Arbitration: Hidden Dangers Could Leave You Holding an Empty Evidence Bag
Arbitration: Love it or hate it, but it likely will be with us for a while. For one thing, the United States Supreme Court strongly favors resolving disputes by arbitration rather than litigation, and as a result, it liberally construes the Federal Arbitration Act. Traditionally, businesses tended to agree, and it is still common to find arbitration clauses in private contracts, including consumer agreements. Over the years, however, many sophisticated in-house lawyers have become disenchanted with arbitration. Often, it can become as expensive and almost as lengthy as traditional litigation—but without the safeguards. (For more information, read "Arbitration: A Valuable Tool...but Not for Every Job.")
But there is one problem with arbitration that is often overlooked. How do you force witnesses to appear at a hearing? This is no minor issue, since material evidence might not be available if third-party witnesses refuse to travel to the forum in which the dispute is being heard.
Some might wonder if the arbitrators can simply require witnesses to appear by issuing a subpoena. Yes and no. It is true that arbitrators often have the right to subpoena witnesses. But that subpoena has to be enforced by a judge through the court systems, and therein lies the problem.
Take this situation, which the U.S. District Court for the Northern District of Illinois recently faced in Alliance Health Care Services, Inc. v. Argonaut Private Equity, LLC. With an arbitration proceeding pending in California, Argonaut and Medical Outsourcing Services, Inc. asked for and obtained a subpoena from the California arbitration panel directing certain parties to produce documents and give testimony in San Francisco at a preliminary hearing. Those parties, however, were located in Illinois. Thus, under the Federal Arbitration Act, Argonaut and Medical had to enforce the subpoena in Illinois by asking the federal court in Chicago to direct the parties to travel to San Francisco for a hearing. That, however, was something the U.S. District Court simply could not do. Under the Federal Rules of Civil Procedure, which governed the situation, a court can only require a party to appear at a hearing within its district or within 100 miles of the courthouse. Thus, the court in Chicago did not have the power to require Illinois residents to appear at a hearing in San Francisco.
But a federal court in California could do that, right? Unfortunately, the answer was "no." Although Argonaut and Medical could ask the California court to enforce their subpoena, the court did not have jurisdiction over the parties who lived in Illinois. Thus, neither the court in which the arbitration was taking place nor the court where the parties resided had the power to require Illinois residents to attend the hearing. That scenario left Argonaut and Medical without either the documents or the testimony they needed.
Although litigation is expensive—and that expense is often increased significantly by discovery—discovery is usually essential to the fair and efficient resolution of any dispute. Companies should bear that in mind when they consider adding an arbitration provision to their agreements. Despite the hidden dangers, arbitration still may be a wise choice in certain instances. That decision, however, should be made after careful consultation with legal counsel and with full knowledge of the associated risks. After all, no one wants to be left at trial holding an empty evidence bag.