Today’s most interesting case relates to the authority of an arbitrator to issue a discovery subpoena.  Also, there are cases showing the effect of SCOTUS’s DIG of Henry Schein and some more general judicial musings.

Discovery subpoenas in arbitration

Section 7 of the Federal Arbitration Act provides that an arbitrator may subpoena “any person to attend before them . . . as a witness. . . “ (Emphasis added)  International Seaway Trading Corp. v. Target Corp., 2021 U.S. Dist. LEXIS 31755 (D. Minn. Feb. 22, 2021) joins the debate over the extent to which an arbitrator’s subpoena may be used in connection with pre-hearing discovery.

The case arises out of a dispute over whether Target improperly failed to pay Seaway, a vendor of shoes and boots, for goods purchased and whether the goods were defective. Lawrence Salz, a non-party former employee and part owner of Seaway, appeared for a prehearing deposition pursuant to an uncontested subpoena. During that deposition, counsel for Target asked Salz questions regarding Seaway’s ownership and revenue. His counsel instructed Salz not to answer, claiming that the questions were not relevant to the parties’ dispute. After the deposition, Seaway advised the arbitrator that Seaway had “no funds or assets” and did not intend to oppose Target’s counterclaim or pursue its own claims. Target responded that it still intended to press forward on its own claims for relief.  On December 4, 2020, Target asked the arbitrator to issue a fresh subpoena to compel Salz to testify at an additional prehearing deposition focused on Seaway’s ownership. Mr. Salz abandoned his earlier willingness to appear.  He moved to quash, arguing that the arbitrator lacked authority to issue a subpoena compelling attendance outside a hearing.  This case addresses that motion.

Magistrate Judge Menendez begins her analysis with the Eighth Circuit’s decision in In re: Security Life Insurance Company of North America, 228 F. 3d 865 (8^th Cir. 2000), which holds that an arbitrator may issue a subpoena for the production of documents prior to an arbitration hearing. While that case does not address whether that power extends to a prehearing deposition, the court finds no reason to limit the precedent’s scope. The interest “in efficient resolution of disputes through arbitration” which underpinned the Circuit’s decision in Security Life, the court opines, applies equally to a pre-hearing deposition “so that the parties may review and digest the relevant testimony before the hearing occurs.”  In addition to providing support for those seeking to enforce a subpoena, the case is valuable reading for those on the other side,  as it cites to Second, Third, Ninth, and Eleventh Circuit decisions rejecting discovery subpoenas.

In this day of COVID lockdowns, the case also provides an interesting take on the geographical scope of subpoenas. Section 7 of the FAA provides that a summons “shall be served in the same manner as subpoenas to appear and testify before the court.”  Here, the arbitrator subpoenaed Salz, a resident of St. Louis, to a video deposition. Although Federal Rule 45(b)(2) allows nationwide service of subpoenas, Rule 45(c) provides that the subpoena may not compel a witness to testify at a deposition more than 100 miles from his or her home or place of employment. Salz claimed that the deposition subpoena violated this rule, since the arbitrator was located in Minneapolis, more than 100 miles away from Salz’s home.  The court makes short shrift of this claim, since “a subpoena for a remote deposit, like the one issued by the arbitrator here, does not require Mr. Salz to travel at all.”

In light of the Circuit split referenced above, the validity of a discovery subpoena will depend on the court in which the issue is addressed, so imaginative counsel need to find a way to get into a favorable venue. While Section 7 of the FAA places the power to enforce a subpoena in the District Court in which the action is pending, perhaps Fed. R. 45(d)(3), which places the authority to quash a subpoena in the court in which compliance is required, may, in some cases, give the witness’s counsel some flexibility. Might there be a race to the courthouse?

Handbook arbitration clause

Butler v. Z&H Foods, Inc., 2021 U.S. Dist. LEXIS 31685 (S.D. Tex. Jan. 29, 2021) is a reminder that the format in which an employer presents an arbitration clause to its employees may affect enforceability.  Plaintiffs, former employees at Defendant’s restaurant, asserted discrimination and retaliation in violation of Title VII and 42 U.S.C. §1981. Defendant moved to dismiss or stay the action based upon an arbitration agreement which employees executed as part of the on-boarding process.  The court holds that Texas law, which applies here, provides that a contract is illusory and unenforceable where “one party has the unrestrained unilateral authority to terminate its obligation to arbitrate,” quoting Lazalde v. Vista Quality Markets, 746 F. 3d 222 (5^th Cir. 2014).  Plaintiffs argued that, since the arbitration agreement was set forth as part of an employee handbook in which Defendant “reserves the right to amend or modify these policies at any time,” there was never an enforceable agreement.  The court, Bennett, J., rejects the argument, opining that, because the arbitration clause provided that it “can only be revoked or modified by a writing signed by the Parties,” it differs from Defendant’s other, more malleable policies.  Under the rubric that all documents and each portion thereof must be given meaning, the court holds that the parties did not intend to give Defendant the right to revoke the arbitration provision to the same extent that it might otherwise modify the handbook. He grants the motion to dismiss and compels arbitration.  The lesson to those drafting employment policies – be sure to distinguish your arbitration agreement from other employment policies, if you want to ensure enforceability of your arbitration rights, while retaining flexibility in benefits and other H.R. procedures.

