Arbitration law - Second Circuit holds Section 7 of the Federal Arbitration Act does not permit arbitration panels to issue prehearing document subpoenas to nonparties - Life Receivables Trust v. Syndicate 102 at Lloyd's of London.


Arbitration Law--Second Circuit Holds Section 7 of the Federal Arbitration Act Does Not Permit Arbitration Panels to Issue Prehearing Document Subpoenas to Nonparties--Life Receivables Trust v. Syndicate 102 at Lloyd's of London, 549 F.3d 210 (2d Cir. 2008)

The Federal Arbitration Act (FAA) ensures judicial enforcement and validity of private arbitration agreements. (1) Section 7 of the FAA is the only section that deals with discovery, and grants arbitration panels the authority to summon persons before the panel as witnesses and bring with them materials to be used as evidence in the case. (2) In Life Receivables Trust v. Syndicate 102 at Lloyd's of London, (3) the United States Court of Appeals for the Second Circuit (Second Circuit) considered whether section 7 of the FAA authorizes arbitrators to compel prehearing document discovery from entities not parties to the arbitration proceedings. (4) The Second Circuit, relying on the plain language of section 7, reversed the order enforcing a prehearing subpoena for documents from entities not parties to the arbitration proceedings. (5)

Peachtree Life Settlements (Peachtree) purchases life insurance policies from elderly policyholders (insureds), offering them a cash payment at a discount to the policy's face value. (6) Peachtree generally purchases these policies on its own account; however, Peachtree occasionally purchases policies for related entities such as Peachtree's special purpose vehicle, Life Receivables Trust (the Trust). (7) In these instances, Peachtree performs the financial and actuarial research to purchase the policy, but transfers its interest in the policy to the Trust in exchange for a fee. (8) To mitigate the risk that the insureds live beyond Peachtree's actuarial projections, Peachtree purchases contingent cost insurance (CCI) to pay the death benefit to the Trust in the event the insured lives longer than the projection. (9)

In 2000, Peachtree purchased two life insurance policies and obtained, on behalf of the Trust, CCI from Lloyd's of London Syndicate 102 (Syndicate 102). (10) The policies required Syndicate 102 to pay the death benefit to the Trust and to assume the policies themselves once the insured outlived his estimated life by two years. (11) After the insured outlived the estimate by two years, Syndicate 102 refused to pay the death benefit, claiming the Trust fraudulently misrepresented the date when it acquired the policy and fraudulently calculated the insured's life expectancy. (12) The Trust initiated an arbitration demand to resolve the conflict because the CCI policy included a mandatory arbitration clause. (13) As part of the arbitration, Syndicate 102 submitted discovery requests to the Trust and Peachtree. (14) The Trust produced the requested documents, but notified Syndicate 102 that it had no way of producing Peachtree's documents because it did not control Peachtree. (15)

In response, the arbitration panel ordered the Trust to produce all responsive documents, including all documents in its possession relating to Peachtree. (16) When Peachtree responded to the arbitration panel's discovery order, it asserted that the panel had no authority or jurisdiction over Peachtree because it was not a party to the arbitration. (17) The panel issued a formal subpoena on Peachtree, which responded by filing suit in federal court to quash the subpoena, arguing that an arbitration panel cannot compel prehearing discovery from a third party. (18) The district court denied Peachtree's motion to quash the subpoena, and Peachtree complied with the order pending appeal. (19) On appeal, the Second Circuit reversed the district court's order and joined the Third Circuit in holding that the plain language and history of section 7 did not envision authorizing prehearing discovery from third parties. (20)

Congress enacted the FAA in 1925 in an attempt to reverse judicial hostility to arbitrations and encourage parties to submit to arbitration. (21) By enacting the FAA, Congress sought to place arbitration agreements "upon the same footing as other contracts." (22) Although the FAA facilitates the enforcement of discovery requests in federal court, because arbitration agreements are contractual in nature the parties can tailor the procedure and power of arbitration panels to order discovery. (23) As such, the power of an arbitration agreement stems from the agreement itself, not from the FAA. (24) Section 7 of the FAA is the only provision in the FAA to address discovery. (25) It permits an arbitration panel to summon any person to appear before the panel as a witness, and to produce documents relevant to the dispute at such time. (26)

Frequently, parties contractually agree to abide by standardized arbitration rules, such as the American Arbitration Association Rules (AAA). (27) The AAA contains a subpoena provision that authorizes arbitrators to issue subpoenas to parties and nonparties to the arbitration, but which is subject to the voluntary compliance of the nonparty. (28) Nevertheless, when a nonparty refuses to comply with a subpoena, under the AAA or otherwise, the only means of enforcing the subpoena is section 7 of the FAA. (29)

The Circuit Courts of Appeal are divided on the scope of section 7's authority. (30) The Eighth Circuit, relying on a "power-by-implication analysis," determined that implicit in an arbitration panel's power to subpoena relevant documents for production at a hearing is the power to order their production for review prior to the hearing. (31) In a narrower reading, the Fourth Circuit concluded that the subpoena powers are limited by the express authorization of the FAA; however, the court recognized that certain circumstances might arise where a party could petition the district court to compel discovery "upon a showing of special need or hardship." (32) Finally, writing for the Third Circuit, then-Judge Alito stated that section 7's plain meaning and Supreme Court precedent indicate that the FAA does not give arbitrators the authority to subpoena production of documentary evidence from a third party, without summoning them to appear as a witness. (33) The Third Circuit reasoned that Congress modeled section 7 of the FAA after an earlier version of Rule 45 of the Federal Rules of Civil Procedure that did not even permit federal courts to issue prehearing document subpoenas to nonparties. (34)

In Life Receivables Trust v. Syndicate 102 at Lloyd's of London, the Second Circuit reversed the district court's order compelling production of documents, and held that section 7 of the FAA does not authorize arbitration panels to compel third-party production. (35) Relying on the plain language of section 7, the court held that section 7 is "straightforward and unambiguous," and that documents are only discoverable in arbitration when brought before arbitrators by a testifying witness. (36) In so holding, the Second Circuit joined the Third Circuit in rejecting the Eighth Circuit's power-by-implication analysis. (37) The Second Circuit reasoned that although there may be valid reasons to empower arbitrators to subpoena documents from third parties, the statute's clear language cannot "morph into...

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