Discovery on Non-Parties in Fee Arbitration: Tips and Techniques
By Prof. Lisa Miller, Esq.
Third-party entities and their documents and records are surprisingly central to arbitrations of all types and sizes, including attorney-client fee arbitrations. Arbitration is a dominant forum for attorney fee dispute resolution, and documents of all sorts can be germane to these proceedings.
With the number of parties participating on various social media outlets, third parties to arbitration often have relevant documents. Third parties often have documents neither attorney nor client possess. And because these third parties generally have no skin in the game, arbitrators rely heavily on the evidence they provide. Clever engagement letter drafting might help prevent surprises if a dispute arises and arbitration is invoked.
II. Existing Law
A. Ninth Circuit Approach
The general inability of arbitrators to compel third parties to produce documents before arbitration by issuing subpoenas was confirmed by the Ninth Circuit in CVS Health Corp. v. Vividus, LLC, 878 F. 3d 703 (9th Cir. 2017). The facts in Vividus include litigation in State A and arbitration in State B. Defendants in A produced documents pursuant to a protective order. Petitioners wanted to use those documents in the arbitration in B, so they requested, and received, subpoenas from the arbitrators, which were sent to defendants in A.
Defendants in A failed to respond to the subpoenas and Petitioners in B moved to enforce the subpoenas in the US District Court in B. The district court found that arbitrators have no authority under the FAA; on appeal, based on the FAA, the Ninth Circuit agreed with the District Court. The Vividus Court interpreted the FAA, finding that arbitrators possess no independent power to order third parties to produce documents outside of the arbitration hearing itself. The Circuit Court opined that under the FAA, arbitrators are not vested with the full range of discovery powers that the courts possess.
“Section 7 of the FAA does not grant arbitrators the power to order third parties to produce documents prior to an arbitration hearing.” CVS Health Corp. v. Vividus, 878 F.3d 703, 708 (9th Cir. 2017). The court rejected the argument that the FAA prohibits pre-hearing depositions, because state law could provide parties with greater rights in arbitration than those provided by the FAA:
While the substantive rules of the FAA apply in state court as well as in federal court, in Southland Corp. v Keating, 465 U.S. 1 (1984), the US Supreme Court explained that the purpose of the preemption of state substantive rules regarding arbitration was “to foreclose state legislative attempts to undercut the enforceability of arbitration agreements” (465 U.S. at 16). But the Court clarified that it did not intend such preemption to extend to state rules of civil procedure that are applicable in state proceedings (465 U.S. at 16, fn. 10).
B. California Approach
Parties typically ask their opponent to produce witnesses in their control without the need of a subpoena. Arbitrators have power to issue subpoenas for witnesses and for production of documents, records, and evidence at the hearing. These subpoenas are generally enforceable by the Superior Court under Cal. Code Civ. Proc. §1282.6 “Subpoenas shall be served and enforced” in compliance with Cal. Code Civ. Proc. §§1985-1997.
Arbitrators have power to issue enforceable subpoenas at arbitral proceeding for witness appearances and production of documents, records, and evidence. This is effective under Cal. Code Civ. Proc. §1282.6 (Subpoenas shall be served and enforced in compliance with Cal. Code Civ. Proc. §§ 1985-1997). Challenges arise when parties seek evidence from third parties to be disgorged prior to the date of the arbitration hearing itself.
In cases arising under Cal. Code Civ. Proc. §1283.05, third parties objecting to discovery directed to them should appeal first to the arbitrator. But they may then challenge any final arbitral ruling with the court (Berglund v. Arthroscopic & Laser Surgery Center of San Diego, 44 Cal.4th 528 (2008)). Currently, authority is not clear regarding whether third-party discovery initiated under different authority would track this same procedure.
Cal. Code Civ. Pro. §1282.6 is analogous to 9 USC §7. Section 1282.6, entitled “Attendance of witnesses and production of evidence; Subpoenas”, states:
(a) A subpoena requiring the attendance of witnesses, and a subpoena duces tecum for the production of books, records, documents and other evidence, at an arbitration proceeding or a deposition under §1283, and if §1283.05 is applicable, for the purposes of discovery, shall be issued as provided in this section…
Unlike §7, §1282.6 specifically contemplates some pre-hearing document production by third parties. The issue is enforcement of that right.