Arbitrability of False Claims Act issues

The plaintiff in U.S. ex rel Dorsa v. Miraca Life Sciences, Inc., 2021 U.S. Dist. LEXIS 32373 (M.D. Tenn. Feb. 22, 2021) sued his employer under the False Claims Act, alleging unlawful retaliation arising out of his termination for whistleblower activity.  Miraca moved to stay the action and compel arbitration.  Plaintiff’s employment contract required arbitration of disputes “arising out of or in connection with this Agreement, including. . . the negotiation, execution, interpretation, performance of non-performance of this Agreement.”  The court, Friedman, J., holds that FCA retaliation claims do not fall within that scope, opining “the claim has nothing to do with the parties’ Agreement.” (Emphasis added).  “Defendant’s argument might well have prevailed if the arbitration clause were worded more broadly to encompass ‘any dispute between us’ or ‘any dispute having connection with our employment relationship.  But it is not for the Court to rewrite such clauses.”

In an interesting twist on recent history, the court holds that, because the arbitration clause excludes injunctive relief, the threshold question of arbitrability remains with the court, even though the agreement invokes AAA rules which provide for the arbitrator to determine his or her own jurisdiction.  This is the issue which SCOTUS declined to consider last month when it dismissed certiorari as improvidently granted in Archer & White Sales, Inc. v. Henry Schein, Inc., 935 F. 3d 274 (5^th Cir. 2019) – the case upon which Judge Friedman here relies.

Manifest disregard

Seneca Nation of Indians v. State of New York, 2021 U.S. App. LEXIS 4981 (2^nd Cir. Feb. 22, 2021), in addition to reminding us of the impact of Tribal casino gambling on state revenues (from 2002 to 2016, New York state received $1.4 billion in payments from its percentage of net slot machine revenues, a/k/a “the drop”), contains a crisp statement of the standard for reversing an arbitration for “manifest disregard” of the law. The case relates to whether the Nation’s agreement with the State required that it share slot revenues during a seven-year renewal period.  The three-member arbitration panel held that payments had to continue. The Nation claimed the arbitrators manifestly disregarded federal law by failing to hold that the Secretary of Interior’s approval was required before payments could become effective for those additional years. The District Court denied vacatur and this appeal ensued.

For those not practicing in the areas of casino or Native American law, the nub of the opinion by Circuit Judge Pooler, writing for herself and Circuit Judges Lohier and Nardini, is its recitation of the “manifest disregard” standard. “This Court will uphold an arbitration award under this standard so long as ‘the arbitrator has provided even a barely colorable justification for his or her interpretation of the contract.’. . .  To succeed in challenging an award under the manifest disregard standard, a party must make ‘a showing that the arbitrators knew of the relevant legal principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.’” (Internal citations omitted).  The interesting twist here is the court’s dictum that “even were we to determine that, as a matter of first impression, [the statute’s] secretarial approval requirement applied in this context the panel could not have willfully flouted that legal principle because it was not ‘well defined, explicit and clearly applicable.’”  In short, arbitrators need not be correct in their interpretation of a legal question of first impression; they merely need to make a good faith effort to make the right determination and document those efforts.

 Quick Hits

Metadata

Ahmad v. Day, 2021 U.S. Dist. LEXIS 32401 (S.D.N.Y. Feb. 22, 2021)  provides a “why didn’t I think of that” moment for those dealing with issues related to the e-signing of arbitration agreements.  Plaintiff opposed defendants’  attempt to invoke an employment-based arbitration agreement, arguing that “iCIMS [his employer] falsified his electronic signature on the Employment Agreement.”  The court, Gorenstein, M.J., defers ruling on defendants’ motion to compel arbitration pending discovery regarding “[m]etadata of the alleged acceptance of [the] confidentiality agreement.”  Metadata, invisible electronic data sometimes thought of as “the document behind the document,” would potentially show such information as the actual date of execution of the agreement, regardless of the date which may appear in writing; the location and computer from which the signer logged in at the time of execution; and the password used to gain access – all of which could triangulate back to or away from Mr. Ahmad. It seems that such information would regularly be useful in the increasing number of electronic portal cases in which the parties dispute whether an agreement was ever formed.

Section 1782 discovery and international arbitrations

For those of you who are members of the ABA’s Litigation Section or have access to their materials, there is a good summary in the current issue of Litigation News of the various Circuit (and intra-Circuit) splits on using Section 1782 before foreign arbitration panels, Zemil, “Navigating U.S. Discovery in Foreign Commercial Arbitration Proceedings,” 46 ABA Litigation News No. 2, p. 20 (Winter 2021). Let’s keep hoping that SCOTUS uses the pending cert. petition in Servotronics to give some uniformity to the issue.

“Highlights” is running a day late this week, so I’ll see you either tomorrow or Monday.  If the latter, have a good weekend.

David A. Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com