Today’s lead case is about (almost) everything you ever wanted or needed to think about regarding third-party subpoenas for arbitration testimony. Because of the decision’s importance, this “Highlights” will focus on it, but includes cases considering waiver and an update on SCOTUS and forum rules changes.
Almost any issue you might think of – and some you would not – regarding summonses to third parties to testify at an arbitration hearing is addressed in Judge Rakoff’s exhaustive opinion in Broumand v. Joseph, 2021 U.S. Dist. LEXIS 37595 (S.D.N.Y. Feb. 27, 2021). (For some reason, LEXIS also published the case as 2021 U.S. Dist. LEXIS 37533). The case arises out of subpoenas issued by an arbitrator commanding non-party witnesses located in California and Virginia to testify in a videoconference hearing on February 1, 2021. While everyone participated by video from various locations, the arbitrator was physically located in New York City. The witnesses ignored the subpoenas. This action seeks an order compelling their compliance.
The opinion methodically walks through each step in evaluating a motion to compel arbitration subpoena compliance, beginning with whether the court even has personal jurisdiction over the proposed witnesses. After holding that they are not subject to service under New York’s long-arm statutes, Judge Rakoff turns to Section 7 of the Federal Arbitration Act, which provides that an arbitral summons “shall be served in the same manner as subpoenas to appear and testify in court.” That language effectively invokes Federal Rule of Civil Procedure 45(b)(2), which governs federal court subpoenas. The lynchpin issue raised by the parties is which Rule 45(b)(2)? Before 2013, a federal subpoena could only be served within the District from which the subpoena issued or outside the District, but within 100 miles of the place of the hearing, which used to be known as “bulge service.” Based on those geographical limits, the Second Circuit, which includes the Southern District of New York, held that an arbitration subpoena was likewise geographically limited, Dynegy Midstream Services, LP. V. Trammochem, 451 F. 3d 89 (2nd Cir. 2006). Such a holding would have invalidated service in Virginia and California of a subpoena issued out of New York. However, in 2013, Rule 45(b) was amended to permit service of a summons anywhere in the U.S. The problem facing Judge Rakoff is that the language in the FAA predates those 2013 changes. So, the issue becomes whether FAA Section 7’s reference to service “in the same manner as subpoenas” means the manner of service at the time the FAA was passed or at the time that the subpoena was served. Judge Rakoff discusses two approaches to the statutory interpretation issue – one of which he calls “dynamic” and one, “static.” As the name implies, under the static approach, when a statute incorporates an outside procedure by reference, any subsequent changes to the incorporated statute are irrelevant; the procedure at the time of the original incorporation governs. The dynamic approach takes the opposite tack; the incorporating statute automatically adopts all changes to the incorporated procedure. Determining which standard to apply, Judge Rakoff holds, depends on the language of incorporation. If the incorporating statute merely invokes a process, the dynamic rule applies; if it specifically refers to a particular title or section number, it is static. Since Section 7 of the FAA merely calls for service of an arbitration summons in the same manner as that for service of a subpoena in federal court, without specifically referencing Rule 45, Judge Rakoff holds that the reference is dynamic. Therefore, the 100-mile bulge rule does not apply and a subpoena for a New York arbitration may be served in California or Virginia.
Having found that service is proper, the court moves to due process issues. Remember “minimum contacts” and “reasonable circumstances?” Due process holds that a summons is only proper if the proposed respondent has adequate contacts with the jurisdiction in which he or she is commanded to appear. Here, the court asks, what is that “jurisdiction?” Judge Rakoff had already opined that the witnesses’ contacts with New York were so minimal that they would not support long-arm jurisdiction under state law. However, he holds that, since this is an action in which service is made under Section 7 of the FAA, a federal statute, and service can be made anywhere in the nation under Rule 45(c), the relevant “jurisdiction” is the entire United States. Since the respondents clearly have contacts with the U.S., Judge Rakoff finds the “minimum contact” test to be satisfied, even though there may not be any ties between the subpoenaed witnesses and New York, where the arbitration is being held and where the court sits. Further, since the hearing is by video and the witnesses will not need to travel to New York, he finds that defendants have made no showing that it is unreasonable for the court to exercise personal jurisdiction over them – even during the COVID pandemic, when interstate travel might be unreasonable.