The California Supreme Court focused its analysis in this regard on third parties’ lack of consent to arbitration agreements when it considered discovery enforcement issues in Berglund. In Berglund, the Court analyzed whether arbitration discovery orders to third parties should be subject to full judicial review under the California Arbitration Act (California Act) (Berglund, at 532).
The Court opined that while the dispute must first be submitted to the arbitrator for resolution, third parties are entitled to full judicial review of the discovery order that the party is seeking to enforce. This line of analysis explicitly noted that the fact that third parties never consented to the jurisdiction of the arbitrator. Toggled onto this assertion, the Berglund Court noted that arbitrators are, technically, free to not follow the law if the arbitrators so choose. The Court specifically referenced the fact that arbitrators’ decisions are only subject to judicial review in limited situations. (Berglund, at 538). As a result, in California, arbitrators’ subpoenas can be judicially enforced under the California Act.
The specific procedure for judicial enforcement of subpoenas under Cal. Code Civ. Proc. §1282.6 is not set out in detail. Assuming that the civil court action underlying the referral to the arbitral forum is pending in a California court, in most situations, motions to compel attendance of witnesses and production of documents may be filed as part of that proceeding.
But if no action is pending, counsel seeking Court enforcement for subpoenas against third parties in arbitration must file a new court proceeding. In this newly filed proceeding, counsel can seek the Court’s assistance against the non-cooperating third party in the related arbitration.
Third parties being barraged with demands for documents in arbitrations to which they are not participants have some options to fight off these incursions. Third parties generally must first direct objections to the arbitrator regarding objectionable discovery directed to them. And under the Court’s reasoning in Berglund, third parties may then challenge any final ruling in Court.
Recently, a non-California court was presented with a commission from a California Superior Court (the laws of most US states permit attorneys to issue subpoenas, without prior judicial action, as officers of the court; a court commission comes into play when a witness objects). The non-California court was petitioned to enforce the taking of a deposition outside of California in Roche Molecular Systems v. Cepheid, 905 F.3d 1363 (Fed. Cir. 2018). The Roche court delved into the limits of arbitrators’ powers to issue third-party subpoenas within California.
Roche was in arbitration in California resolving patent license and royalties disputes. Roche petitioned the arbitration panel for a commission from the Superior Court of California to take the deposition of a former employee of opposing party in his home state of New York.
The non-party objected to the subpoena, relying on the Federal Arbitration Act (Federal Act) and Life Receivables Trust v. Goshawk’s Syndicate 102 at Lloyd’s of London, Respondent; and Life Settlement Corp. (dba Peach Tree Life Settlements), Appellant; 66 A.D.3d 495 (2009), 888 N.Y.S.2d 458 2009, NY Slip Op 7322 2008, U.S. App. LEXIS 24977 (Nov. 25, 2008). The non-party refused to appear for a pre-hearing deposition (he agreed to testify at the arbitration) arguing that the California Code of Civil Procedure (Cal. Code Civ. Pro.) does not authorize arbitrators in domestic arbitrations to issue subpoenas to third parties.
Roche convinced the Court that Cal. Code Civ. Pro. Title 9.3, Arbitration and Conciliation of International Commercial Disputes, applied to the instant dispute. He argued that because the subject matter of the dispute related to commercial interests in more than one state, under Cal. Code Civ. Pro. §1297.13, it qualified as an “international” agreement. Regarding arbitrations resolving disputes under international agreements, Cal. Code Civ. Pro. §1297.271 specifically allows arbitral tribunals to seek assistance from a California court by securing subpoenas to take depositions.
In fee arbitration settings, law firms and clients could be in, or could reasonably agree in their retention documents that they exist in, different states. This could trigger coverage under Cal. Code Civ. Pro. Title 9.3, Arbitration and Conciliation of International Commercial Disputes; Part 3, Special Proceedings of a Civil Nature.
