ARBITRATORS, WITHOUT SPECIFIC AUTHORITY, CANNOT ORDER THIRD PARTY DISCOVERY
Aixtron, Inc. v. Veeco Instruments Inc. (July 16, 2020) 2020 DJDAR 7407; 2020 Cal. App. LEXIS 667 (Aixtron) impacts arbitration discovery, both intended and unintended: The intended, obvious aspects are its holdings that an arbitrator does not have the authority to order nonparty or third party discovery under the California Arbitration Act (CAA) and the Federal Arbitration Act (FAA), unless the parties have conferred that authority in their arbitration agreement, and that a party may appeal, under certain conditions, an interim order regarding that discovery. Secondarily, Aixtron is a reminder of the importance of the initial arbitration management conference (AMC), which should include a discussion about what arbitration rules shall apply.
Aixtron and Veeco Instruments are global technology companies. The discovery dispute arose when a high-level Veeco employee resigned and decamped, along with his electronic devices, to Aixtron. Veeco believed the employee had taken trade secrets with him, in violation of a confidentiality agreement, which also contained an arbitration clause, and sued that employee for breach of contract, breach of the duty of loyalty and conversion. (The arbitration clause stated generally that all claims and controversies shall be settled in accordance with the AAA and was completely silent about discovery rules and procedures.)
Veeco filed a motion with the arbitrator to enforce a subpoena for the production of Aixtron’s business records and certain Aixtron computers. The employee and Aixtron objected. After argument, the arbitrator modified the language of Veeco’s demands and approved the subpoena for service on Aixtron. The arbitrator found that the revised subpoena was “reasonable as to subject matter and scope,” and that he had the authority (under the dispute resolution provider’s rules) to order issuance of third party subpoenas for discovery purposes. Aixtron petitioned in the superior court for a protective order and for rehearing on the arbitrator’s discovery order, which the court denied. Thereafter, the court ordered Aixtron to produce the documents. Aixtron appealed both orders.
Aixtron analyzes, at length, an arbitrator’s authority to conduct third party discovery under the FAA and CAA. Regarding the FAA, the court adopted the decision in CVS Health Corp. v. Vividus, LLC (9th Cir. 2017) 878 F.3d 703, which concludes that the FAA does not grant arbitrators the power to order a third party to produce documents as part of pre-hearing discovery. (At 54-57.)
As for discovery under the CAA, Aixtron begins with the premise, as established by several authorities, including Berglund v. Arthroscopic & Laser Surgery Center of San Diego, L.P. (2008) 44 Cal.4th 528, that “The right to discovery in arbitration proceedings under the CAA ‘is generally limited’ and ‘highly restricted.’” (At 57.) Aixtron argues that sections 1283.1 and 1283.05 of the CAA prohibits third party discovery. The appellate court, after conducting a statutory interpretation of those sections, concludes that section 1283.1 provides generally for an arbitrator’s authority to order discovery only as provided by the arbitration agreement (at 59-60) and that section 1283.05 limits discovery to claims for wrongful death or personal injury, which were not at issue in the matter. (At 59). Veeco contended that section 1282.6 of the CAA allows for the Aixtron subpoena. The appellate court disagreed, stating that the subpoena under that section is to compel the attendance of witnesses at the arbitration proceeding and is not intended for discovery purposes. (At 63, 70-71.) Aixtron concludes that neither the language of the instant arbitration agreement, the FAA or the CAA, nor the provider’s rules, authorizes a third party subpoena for Aixtron’s business records and computers and reversed the trial court’s orders denying Aixtron’s petition and granting Veeco’s petition. (At 76.)
MDM’s observation: Before the AMC, participating attorneys should review the pertinent arbitration agreement to determine what rules of procedure and discovery are referenced (e.g., the CAA, AAA or the provider’s rules) and whether those rules are satisfactory; if not, the attorneys for the parties should attempt to resolve that issue with one another and then be prepared to discuss that situation with the arbitrator at the conference so that problems, such as in Aixtron, may be avoided.
Copyright Michael D. Marcus, July 2020
Please visit my website at www.marcusmediation.com for information about my mediation and arbitration background and experience. Copies of my previous Mediation Messages and Arbitration Insights are available by going to the articles link on the website.
