Pre-Hearing Discovery in Arbitration: Is It Illusory?
In the past few years, more litigation has moved away from the courtroom and into the arbitration process. While initially viewed as a way to quickly resolve simple disputes with relatively few facts at issue, today arbitration is increasingly viewed by corporations as a fast and less expensive way to resolve complex commercial disputes. Although arbitration, like civil litigation, is intended to provide a full and fair hearing of the issues, arbitration inherently restricts a party's right to discovery. Judges, for example, have pretrial subpoena power over both parties and nonparties but arbitrators, by contrast, do not have such pre-hearing subpoena power over nonparties. Thus, in order to make an informed decision that arbitration is preferable to civil litigation, the attorney and client must be fully aware of the differences in litigating in the two forums.
I. Fundamental Purpose of Discover
A. Pretrial Discovery in Litigation
The purpose of pretrial discovery in litigation is the full disclosure of relevant facts between disputing parties. Both the Federal Rules of Civil Procedure as well as the Illinois Supreme Court Rules provide for board discovery in that a party is permitted to discover all information that is not privileged and which is relevant to the litigated matter.1 Generally, three purposes are served by permitting liberal discovery: (1) liberal discovery aids in narrowing and clarifying disputed issues prior to trial; (2) liberal discovery facilitates acquisition of evidence by parties for use at trial; and (3) liberal discovery assists in securing information about the existence of evidence that may be used at trial and how and from whom such evidence may be obtained.2 In fulfilling these goals, discovery helps to avoid unfair surprise at trial while providing information that may be used as a basis for pretrial settlement. In attempting to accomplish these goals, however, the discovery process often has been viewed as fostering significant delay as well as increased expense.
Courts have power to order broad discovery in aid of litigation, including the authority to issue subpoena for discovery depositions and for document production. Illinois Supreme Court Rule 201, for example, authorizes a variety of discovery measures for the acquisition and preservation of evidence, including oral depositions, depositions on written questions, written interrogatories to parties, inspection of documents, and physical and mental examinations of persons.3 Rule 201 applies without limitation to party/nonparty status. Rule 202 authorizes a party to take the deposition of "any party or person for the purpose of discovery or for use as evidence."4 Rule 202 also applies without limitation to party/nonparty status. Rule 214 provides for the discovery of documents, objects and other tangible things.5 This rule, by its terms, applies to the production of documents by parties and further states that it does not "preclude an independent action against a person not a party for production of documents and things."6
B. Pre-Hearing Discovery in Arbitration
Discovery in arbitration generally is designed to be minimal and informal, and is far less extensive than discovery under traditional litigation.7 Discovery in arbitration is limited because the object of arbitration is to foster final disposition of disputes in an easier, faster, and more economical manner than by litigation.8 Illinois courts have noted that parties willingly accept the absence of procedures employed in the justice system in return for the benefits of a quick, less expensive resolution of their dispute.9 The distinction has also been state that "[a]n arbitration hearing is not a court of law . . .When contracting parties stipulate that disputes will be submitted to arbitration, they relinquish the right to certain procedural niceties which are normally associated with a formal trial, such as the right to pretrial discovery . . ."10
The reluctance to engage in discovery in arbitration is premised on the theory that discovery generally is unnecessary for a fair adjudication of the issues, and inevitably causes increased costs, delay, complexity and unnecessary intrusion into parties' affairs.11 Gradually, however, as more and more matters are submitted to arbitration, and as these matters become more complex, the need for discovery in arbitration has gained more attention and consideration.
II. Arbitrators' Authority to Compel Pre-Hearing Discovery
Discovery methods during arbitration vary depending on the rules under which the arbitration is conducted and provisions of the parties' respective arbitration agreement.
A. Contractual Agreement Between Parties
An arbitration is largely what is agreed to by the parties. Parties can define the arbitration process to be whatever they want and thereby tailor the dispute resolution process to their particular circumstances and dispute. Because it is contractual in nature, the parties in arbitration are free to contract as to the scope of discovery.12 For example, a clause may be inserted into an arbitration agreement such as the following:
Parties shall have all rights of discovery as are provided under [insert whatever rules or part thereof that are deemed appropriate] notwithstanding the American Arbitration Association rules to the contrary.13
Although provisions allowing for pre-hearing discovery may bind parties, such provisions cannot bind nonparties.14 Absent a statute, parties to an arbitration have no right or power to contract to impose discovery obligations on nonparties.