III. Retainer Language
A. California Business & Professional Code §6200: Fee Dispute Notice Obligations
Attorneys who are active members of the State Bar of California, with offices in California, are required to arbitrate disputes with their clients regarding:
Counsel must send written notice to the client of the client's right to arbitrate either prior to, or at the commencement of, proceedings or service of summons or claims against the client. Arbitration of attorney-client fee disputes is voluntary for the client; it is mandatory for the attorney if the client elects arbitration (Powers v. Dickson, Carlson & Campillo, 54 Cal.App.4th 1102 (1997); Benjamin, Weill & Mazer v. Kors, 195 Cal.App.4th 40, 53 (2011)). Fee arbitrations may not contemplate claims for affirmative relief against the attorney for damages or for claims based on alleged malpractice or professional misconduct. The sole subject matter focus of these arbitrations on fees, or costs, or both, must be strictly limited (Lawrence v. Walzer Gabrielson, 207 Cal.App.3d 1501, 1507-08 (1989)).
NOTE: California lawyers should review B&P §§6200-6206: Failure to provide written notice is grounds for dismissal of the action or other proceeding counsel might have filed against the client (B&P §6201(a)).
B&P §6201 requires that written notice to clients of clients’ right to fee arbitration must be on the State Bar-approved form. The State Bar Mandatory Fee Arbitration Committee has interpreted B&P §6201’s language to require that counsel not alter the prescribed form in any manner, other than to designate counsel’s preferred local bar association fee-dispute program for proceedings.
The Fee Arbitration Committee’s focus to date has been on providing to clients proper, correct, complete notice of their fee arbitration rights, without individual counsel’s massaging of these important notices. The Fee Arbitration Committee’s focus has not been on the presence or absence of additional clauses that do not otherwise impair or impede rights under the Business and Professions Code. As a result, few cases interpret or address this type of situation.
For this reason, counsel can consider adding to the retainer agreement additional clauses regarding discovery. Counsel may add clauses, but may not in any way blunt or hamper clients’ rights to or understanding of arbitration rights regarding fees and costs.
In general, assuming that counsel adds additional understandings to the arbitration section of the retainer agreement, courts tend to broadly favor arbitration. Assuming that counsel has not changed, in any way, the State Bar fee arbitration form, if the arbitration clauses in the retainer agreement generally touch on fees or costs or both, the stated issues will be arbitrable. As a result, courts are unlikely to invalidate additional arbitration-related clauses in retainer agreements that do not infringe on the State Bar’s form notice.
NOTE: Parties may not issue their own subpoenas but arbitrators may issue them on a party’s request, for good cause shown. Party requesting subpoenas obtain blank subpoena forms from the program or judicial council forms and submit completed subpoenas to the arbitrator or program chair with a statement providing the rationale for the need for the subpoena.
Counsel should check the rules addressing compliance with deadlines for requesting subpoenas and that counsel’s subpoena forms comply with Cal. Code Civ. Pro. Title 5, Rights and Duties of Witnesses, specifically §2065 regarding witness’ rights to fees and mileage.
If counsel elects to draft and include additional clauses in the retainer regarding fee arbitration, counsel must be sensitive to the fact that counsel is a fiduciary to the client. Although the fiduciary relationship does not exist prior to agreement to the terms of the retainer and signatures, counsel should consider advising the client in writing of client’s rights to consult an independent attorney in order to obtain an independent analysis of these fee arbitration-related clauses and requirements.
At the time that counsel may eventually seek to enforce rights created through the retainer, counsel would be in a fiduciary position. As a result, counsel would be better-protected in the presence of a written advisory of the advisability of independent attorney review. This is generally in line with the California rule of professional conduct numbers 1.4 and 1.7.
As well, counsel who add clauses to fee arbitration agreements via the retainer agreement must be sensitive to allegations after-the-fact that counsel fraudulently induced the client or misled the client to secure agreement to these arbitration requirements (Flores v. Nature’s Best Distribution, 7 Cal.App.5th 1 (2016)). Clients could believe that counsel failed to sufficiently outline the implications of these arbitration-related clauses based on the concept that the parties were just about to tip into an attorney-client relationship, triggering particular duties to disclose (Alderman v. Hamilton 205, Cal.App.3d 1033, 1037(1988)).
The result of these arguments, if successful, would be cancellation of the additional, negotiated fee arbitration terms and requirements. Courts are likely to enforce standard fee arbitration law, no matter what additional requirements counsel negotiated with clients, and which the court recently invalidated.
