring items to an arbitration proceeding while saying nothing about the power simply to compel the production of items without summoning the custodian to testify, the FAA implicitly withholds the latter power.” If the FAA were intended to give broader power, Alito said, “We believe that the drafters would have said so, and they would have then had no need to spell out the more limited power to compel a non-party witness to bring items with him to an arbitration proceeding.” Since the language of the FAA was “straightforward,” Alito found that the court’s task was to “see if the result is absurd.” Alito concluded that it is not because “a reasonable argument can be made that a literal reading . . . actually furthers arbitration’s goal of ‘resolving disputes in a timely and cost efficient manner.’” Until 1991, Alito said, even the Federal Rules of Civil Procedure did not permit a federal court to compel pre-hearing document production by non-parties. “That the federal courts were left for decades to operate with this limitation of their subpoena power strongly suggests that the result produced by interpreting . . . the FAA as embodying a similar limitation is not absurd,” Alito wrote. Alito said it was also “not absurd to read the FAA as circumscribing an arbitration panel’s power to affect those who did not agree to its jurisdiction.” There is also significant wisdom in such a limitation, Alito found. “The requirement that document production be made at an actual hearing may, in the long run, discourage the issuance of large-scale subpoenas upon non-parties. This is so because parties that consider obtaining such a subpoena will be forced to consider whether the documents are important enough to justify the time, money, and effort that the subpoenaing parties will be required to expend if an actual appearance before an arbitrator is needed,” Alito wrote. “Under a system of pre-hearing document production, by contrast, there is less incentive to limit the scope of discovery and more incentive to engage in fishing expeditions that undermine some of the advantages of the supposedly shorter and cheaper system of arbitration.” In a concurring opinion, Michael Chertoff said he agreed with Alito and joined him in full but that he wanted arbitrators to know that they are “not powerless to require advance production of documents when necessary to allow fair and efficient proceedings.” Chertoff noted that the FAA gives arbitrators the power to compel a third-party witness to appear with documents before a single arbitrator, who can then adjourn the proceedings. “This gives the arbitration panel the effective ability to require delivery of documents from a third-party in advance, notwithstanding the limitation,” Chertoff wrote. Such a procedure requires the arbitrators “to decide that they are prepared to suffer some inconvenience of their own,” Chertoff said, but “that is not necessarily a bad thing, since it will induce the arbitrators and parties to weigh whether advance production is really needed.” (Copies of the 14-page opinion in Hay Group Inc. v. EBS Acquisition Corp., et al. , PICS No. 04-0358, are available from The Legal Intelligencer . Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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