B. American Arbitration Association Rules
The rules of the American Arbitration Association ("AAA"), however, clearly authorize an arbitrator to exercise his or her discretion to order pre-hearing discovery. Paragraph 7 of the National Rules for the Resolution of Employment Disputes promulgated by the AAA provides:
The arbitrator shall have the authority to order such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute.
Although Paragraph 7 of the AAA rules does not compel or otherwise mandate pre-hearing discovery in aid of arbitration as a matter of right, it does provide an arbitrator with the discretion to order such discovery if necessary to a full and fair resolution of a given arbitration. In practice, arbitrators generally require parties to provide pre-hearing depositions and issue subpoenas to third parties for production of documents and depositions.
C. Federal and Uniform Arbitration Acts
Although the parties and or the AAA rules may intend to give an arbitrator unlimited authority to order discovery deemed necessary, the authority of an arbitrator ultimately is limited by statute.
Neither the Uniform Arbitration Act15 ("UAA"), adopted in its entirety by Illinois,16 nor the Federal Arbitration Act17 ("FAA") mentions discovery, nor does either act mention any rights of parties or powers of arbitrators with respect to discovery. Section 7 of the FAA, however, does provide:
The arbitrators . . . may summon in writing any person 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 or document, or paper which may be deemed material as evidence in the case . . .18
While some courts have held that Section 7 of the FAA empowers arbitrators to issue discovery subpoenas for depositions and production of documents to parties and nonparties alike,12 other courts hold that this grant of subpoena power is limited to compelling persons to give testimony and produce documents at the arbitration hearing and not before.20
Section 5/7 of the UAA is similar Section 7 of the FAA and provides:
(a) The arbitrators may issue subpoenas for the attendance of witnesses and for the production of books, records, documents and other evidence . . .
(b) On application of a party and for use as evidence, the arbitrators may permit a deposition to be taken, in the manner and upon the terms designated by the arbitrators, of a witness who cannot be subpoenaed or is unable to attend the hearing.
Because Subsection (b) specifically limits the arbitration depositions to those for "use as evidence" and only of "a witness who cannot be subpoenaed or is unable to attend the hearing," some courts have limited the subpoena power of subsection (a) to the circumstances defined in subsection (b).21 In other words, some courts have determined that arbitrators have subpoena power over nonparty witnesses for attendance at the hearing but do not have such power for pre-hearing discovery pruposes.22
III. Compelling Discovery From Nonparties in Aid of Arbitration
Illinois' Uniform Arbitration Act does not explicitly provide an arbitrator with the power to compel a nonparty to respond to pre-hearing discovery requests. The same Act, however, does not explicitly deny an arbitrator such power. Thus, a situation may arise where a third party simply refuses to comply with a pre-hearing subpoena for document production and or depositions. The party seeking the discovery can seek an order from the arbitrator compelling discovery but that order can only be enforced in a state court proceeding. Thus, the issue of the arbitrator's authority to issue the subpoena will be litigated. Because the arbitrator has issued the subpoena, the third party opposing it should not be allowed to argue in the state court proceeding that the discovery being sought from it is irrelevant and/or unnecessary. Rather, the sole issue should be the statutory authority of the arbitrator to order such discovery.
Although Illinois' Uniform Arbitration Act does not explicitly address an arbitrator's precise authority as to third parties, a strong position can be advanced that Illinois law in conjunction with the rules of the AAA provide an arbitrator with the authority to issue subpoenas duces tecum for the production of books and records as well as subpoenas for deposition.
Paragraph 7 of the AAA rules provides an arbitrator with authority to order such discovery as the arbitrator considers necessary to a full and fair exploration of the issues in dispute. Section 5/7(a) of the UAA codifies an arbitrator's right to allow the parties to conduct discovery in arbitration proceedings, stating that "the arbitrator may issue subpoenas for the attendance of witnesses and for the production of documents and other evidence . . ." Section 5/7(a) goes even further to ensure that the discovery an arbitrator deems necessary to ensure a full and fair exploration of the issues in dispute is complied with by both parties and nonparties. The last sentence of Section 5/7(a) provides: "[s]ubpoenas so issued shall be served, and upon application to the court by a party or the arbitrators, enforced, in the manner provided by law for the service and enforcement of subpoenas in civil cases." Thus, the interplay between the rules of the AAA and the UAA appear to provide an arbitrator with authority to exercise his or her discretion to order pre-hearing discovery.
