Down the Procedural Rabbit Hole
By Montgomery G. Griffin and Theodore S. Avery
It is not uncommon in FINRA arbitration (or for that matter, arbitrations of any kind) that the testimony of a non-party witness becomes important. In FINRA customer arbitrations, for instance, the broker whose conduct is at issue may no longer be employed by the respondent brokerage firm or working in the securities industry at large, rendering him or her a non-party witness over whom FINRA arbitrators lack jurisdiction. The arbitrators or one or both of the parties may nonetheless wish to question such a non-party witness and receive his or her testimony on the topics at issue in the arbitration.
In a court proceeding, such a situation is generally unproblematic. A party may have a subpoena issued commanding the person to appear at trial (or for a deposition), and if that person refuses to comply, the party may enforce the subpoena through routine court procedure, forcing the witness to appear at trial (or for deposition).
And many arbitration practitioners assume it is the same in arbitration: one simply has the arbitrators issue a subpoena (or “summons”)—FINRA Rule 12512, for example, specifies that “[a]rbitrators shall have authority to issue subpoenas for . . . the appearance of witnesses”—and if the witness does not comply, one runs to court for rubber-stamp enforcement.
Practitioners who make this assumption, however, are in for a rude awakening should they ever actually need to enforce their subpoenas. In reality, enforcing an arbitration subpoena against a non-party witness is one of the most pitfall-ridden procedures an arbitration practitioner can attempt. Indeed, when a recalcitrant non-party witness forced the Law Offices of Montgomery G. Griffin (“LOMGG”) to enforce an arbitration subpoena for testimony, the LOMGG conducted extensive legal research and could not identify a single case where a party had successfully enforced an arbitration subpoena for testimony against a resisting out-of-state, non-party witness. As discussed here, the LOMGG prevailed over Greenberg Traurig LLP in a federal district court in the State of Florida in its effort to enforce the subpoena at issue in a $42 million California arbitration matter. The breakthrough result hinged on enormous research, creative arguments, and careful navigation of the myriad issues surrounding enforcement of arbitration subpoenas discussed below.
The first step is identifying the legal authority that one will use to enforce the subpoena. Importantly, the authority must indeed be a law and not a provision of the arbitration rules applicable to the parties (such as FINRA Rule 12512 quoted above)—non-parties are not at all bound by the parties’ arbitration agreement. Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 406 (3d Cir. Pa. 2004).
One has two basic options when it comes to selecting their legal authority: state arbitration laws, or the Federal Arbitration Act (“FAA”). State arbitration laws regarding enforcement of subpoenas are generally more straight forward and less demanding than the FAA. Unfortunately, however, there is a question as to whether the FAA preempts state laws regarding subpoena enforcement in arbitrations that are based on a “contract evidencing a transaction involving commerce . . . .” 9 U.S.C. § 2. Indeed, although the result is questionable, what appears to be the only case to address the issue determined that the FAA does in fact preempt state laws regarding subpoena enforcement in such arbitrations. In re Beck’s Superior Hybrids, Inc., 940 N.E.2d 352, 363 (2011).
Thus, unless one wants to gamble enforcement on successful non-preemption arguments, one must rely on the FAA. Regarding subpoena enforcement, Section 7 of the FAA provides in relevant part:
The arbitrators selected . . . or a majority of them, may summon in writing any person to attend before them or any of them as a witness . . . . The fees for such attendance shall be the same as the fees of witnesses before masters of the United States courts. Said summons shall issue in the name of the arbitrator or arbitrators, or a majority of them, and shall be signed by the arbitrators, or a majority of them, and shall be directed to the said person and shall be served in the same manner as subpoenas to appear and testify before the court; if any person or persons so summoned to testify shall refuse or neglect to obey said summons, 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 . . . .
This text raises many issues. To start, it makes clear that at least a majority of arbitrators must sign a subpoena for it to be enforceable. Since it is customary in many arbitral forums for just a chairperson to sign a subpoena, this may mean that a party first needs to go back to the arbitrators for a new subpoena and serve that new subpoena.
Section 7 also specifies that one must serve the subpoena “in the same manner” as subpoenas in court. Courts have taken this to mean that section 7 incorporates the service and enforcement provisions of Federal Rules of Civil Procedure, Rule 45 (“Rule 45”), which governs subpoenas in federal court. See, e.g., Alliance Healthcare Servs. v. Argonaut Private Equity, LLC, 804 F. Supp. 2d 808, 811 (N.D. Ill. 2011). For service, this means including payment of witness fees to the witness upon service. For enforcement, this adds the complications that Rule 45 requires (1) that a witness can be compelled only to attend a hearing within 100 miles of where the witness resides or does business, and (2) a petition to enforce the subpoena must be brought in the federal district court where compliance is required.
These Rule 45 enforcement requirements set up a potential conflict with the rest of the language of FAA Section 7. Section 7 of the FAA vests enforcement authority with only the district court where a majority of the arbitrators are “sitting.” Therefore, to avoid a conflict that could be fatal to enforcement efforts, a party seeking to enforce a subpoena must ensure that (1) the hearing that the witness is to attend is within 100 miles of the witness, (2) the petition to enforce the subpoena is in the same location, and (3) at least a majority of the arbitrators are “sitting” in that location.
