On April 24, 2024, Justice Doyle of the Monroe County Commercial Division issued a decision in Matter of Investcloud Inc. v. Siegal, 2024 NY Slip Op. 50469(U), holding that the decision to allow non-party pre-hearing discovery is for the arbitrator, not a court, explaining:
Whether the FAA allows non-party pre-hearing discovery has resulted in a circuit split among the U.S. Court of Appeals. (See e.g., In re Sec. Life Ins. Co. of Am., 228 F3d 865 [8th Cir. 2000]- FAA Section 7 grants arbitration panel inherent authority to conduct pre-hearing discovery of integrally related non-party; Life Receivables Tr. v. Syndicate 102 at Lloyd’s of London, 549 F3d 210, 218 [2nd Cir. 2008]- arbitrators possess a variety of tools to compel discovery from non-parties. However, those relying on section 7 of the FAA must do so according to its plain text, which requires that documents be produced by a testifying witness at the hearing; compare COMSAT Corp. v. Nat’l Sci. Found., 190 F3d 269, 278 [4th Cir. 1999]: a federal court may not compel a third party to comply with an arbitrator’s subpoena for prehearing discovery, absent a showing of special need or hardship.)
In ImClone Sys. Inc. v. Waksal (22 AD3d 387 [2nd Dept. 2005]) the Second Department determined that as there was no controlling US Supreme Court authority, or unanimity among the lower federal courts, it was free to exercise its own judgment as to whether the FAA allows pre-hearing, non-party discovery. The Court adopted the 4th Circuit’s view and held:
We subscribe to the view that depositions of nonparties may be directed in FAA arbitration where there is a showing of special need or hardship, such as where the information sought is otherwise unavailable. This view properly takes into consideration the realities and complexities of modern arbitration.
This Court is bound by ImClone and its holding. Under New York’s interpretation of the FAA, an arbitrator is authorized to order non-party discovery (through subpoena) upon a showing of special need or hardship.
However, the determination on whether process should be issued to compel non-party discovery (a determination as to whether petitioner established a special need or hardship), and the issuance of such process, must be made by the arbiter.
As respondents correctly note, the Court of Appeals has cautioned trial courts from becoming unnecessarily entangled in arbitrations or from serving as a vehicle to protract litigation. Furthermore, the parties herein, having consented to private arbitration of their disagreements, necessarily waived certain procedural rights attendant to formal litigation in return for a more efficient and cost-effective resolution of their disputes.
The parties herein agreed that the JAMS rules would apply to their arbitration proceeding. The relevant JAMS rules (although not as clear as one would hope) do contemplate the use of pre-hearing, non-party discovery. The JAMS Recommended Arbitration Discovery Protocols for Domestic, Commercial Cases set forth relevant factors arbiters should consider in determining the scope of relevant discovery, including its power to subpoena third-party information, and whether the denial of the requested discovery would, in the arbitrator’s judgment (after appropriate scrutinizing of the issues), deprive the requesting party of what is reasonably necessary to allow that party a fair opportunity to prepare and present its case. As petitioner herein agreed to arbitrate any disputes with Manning, and the arbitration rules are not arbitrary and satisfy the necessary due process to protect the rights of the parties and ensure a fair arbitration proceeding, this Court declines to intervene.
Furthermore, as the parties agreed that the FAA applies to their arbitration, any authority to issue subpoenas is derived from Section 7. Its plain language limits the power to issue subpoenas to the arbitrator.
Finally, whether petitioner has established a special need or hardship to justify the issuance of a third-party subpoena for documents and pre-hearing discovery is best determined by the arbiter. The arbiter has overseen the extensive discovery in the proceeding and can fairly determine — employing the factors outlined by JAMS as agreed to by the parties- whether the discovery is required to ensure a fair arbitral hearing. This Court should not intrude into the arbitration proceeding to determine issues best left to the discretion of the arbiter, and ImClone and Roche do not mandate same.
(Internal quotations and citations omitted).