Several well-reasoned federal cases interpreting a substantially similar provision of the FAA support this position and provide guidance as to the proper scope of an arbitrator's authority to order discovery in aid of arbitration. In Meadows Indemnity Company, Ltd. v. Nutmeg Ins. Co.,23 for example, a Tennessee federal court addressed whether a non-party could be compelled to produce documents for inspection and copying by the requesting party prior to the hearing. Recognizing that the FAA provides an arbitrator with the authority to require a witness to appear before the arbitrator and bring material documents, the court refused to make a rigid distinction between the production of documents at the time of the hearing versus prior to the hearing:
There is little dispute the arbitration panel, pursuant to its authority under Section 7, could require a witness . . . to appear before the panel and bring all of the documents at issue to a hearing. Considering the sheer number of documents addressed by the subpoena, however, this scenario seems quite fantastic and practically unreasonable. With this in mind, the arbitration panel issued the disputed subpoena as a method of dealing with complex and voluminous discovery matters in an orderly and efficient manner. (citation omitted). Mindful that one of the ultimate goals of the arbitration panel is to make a full and fair determination of the issues involved, and the underlying policies behind arbitration included resolution of issues in an efficient and less costly manner, the panel's decision to issue the subpoena seems entirely reasonable.24
The Meadows court went further to hold that Section 7 of the FAA, which is substantially similar to Section 7(a) of the UAA, authorizes pre-hearing discovery:
The power of the panel to compel production of documents from third-parties for the purposes of a hearing implicitly authorizes the lesser power to compel such documents for arbitration purposes prior to the hearing. [The nonparty's] argument requires adoption of an unnecessarily constrictive and unreasonable reading of Section 7 which would limit the ability of the arbitration panel to deal effectively with a large and complex case such as the one at hand, and generally hamper the use of arbitration as a forum for dispute resolution.25
Similarly, in Stanton v. Paine Webber Jackson & Curtis,26 the arbitrator, at the request of the defendants, issued subpoenas to nonparties requiring pre-hearing production of documents. The plaintiff objected, contending issuance of the subpoenas was improper because it constituted impermissible pre-hearing discovery. The court, observing that prohibiting the subpoenas would be improper judicial intrusion into an arbitration proceeding, held that pursuant to:
. . . the Arbitration Act, the arbitrators may order and conduct such discovery as they find necessary. (citations omitted). Plaintiff's contention that § 7 of the Arbitration Act only permits the arbitrators to compel witnesses at the hearing, and prohibits pre-hearing appearances, is unfounded.27
Both Meadows and Stanton recognize that artificially limiting the power of a arbitrator to compel the production of documents and witnesses only for the hearing is an unnecessarily constrictive and unreasonable reading of Section 7 of the FAA which severely hampers the ability of an arbitrator to ensure a full and fair determination of the issues involved in a complex matter.
This recognition of pre-hearing discovery in aid of arbitration has been acknowledged by an Illinois federal court in Amgen Inc. v. Kidney Center of Delaware County, Ltd.,28 where the court noted:
While [Section 7 of the FAA] appears to allow an arbitrator to summon a third person only to testify at trial, as opposed to a pretrial discovery deposition, courts have held . . . that implicit in the power to compel testimony and documents for purpose of a hearing is the lessor power to compel such testimony and documents for purposes prior to hearing.29
Although decisions including Meadows, Stanton, and Amgen recognize nonparty discovery in aid of arbitration under the FAA, no Illinois appellate court directly has acknowledged the authority of an arbitrator to compel pre-hearing discovery of a nonparty witness under Section 5/7 of the UAA.
IV. When Pre-Hearing Discovery Should Be Authorized
Whether Section 5/7 of the UAA authorizes pre-hearing discovery from nonparties turns on whether a restrictive, limiting interpretation of the UAA is employed or whether a more textual interpretation is adopted. Although parties limit access to the full panoply of discovery procedures available in litigation, especially with respect to nonparties, an arbitrator should have authority to exercise his or her discretion to order such pre-hearing discovery.