A substantial risk for counsel, in this situation, which counsel must remain vigilant to avoid, is overreaching. If counsel overshoots the mark, by attempting to implement onerous arbitration clauses in the attorney-client retainer, counsel will be a double loser: counsel will not enjoy he benefits of discovery on non-signatories associated with the client, as well as violating the California Rules of Professional Conduct.
Courts recognize that attorney-client agreements rely on good faith and reasonableness, with a higher standard than ordinary commercial contracts. As a result, attorneys must be fair and frank when discussing contract terms. When counsel’s retainer agreement includes an expanded arbitration clause, counsel should disclose in detail to the client all of the implications of the proposed arbitration provision. The discussion should include the client’s loss of the right to sue in court and have a jury trial, and, arguably, the implications of the expanded discovery clauses.
To secure advance access to documents held by some third parties, counsel can draft arbitration language in the contract to require that the party agree to production obligations. However, to assert a claim in arbitration and add an additional party to the arbitration may be a fairly steep price to pay just to get documents.
B&P §6200 et seq. is silent regarding discovery, introducing a level of flexibility to the fee arbitration process. Consequently, counsel should follow local program rules; most programs address only signatories to the retainer agreement, and allow limited pre-hearing discovery.
Pursuant to this statutory language, arbitrators may be induced to compel, by subpoena duces tecum, production of relevant documents. B&P §6200(g)(3). Although arbitrators issue subpoenas, only civil courts may effectively compel enforcement of subpoenas for the production of documents (see, Arbitration Advisory 2008-02 “Authority to Compel Compliance with Third-Party Subpoenas”)
1. If a party’s subpoena for document production is addressed to a third party over whom a party to the arbitration (via the underlying contract agreement) has control (a party’s subcontractor, subsidiary, power of attorney, or other legally recognized relationship), in the event of noncompliance, the party issuing the unsuccessful subpoena may request that the arbitrator draw an adverse evidentiary inference against the controlling party, who is a signatory to the contract and a party to the arbitration.
2. If third parties fail to comply with subpoenas for documents from parties to the arbitration, a party can request that the arbitrator convene a brief, early, focused evidentiary hearing, prior to the main tribunal, through which a party can obtain the “missing” documents. This early, focused hearing can be accomplished telephonically, to avoid needless expense and inconvenience, while still effecting necessary discovery. This approach allows a fairly efficient end-run around Ninth Circuit decisions holding that courts will not enforce arbitral subpoenas for documents and testimony prior to any hearing and outside of the arbitrators’ presence.
3. If a party have some legal power over other entities involved in the business or transaction (an owner, for example), a contract might require that subcontractor and supplier agreements convey the right to access and copy documents relevant to the project (similar to audit rights).
Prof. Lisa Miller, Esq.
Lisa Miller is an administrative judge and CEO of Los Angeles’ Lex Law Corp. She hears fee disputes for several bar associations as well as administrative matters for numerous California municipalities and the Financial Industry Regulatory Authority. She consults with lawyers and law firms on administrative litigation strategy and advocacy on both coasts.
Ms. Miller has been hearing matters as an administrative bench officer for more than a decade as both sole hearing officer and panel chair. She hears use of force, personnel, cannabis, code enforcement, and other types of cases. She travels throughout California to conduct hearings in person.
She is writes and lectures nationally on cryptocurrency and blockchain. Her work on lawyer ethics and blockchain has been featured on the cover of Los Angeles Lawyer, the magazine of the Los Angeles County Bar Association.
Ms. Miller holds numerous leadership positions, including with the City of Los Angeles and the County of Los Angeles. She chairs the Ethics and Technology subcommittee of the Los Angeles County Bar Association’s Professional Responsibility and Ethics Committee.
She is a visiting lecturer in the law faculty at several universities in the European Union. She lectures on international arbitration, international dispute resolution in intellectual property, and the expected effects of BREXIT on international dispute resolution planning and strategy. She has published in peer-reviewed legal journals regarding the effects on international dispute resolution from changes to the North American Free Trade Agreement. She teaches administrative law as an adjunct professor in the US and wrote the texts for those classes.
Lisa Miller can be reached through the Lex Law website at
www.LexLawCorp.com, by telephone at (747) 389-4207, or via e-mail at
admin@LexLawCorp.com. She welcomes your inquiries.