In the LOMGG case referenced earlier, this was no simple task since the arbitration was pending in California and the witness (a former broker of the LOMGG’s clients) had relocated from California to Broward County in Florida. One solution could be to host a videoconferencing session for the witness to attend within 100 miles of the witness and then seek enforcement in the court located there. But in such a scenario, would the “hearing” be determined to be within 100 miles of the witness as Rule 45 requires? Or, would it be determined to be in the distant location where the arbitrators and parties were receiving the witness’s video testimony? The few courts that have addressed the issue have generally found that the hearing would be in the latter location, making such a videoconferencing subpoena unenforceable under Rule 45. See Lin v. Horan Capital Mgmt., LLC, 2014 U.S. Dist. LEXIS 114631 (S.D.N.Y. 2014); Roundtree v. Chase Bank USA, N.A., 2014 U.S. Dist. LEXIS 76255, *3 (W.D. Wash. 2014). Furthermore, even if that hurdle were overcome, there would be the issue of determining whether the arbitrators could be said to be “sitting” where the witness was attending, as would be necessary to bring the enforcement action there under FAA Section 7.
With video conferencing out of the picture, the only apparent promising route to achieve an enforceable subpoena would be to physically convene the hearing within 100 miles of the witness. This could be cost prohibitive in many arbitrations where the witness is distant, since it involves travel and lodging costs for the arbitrators and parties (and their lawyers) simply to obtain the testimony of a single witness. As noted by the court in the LOMGG case, however, there were approximately $42 million in losses at issue, making it a worthwhile endeavor in that matter.
But even if the parties do convene a hearing near the witness, what of the “sitting” issue? Would choosing to physically convene a hearing at the location be enough to have the arbitrators be deemed to be “sitting” in that location, as required to bring enforcement proceedings there under FAA Section 7? Unfortunately, at the time of the LOMGG’s case, there was virtually no authority that interpreted the “sitting” language of Section 7.
Those familiar with international commercial arbitrations may quickly think of the “seat” of the arbitration when reviewing the “sitting” language. In international commercial arbitration parlance, the “seat” of an arbitration is effectively its legal location—a fixed location not subject to change based on where hearings are held. If one assumes that the arbitrators are “sitting” at the legal “seat” of the arbitration, though, that would likely mean that the arbitrators cannot change where they sit, and thus could not move where they are sitting to be in the same location as the witness for enforcement purposes.
Indeed, this is the interpretation that the recalcitrant witness took through his counsel (Greenberg Traurig LLP) in the LOMGG enforcement matter. The witness argued that since the parties, arbitrators, and all prior proceedings had taken place in California, the arbitrators were all inexorably “sitting” there for purposes of Section 7, making enforcement at the witness’s location impossible.
As the LOMGG pointed out, however, such an interpretation is contrary to good sense and the plain text of Section 7 alike. Under that interpretation, arbitration parties would largely be powerless to command participation of non-parties, rendering arbitration a substantially inferior means of dispute resolution relative to court litigation—a result contrary to the spirit of the FAA. Furthermore, Section 7’s language appears to contradict this “seat” interpretation. Section 7 speaks of where the majority of arbitrators are sitting, which contemplates that arbitrators may sit in different places, an impossible result under the “seat” interpretation of the sitting language. The LOMGG argued that a more sound interpretation is that the arbitrators “sit” wherever they convene for the hearing at issue in the subpoena.
As if all of these issues were not enough, other problems riddle arbitration subpoena enforcement. Perhaps most notably, despite that both Rule 45 and Section 7 command a party seeking enforcement to do so in a federal district court, some federal courts have determined that the mere fact that one is seeking subpoena enforcement under Section 7 does not grant the court subject matter jurisdiction. See Amgen, Inc. v. Kidney Ctr., 95 F.3d 562, 567 (7th Cir. Ill. 1996); Nielsen Transp. Group, Inc. v. Celanese AG, 430 F.3d 567, 572 (2d Cir. N.Y. 2005). Instead, some alternative basis for subject matter jurisdiction must be demonstrated. This is a challenge since there is no obvious amount in controversy for purposes of diversity jurisdiction, and it is not clear what provides federal question jurisdiction if not Section 7 itself. The bulk of these authorities seem to indicate, however, that there is subject matter jurisdiction over the enforcement petition if there would be subject matter jurisdiction over the arbitration itself, a requirement that was satisfied in the LOMGG matter.
Fortunately, after reviewing substantial briefing by both sides, the United States District Court for the Southern District of Florida adopted the LOMGG’s position on all of these issues and enforced the subpoena at issue. As mentioned before, to the LOMGG’s knowledge, this result represented the first successful court enforcement of an arbitration subpoena against an out-of-state, non-party witness. Indeed, a 2015 publication by the New York City Bar Association International Commercial Disputes Committee remarked that the committee was not aware of any federal decisions that considered the sitting issue the LOMGG litigated, further confirming that the decision was likely the first of its kind. Additionally, the decision created precedent on a variety of important issues related to arbitration subpoena enforcement, such as the meaning of the “sitting” language in Section 7. But as the above makes clear, achieving this outcome was no easy task. Further, significant uncertainty and traps for the unwary remain when it comes to arbitration subpoena enforcement. Hopefully, substantial clarification will at some point come from courts or legislators, so that arbitration parties, like court parties, can enjoy reliable and routine enforcement of subpoenas to non-party witnesses. In the meantime: arbitration practitioners beware!