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In the Matter of the Arbitration Between v. Argonaut Private Equity

August 9, 2011

IN THE MATTER OF THE ARBITRATION BETWEEN: ALLIANCE HEALTHCARE SERVICES, INC., PETITIONER,
v.
ARGONAUT PRIVATE EQUITY, LLC AND MEDICAL OUTSOURCING SERVICES, INC., RESPONDENTS.



The opinion of the court was delivered by: Matthew F. Kennelly, District Judge:

MEMORANDUM OPINION AND ORDER

Argonaut Private Equity, LLC (Argonaut) and Medical Outsourcing Services, Inc. (MOS) have moved to enforce subpoenas an arbitration panel issued in connection with an arbitration being conducted in Chicago. The subpoenas are directed to the accounting firm Grant Thornton, LP (GT) and Marc Chiang, who works for GT. The subpoenas call for oral testimony and production of records before a member of the arbitration panel at a hearing in San Francisco, California. GT and Chiang (collectively "GT") object, arguing that the subpoenas are beyond the arbitrators' authority and that, in any event, this Court cannot enforce them. For the reasons stated below, the Court denies the motion to enforce the subpoenas.*fn1

Facts

Alliance Healthcare Services, Inc. (Alliance) entered into an agreement with Argonaut and MOS to purchase Medical Outsourcing Services, LLP. The agreement contained a provision requiring arbitration of disputes.

Alliance hired GT to assist in conducting due diligence for the purchase. GT is headquartered in Chicago. Chiang, GT's director for transaction advisory services, oversaw the due diligence. Chiang lives and works in the San Francisco area.

In June 2010, Alliance demanded arbitration, alleging fraud and breach of warranty on the part of Argonaut and MOS. The arbitration is being conducted in Chicago. In late April 2011, Argonaut and MOS obtained from the arbitrators two subpoenas directing GT and Chiang to produce documents and give testimony in San Francisco at a preliminary hearing before one of the three arbitrators. The hearing is not the final merits hearing for the arbitration. Argonaut and MOS say they chose San Francisco for the convenience of GT and Chiang.

GT and Chiang declined to comply with the subpoenas. Id. at 6. Argonaut and MOS have moved this Court for an order enforcing the subpoenas. GT and Chiang oppose the motion.

Applicable Statute

Section 7 of the Federal Arbitration Act (FAA) states, in pertinent part: The arbitrators selected either as prescribed in this title or otherwise, or a majority of them, 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, document, or paper which may be deemed material as evidence in the case . . . . Said summons shall issue in the name of the arbitrator or arbitrators, or a majority of them, and shall be signed by the arbitrators, or a majority of them, and shall be directed to the said person and shall be served in the same manner as subpoenas to appear and testify before the court; if any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators. . . in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.

9 U.S.C. § 7 (emphasis added).

Discussion

1. Validity of the arbitration subpoena

GT argues that the subpoena amounts to a request for pre-hearing arbitration discovery and thus is not enforceable in court. The Sixth and Eighth Circuits have held that the power to compel pre-hearing discovery from a third party is implicit in the power of an arbitrator to compel production of documents from a third party for a hearing. See In re Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir. 2000); Am. Fed'n. of Television and Radio Artists, AFL-CIO v. WJBK-TV (New World Communications of Detroit, Inc.), 164 F.3d 1004, 1009 (6th Cir. 1999). The Second and Third Circuits have ruled to the contrary. Life Receivables Trust v. Syndicate 102 at Lloyd's of London, 549 F.3d 210, 212 (2d Cir. 2008); Hay Group., Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 408-09 (3d Cir. 2004). The Fourth Circuit has read section 7 of the FAA in more or less the same way as the Third, though it has suggested that an arbitration panel may subpoena a non-party for prehearing discovery upon a showing of a "special need." See COMSAT Corp. v. Nat'l. Sci. Found., 190 F.3d 269, 275-76 (4th Cir. 1999). There is no Seventh Circuit authority directly on point.

All of these decisions aside, the Court agrees with the Second Circuit that "[a]ny rule there may be against compelling non-parties to participate in discovery cannot apply to situations . . . in which the non party is 'summon[ed] in writing . . . to attend before [the arbitrators] or any of them as a witness and.to bring with him . . . [documents] which may be deemed material as evidence in the case.'" Stolt-Nielsen SA v. Celanese AG, 430 F.3d 567, 577-78 (2d Cir. 2005) (quoting 9 U.S.C. ยง 7); see also, Hay Group, 360 F.3d at 407 (noting that although FAA section 7 does not authorize enforcement of an arbitration subpoena directed to a non-party in absence of a hearing, it permits a subpoena 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"). The Court also ...


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