Whereas discovery in aid of arbitration is more limited than in litigation in order to achieve more efficient and economical disposition of disputes, such discovery may nevertheless be necessary to the overriding goal of arbitration--providing a full and fair resolution of disputes. Limiting the availability of pre-hearing discovery, however, sacrifices a full and fair resolution for the "assumption" of a more efficient and economical disposition. In practice, however, precluding parties from obtaining pre-hearing discovery may result in less efficient and less economical dispositions of disputes. Denying the attorney advanced time to prepare witness examinations with the benefit of pre-hearing discovery, for example, may result in denying the attorney the opportunity to narrow relevant issues, to focus particular lines of inquisition, as well as to expeditiously process produced documents. As a result, the attorney is forced to conduct such analysis during the hearing. In other words, denying pre-hearing discovery may result in a more efficient and economical pre-hearing period, but may also result in a less efficient and less economical hearing. In this respect, arbitration without limited availability of pre-hearing discovery may not avoid the increased delays and costs commonly associated with litigation.
Regardless of whether arbitration is or is not a more efficient and cost-effective vehicle to the resolution of legal disputes, such discovery limitations may severely hamper the ability of an arbitrator to ensure a full and fair determination of issues involved in complex matters. In an arbitration involving allegations of tortious interference and/or conspiracy, for example, an overly-restrictive anti-discovery spirit of arbitration may fail to permit sufficient fact development to afford just decision-making. Moreover, in complicated matters where only one side has unfettered access to requested third party information, common sense and fairness dictate that the information should be produced in advance of litigation.
Based on policy concerns which install a need to draw decisive lines between litigation and arbitration, courts appear willing to draw unduly restrictive lines between party/nonparty status and between a hearing/pre-hearing basis. Although arbitration and litigation strive to achieve variant purposes, this distinction is perhaps an insufficient basis to draw absolute limitations to the availability of pre-hearing discovery in aid of arbitration. If, for example, a nonparty refuses to comply with an arbitrator's subpoena or moves to quash the subpoena on the ground that the arbitrator had no authority prior to the arbitration hearing to compel a nonparty to appear for a deposition or to produce documents, the parties will be involved in collateral litigation. Such litigation will be necessary if the party deems the subpoenaed information necessary to a full and fair hearing. In the event of such collateral litigation, the parties will nevertheless be left standing with one foot in court and the other in the arbitrator's office. Such collateral litigation, however, may be in conflict with the oft-stated principle that "[a]n arbitration hearing is not a court of law and procedural niceties which are normally associated with a formal trial, such as the right to pretrial discovery or to subpoena documents or witnesses."30 Nevertheless, as parties are encouraged to utilize arbitration for complex and multi-million dollar disputes, the need for pre-hearing discovery from third-parties may be necessary to obtain a full and fair hearing. Without that discovery, the arbitration process may be fatally defective and subject to challenge.
In submitting to arbitration, parties must recognize that they forego the breadth of discovery rights available in litigation and perhaps a degree of accuracy. This is not to say, however, that parties forego all rights to pre-hearing discovery. Arbitrators should retain a degree of discretion to exercise pre-hearing subpoena power when exceptional circumstances warrant such treatment in order to reach a fair and just resolution. Pre-hearing discovery should not be readily available, but a party should not be precluded from such discovery where need outbalances fundamental unfairness. Otherwise, absolute preclusion from third party discovery may deny parties what they in fact bargained for in submitting to arbitration in the first place--a fair and just resolution to their dispute.
1. Rule 26 of the Federal Rules of Civil Procedure provides that "[p]arties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action . . ." Fed. R. Civ. 26(b)(1). Similarly, Illinois Supreme Court Rule 201 allows that a party "may obtain by discovery full disclosure regarding any matter relevant to the subject matter involved in the pending action . . ." ILCS S. Ct. Rule 201(b)(1).
2. See William G. Schopf, Jr., et al., Discovery in Federal and State Courts in Illinois, BCL IL-CLE 4-1 (1993).
3. ILCS S. Ct. Rule 201(a) and (b).
4. ILCS S. Ct. Rule 202.
5. ILCS S. Ct. Rule 214.
7. See David M. Brodsky et al., ADR Discovery Techniques, C566 ALI-ABA 219, 221 (1990).
8. Peterson v. Superior Bank FSB, 242 Ill. App.3d 1090, 1095, 611 N.E.2d 1139, 1142 (1st Dist. 1993) (citing Geldermann, Inc. v. Mullins, 171 Ill. App. 3d 255, 524 N.E.2d 1212 (1st Dist. 1988); Brennan v. Kenwick, 97 Ill. App.3d 1040, 425 N.E.2d 439 (1st Dist. 1981)).