So, as they read the opinion to this point, counsel for Plaintiff may have felt confident that the subpoena would be enforced. If so, they were mistaken. Turning from Fed. R. Civ. P. 45(b), dealing with the scope of service, to Rule 45(c), which provides that a subpoena may only compel attendance within a 100-mile distance from where the summoned party resides, is employed, or regularly transacts business in person, the Court denies enforcement. Judge Rakoff holds that the relevant question for determining the site of compliance is the location of the hearing, which the AAA and the Arbitrator deemed to be New York, not the place from which the witness will be testifying. “In the Court’s view the site of the arbitration does not change simply because certain participants remotely access the proceedings from elsewhere.” He rejects out-of-Circuit cases holding that the proximity requirement does not apply where testimony is by video.  To follow that line, the court opines, “would bestow upon any arbitrator sitting anywhere in the country the unbounded power to compel remote testimony from any person residing anywhere in the country.” (As a working arbitrator, I am not sure why Judge Rakoff thinks that would be a bad thing. Such a subpoena would impose no burden on the witness and would facilitate providing the arbitrator with as many relevant facts as possible to help in reaching a fair and legally valid award).
Finally, Judge Rakoff holds that enforcing a subpoena for video testimony would violate the “presence requirement.” This “requirement” has its genesis in the language of Section 7 of the FAA, which provides that “the arbitrators. . . may summon in writing any person to attend before them as a witness. . . .” (Emphasis added). Based upon the italicized portion of the rule, the Second Circuit, in a doctrine also followed in the Third, Ninth, and Eleventh Circuits, has held that a subpoena may not be used to order non-parties to produce documents in discovery, i.e., outside a hearing. This limitation mandates that “the arbitrators themselves must attend any hearing at which such subpoenas are returnable,” quoting Stolt-Nielsen SA v. Celanese AG, 430 F. 3d 567, 580 (2nd Cir. 2005). Judge Rakoff, thus, defines “attend before [the arbitrator]” literally, excluding the appearance of the subpoenaed witness through a video hookup, even if the arbitrator can watch and question the physically distanced witness to the same extent as if he or she were in the room. (Judge Rakoff’s analysis would not require counsel or even a witness appearing voluntarily to be physically present. It only applies to a subpoenaed third party.)
In summary, Judge Rakoff holds:
- That the current form of Fed. R. Civ. P 46(b) allows nationwide service of a subpoena for testimony at an arbitration covered by the FAA;
- That, in a case arising under a federal statute, the minimum contacts test for personal jurisdiction is met if the subpoenaed party has contacts with the United States, regardless of the state in which he or she resides;
- That the reasonableness test for long arm jurisdiction is met if the witness will be testifying by video at the hearing, even if compelling travel to the hearing venue might be unreasonable;
- That the 100-mile compliance limit of Rule 45(c) is computed to the site of the arbitration, not to the computer from which the witness will log into the proceeding; and
- That, at least in those Circuits which do not allow discovery subpoenas in an arbitration, the “presence requirement” prohibits subpoenaing a witness to any location at which the arbitrator is not also present in the flesh.
I usually do not give this much space to one case. However, with remote proceedings so prevalent during the pandemic and the likelihood that virtual hearings will continue even after parties and arbitrators are traveling again, this is a major holding, particularly coming from a prominent jurist. Counsel need to think through all these issues in deciding whether to agree to virtual hearings and parties may need to continue incurring the costs and delay of transporting parties, counsel, and the panel to various locations to receive compelled third-party testimony.
