Overview
First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.
In a unanimous decision (issued just a month after oral argument), the United States Supreme Court held that when a court grants a motion to compel arbitration, if a party asks for a stay of the case, the court must stay the case, and is not permitted to dismiss it, pursuant to Section 3 of the FAA. Smith v. Spizzirri, 601 U. S. ____ (2024) (Slip Op.). This opinion resolves a circuit split where some circuits gave discretion to the district court to dismiss or stay a case upon the granting of a motion to compel arbitration. The practical impact of the prior circuit split was that in circuits where a dismissal was permitted and a court dismissed the case while compelling it to be arbitrated, that dismissal was immediately appealable. By contrast, staying a case and ordering arbitration are not appealable and thus the court's decision forecloses one of the avenues litigants used immediately to challenge court decisions compelling arbitration. The Supreme Court's decision was based on FAA's clear text and it seems as though this decision will not have much of an impact on the arbitral landscape other than the appellate issue. Au contraire. In an issue that is not being much discussed yet, the court may have swung the court doors open to court involvement in ongoing arbitrations, including a potential new way to address one of the most difficult issues in arbitration—taking third-party discovery.
In explaining its rationale, Justice Sotomayor, writing for the court, relied on other provisions in the FAA to support why Section 3's mandatory stay is sensible within the context of the statute. "When a court denies a request for arbitration, §16 of the FAA authorizes an immediate interlocutory appeal. See 9 U. S. C. §16(a)(1)(C). When a court compels arbitration, by contrast, Congress made clear that, absent certification of a controlling question of law by the district court under 28 U. S. C. §1292(b), the order compelling arbitration is not immediately appealable. See 9 U. S. C. §16(b)."
The court then went on to explain that a stay makes sense because "[t]he FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, . . . enforcing subpoenas issued by arbitrators to compel testimony or produce evidence, see §7 and facilitating recovery on an arbitral award, see §9." "Keeping the suit on the court's docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA's procedural protections."
Following the court's decision in Smith v. Spizzirri, courts will likely be more involved in arbitrations – in the manner describer by Justice Sotomayor – and there is an open question whether parties to an arbitration could file an action while simultaneously seeking a stay so that a court can later assist with an arbitration that would be commenced around the same time as the court filing. Anyone filing in court would need to have proper jurisdiction and venue. And it is admittedly unusual to file a lawsuit in court that a party knows will be arbitrated, and immediately seek a stay in anticipation of needing assistance from a court later in an arbitration proceeding. But the potential advantage is filing in a forum that is better suited to assist the parties (such as the location where third-party witnesses are located) rather than having to resort to filing in the place of arbitration once the arbitration is commenced.
Otherwise, one of the downsides to arbitration is obtaining evidence from non-parties. Common complications are whether pre-hearing discovery is authorized or whether a subpoena compelling a third-party must be in connection with appearing at a hearing before the panel and bringing documents to provide evidence. Another complication is that—regardless of whether the subpoena is issued pre-hearing or in connection with a hearing—the arbitral panel itself is without power to compel the attendance of a non-party; the assistance of a court is needed.
Section 7 of the Federal Arbitration Act (FAA) provides that "arbitrators . . . may summon in writing any person to attend before them . . . as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case."” The Second, Third, Ninth and Eleventh Circuits have held that this language does not provide arbitrators with the authority to order nonparties to provide documents unless the nonparty "is called as a witness at a hearing." Life Receivables Tr. v. Syndicate 102 at Lloyd's of London, 549 F.3d 210, 216–17 (2d Cir. 2008); Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3d Cir. 2004) (Alito, J.) ("Section 7's language unambiguously restricts an arbitrator’s subpoena power to situations in which the non-party has been called to appear in the physical presence of the arbitrator and to hand over the documents at that time."); CVS Health Corp. v. Vividus, LLC, 878 F.3d 703, 708 (9th Cir. 2017) (“Given the clear statutory language, we reject the proposition that section 7 grants arbitrators implicit powers to order document discovery from third parties prior to a hearing."); Managed Care Advisory Grp. v. CIGNA Healthcare, 939 F.3d 1145 (11th Cir. 2019) ("[T]he plain language of the statute is unambiguous in requiring witnesses to appear before an arbitrator and bring any documents with them, thus prohibiting pre-hearing discovery from non-parties.")); see also Broumand v. Joseph, 522 F. Supp. 3d 8, 24 (S.D.N.Y. 2021) but see In re Security Life Ins. Co. of America, 228 F.3d 865, 870 (8th Cir. 2000) (holding that document discovery is available from non-parties under Section 7 of the FAA even without accompanying testimony).
The Second Circuit held that "[t]he language of section 7 is straightforward and unambiguous. Documents are only discoverable in arbitration when brought before arbitrators by a testifying witness. . . . Thus, we join the Third Circuit in holding that section 7 of the FAA does not authorize arbitrators to compel pre-hearing document discovery from entities not party to the arbitration proceedings." Life Receivables Tr., 549 F.3d at 216–17. The Second Circuit has suggested parties can still obtain third-party discovery in advance of the evidentiary hearing—arbitrators can hold a special hearing for purposes of obtaining documents or testimony from a third party. Stolt-Nielson SA v. Celanese AG, 430 F.3d 567, 577-79 (2d Cir. 2005).
In arbitrations where significant third-party discovery is anticipated, parties now have a potential option—file a case, move to stay it (without risking dismissal or an appeal) and have a judge ready to assist and enforce the panel's subpoenas as needed. The presence of an open case may be sufficient to persuade third-parties to cooperate with subpoenas without litigation. Moreover, if venue and jurisdiction exist, parties may be able to file a case in a Circuit where third-party, pre-hearing discovery is permitted, even if that is not necessarily the place of arbitration. There are clearly uncertainties with this approach but it may well be consistent with the Court's opinion, though perhaps an unintended consequence.
We will continue to monitor how this ruling is interpreted and applied by the lower courts. If you have any issues regarding enforcing arbitral awards or rights, do not hesitate to contact us.