9. Peterson, 242 Ill. App.3d at 1095, 611 N.E.2d at 1142 (citing Drinane v. State Farm Mutual Automobile Ins. Co., 153 Ill.2d 207, 606 N.E.2d 1181 (1992)).
10. Burton v. Bush, 614 F.2d 389, 390 (4th Cir. 1980).
11. Anne L. Draznin, Arbitration -- A Viable Alternative -- An Arbitration Practitioner's Viewpoint, BCL IL-CLE 10-16 (1993) (noting that AAA considers pre-hearing discovery procedures -- bills of particulars, interrogatories, depositions, notices to produce documents -- to be "incompatible with the arbitration process" and views the efforts of the legal profession to engraft customary court procedures on the arbitration process as "betraying an ill-conceived notion what the arbitral process is all about.").
12. See Draznin, supra note 11, at 10-8 (because discovery is generally not available under the UAA or the AAA Commercial Arbitration Rules, lawyers add specific provisions for discovery).
13. Id. (citing Donald Levine, Arbitration Clauses, When I Take Them Out, When I Leave Them In and What I Do to Them If I Leave Them In (Mar. 20, 1987) (unpublished paper presented to Chicago Bar Association Arbitration and Alternative Dispute Resolution Committee). See Amgen Inc. v. Kidney Center of Delaware County, Ltd., 879 F.Supp. 878, 883 (N.D. Ill. 1995) (holding that arbitrator's pre-hearing subpoena was enforceable because parties agreed to arbitrate dispute pursuant to the Federal Rules of Civil Procedure).
14. See Nagle v. Nadelhoffer, Nagle, Kuhn, Mitchell, Moss and Saloga, P.C., 244 Ill. App.3d 920, 925, 613 N.E.2d 331, 334 (2d Dist. 1993) ("persons not parties to an arbitration agreement cannot be compelled to participate in arbitration") (citing Mid-America Regional Bargaining Ass'n v. Modern Builders Ind. Concrete Co., 101 Ill. App.3d 83, 86, 427 N.E.2d1011 (1st Dist. 1981))
15. Uniform Arbitration Act § 7, 7 U.L.A. _ (West 1998).
16. 710 ILCS 5/1 et seq. (West 1998)
17. 9 U.S.C.A. § 7 (West 1998)/
19. See, e.g., Amgen Inc., 879 F.Supp. at 881-82 (arbitrator can compel attendance of third person not party to arbitration in same manner that it would secure attendance of any witness in district court); Meadows Indemnity Co. v. Nutmeg Ins. Co., 157 F.R.D. 42, 45 (M.D. Tenn. 1994) ("The Power of the panel to compel production of documents from third-parties for the purposes of a hearing implicitly authorizes the lesser power to compel such documents for arbitration purposes prior to hearing"); Stanton v. Paine Webber Jackson & Curtis, Inc., 685 F. Supp. 1241, 1242 (S.D. Fla. 1984) ("[A]rbitrators may order and conduct such discovery as they find necessary").
20. See, e.g., Burton, 614 F.2d at 391 (arbitrator does not have authority to compel a nonparty to the arbitration agreement to submit to a pre-hearing deposition); Integrity Ins. Co. v. American Centennial Ins. Co., 885 F.Supp. 69, 71 (S.D.N.Y. 1995) (although arbitrator may have authority to issue subpoena requiring nonparty to produce documents prior to hearing, an arbitrator does not have the authority to require nonparty to appear for a discovery deposition prior to hearing).
21. See Prime South Homes, Inc. v. Byrd, 401 S.E.2d 822, 826 (N.C. App. 1991); City of Dearborn v. Freeman-Darling, Inc., 326 N.W.2d 831 (Mich. App. 1982); see also Integrity Ins. Co., 885 F. Supp. 69.
22. See supra note 21.
23. 157 F.R.D. 42,43 (M.D. Tenn. 1994).
24. Id. at 44-45
25. Id. at 45.
26. 685 F.Supp. 1241, 1242-43 (S.D. Fla. 1988).
27. See id. See also Amgen, Inc., 879 F.Supp. at 879 (recognizing an arbitrator's authority to compel testimony and documents prior to hearing); Hines Parts Service, Inc. v. NCR Corp., 859 F.Supp. 349, 353 (N.D. Ind. 1994) (acknowledging an arbitrator's authority to order pre-hearing discovery pursuant to Section 7 of the FAA)
28. 879 F.Supp. at 880 (citing Meadows and Stanton).
30. Burton, 614 F.2d at 390.