Finally, regardless of whether you agree with the case’s outcome, anyone who enjoys good judicial writing should read Broumand. Judge Rakoff, according to Wikipedia (a source he would lambaste me for citing), has been an adjunct professor at Columbia Law School since 1988 and has writing 150 articles. The level of analysis and elegance of writing inherent in those experiences shows in this opinion. Enjoy it.
Who decides waiver of arbitration
Is waiver a gateway issue which the parties may delegate to the arbitrator? In McDaniel v. Crescent Drilling and Production, Inc., 2021 US. Dist. LEXIS 37089 (W.D. Tex. Mar. 1, 2021), the arbitration agreement invoked the AAA Employment Rules, which provide that the arbitrator may determine his or her own jurisdiction. However, despite this competence-competence provision, Magistrate Judge Chestney holds that issues of waiver by litigation conduct are reserved to the court, unless “the delegation clause contains ‘clear and unmistakable evidence’ of the parties’ intent to arbitrate this issue specifically.” (Internal citation omitted)(Emphasis added). On the merits, the court opines that compliance with court orders, service of representative discovery, and the passage of ten months from the filing of the action do not constitute waiver when the defendant gave notice of its intent to seek arbitration promptly after discovering the arbitration clause. She recommends the granting of Crescent’s motion to compel arbitration.
While not raising the competence-competence issue, Castillo v. Duke Capital, LLC, 2021 U.S. Dist. LEXIS 36537 (D. Utah Feb. 25, 2021), also deals with waiver issues. The court, Parrish, J., discusses the difference between contract waiver, which requires proof of an “intentional relinquishment of a known right,” and a litigation-conduct waiver, which is based upon the waiving party’s prosecution of the subject case. The court holds that, by suing plaintiff in state court under the same promissory notes as are at issue here, Duke knowingly waived any right to compel compliance with the arbitration provision contained in those notes. Accordingly, it denies Duke Capital’s motion to compel arbitration. In a footnote, the court discusses at length the choice of law issue of whether Utah state law or federal FAA common law controls waiver questions. Judge Parrish comes down on the side of state law in cases involving contract, rather than litigation-conduct, waiver.
The ICDR has issued new International Dispute rules, which became effective on March 1, 2021. According to the ICDR website, the new procedures affect:
- The use of video, audio, and other electronic means of communication,
- Transparency regarding ICDR decision-making on arbitrator challenges and other administrative determinations,
- A duty to discuss cybersecurity, privacy, and data protection,
- Potential disclosure of third-party funding,
- Non-paying parties,
- Joinder and consolidation,
- Arbitral jurisdiction and arbitrability, and
- Tribunal secretaries.
The Court is scheduled to conference on two arbitration related cases today. Granting review in Servotronics, Inc. v. Rolls-Royce PLC, Dkt. No. 20-794, would finally resolve the important Circuit split over the ability to use 28 U.S.C. §1782 to subpoena U.S. parties for information for use in foreign arbitrations. GE Capital Retail Bank v. Belton, Dkt. No. 20-481, addresses the interplay between the FAA and the Bankruptcy Code. Orders may come down in time for Monday’s “Highlights.”
A new petition for cert. addresses an important issue of federal subject matter jurisdiction. The application in Badgerow v. Walters, Dkt. No. 20-1143 asks the Court to consider whether a District Court, in determining its subject matter jurisdiction over a petition to confirm or vacate an arbitration, may “look through” the award and determine whether there is a federal question underlying the dispute. The petitioner asserts that a split exists between the First, Second, Fourth and Fifth Circuits, which allow such a “look,” and the Seventh and Third, which she claims do not. The opinion as to which certiorari is sought is at 975 F. 3d 469 (5th Cir. 2020).
Have a good weekend.
David A. Reif
 For such a contrary case, in addition to those which the court cites, see International Seaway Trading Corp. v. Target Corp., 2021 U.S. Dist. LEXIS 31755 (D. Minn. Feb. 22, 2021), discussed in the February 25, 2021 issue of “Highlights.”