At 75 – (Berglund, supra, 44 Cal.4th at p. 537.) Nonparties are entitled to full judicial review of arbitrator discovery orders because “arbitrators are not required to follow the law when resolving the parties’ disputes, and their decisions as to parties cannot be judicially reviewed for errors of fact or law” and giving arbitrator discovery orders the same deference normally given arbitration awards would substantially compromise the legal rights of nonparties against whom erroneous discovery orders may be made.“ (Ibid.)
we reject Veeco’s contention that the superior court’s orders are not appealable. We find it unnecessary to resolve the parties’ dispute over whether this case is governed by the Federal Arbitration Act (FAA) or the California Arbitration Act (CAA), since we conclude that under either statutory scheme, the arbitrator did not have the authority to issue a discovery subpoena to Aixtron in the circumstances of this case. We agree with federal appellate cases that hold there is no right to pre-hearing discovery under the FAA. [*3] As part of our analysis, we construe Code of Civil Procedure section 1282.61 and address, as an issue of first impression, whether it granted the arbitrator broad powers to issue pre-hearing discovery subpoenas. We conclude that it did not and hold that the arbitrator’s discovery subpoena to Aixtron was not authorized under the CAA since the parties to the arbitration did not provide for full discovery rights in their arbitration agreement (§ 1283.1). Since we conclude the arbitrator did not have the authority to issue the discovery subpoena, we reverse the superior court’s orders.
Issues of appealability of a discovery order issued originally by an arbitrator and; Veeco argues that Aixtron’s first appeal is improper because the superior court’s August Order, which denied Aixtron’s petition for a protective order and rehearing, is not appealable. On its facts, Berglund established that a nonparty dissatisfied with an arbitrator’s discovery order may seek “full judicial review” by a superior court of that order. It is reasonable to conclude that the Supreme Court’s repeated use of the phrase “full judicial review” (Berglund, supra, 44 Cal.4th at pp. 532, 534, 538, 539) also suggests a right to appellate review of the superior court’s order. Thus, Aixtron argues that the August Order is appealable because, as in Berglund, its appeal stems from the superior court’s denial of a petition for a protective order after a nonparty was [*39] served with a subpoena for the production of documents in arbitration. But the Berglund court did not address the question whether a nonparty or a party to the arbitration that is dissatisfied with the superior court’s decision has a right of direct appeal. (See Uber, supra, 27 Cal.App.5th at pp. 959–960 [Berglund “did not determine whether a party to the arbitration dissatisfied with the superior court decision then has a right of direct appeal”; italics added].) The Supreme Court noted without comment in its recitation of the procedural status of the case that the appellate court had denied the nonparty’s request for a stay and denied its petition for writ of supersedeas but allowed the nonparty’s appeal of the superior court’s order to proceed. But the court did not discuss the appealability of that order. (Berglund, supra, 44 Cal.4th at p. 533.) “It is axiomatic that HN11 cases are not authority for propositions not considered.” (People v. Ault (2004) 33 Cal.4th 1250, 1268, fn. 10 [17 Cal. Rptr. 3d 302, 95 P.3d 523].) Berglund thus does not provide clear authority for Aixtron’s contention that the August Order is appealable. At 44 because the superior court’s August Order was “a final determination of the discovery rights [between Aixtron and Veeco] in the special proceeding commenced for the sole purpose of resolving this discovery dispute, the order is appealable” under the one final judgment rule and section 904.1. (Uber, supra, 27 Cal.App.5th at p. 962.) Like the nonparty in Uber, Aixtron filed a special proceeding in the superior court for the express purpose of challenging the arbitrator’s discovery order. The superior court finally determined Aixtron’s and Veeco’s rights as to the discovery order when it denied Aixtron’s petition. The August Order embodied the final determination of Aixtron’s and Veeco’s rights in the special proceeding (§ 577). At 45 – The August Order summarily denied Aixtron’s petition for a protective order, and the December Order granted Veeco’s petition to enforce the arbitrator’s discovery order and ordered Aixtron to produce the responsive documents within 20 days pursuant to the protective order that the parties to the arbitration had already stipulated to in Veeco Instruments, Inc. v. Miguel Saldana (Super. Ct. Santa Clara County, 2016, No. 16CV294921). Contrary to Veeco’s assertions, the superior court did not order further discovery proceedings before the arbitrator on either occasion.
Both orders were final and appealable because there was no issue left for future consideration except the fact of Aixtron’s compliance or noncompliance with their terms.