By Nicholas Grether, Esq., The Maloney Firm, APC

Many businesses utilize arbitration as an efficient means of dispute resolution for different types of legal claims.  If you have been to your doctor recently or purchased a cell phone, you likely agreed to arbitrate any dispute with them.  Other common examples are employment claims (e.g. wage and hour issues, discrimination, harassment) and misappropriation of confidential information. 

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Arbitration is a method for private dispute resolution that is subject to state and federal laws and that has important limitations that differentiate it from a lawsuit in court.  These limitations are either defined by state and federal statutes or are modified by an agreement between an employer and employee or consumer and business (most commonly).  For example, the U.S. Supreme Court has consistently held that the Federal Arbitration Act (“FAA”) provides that class action procedures available in court are not available to plaintiffs who agreed to arbitrate their claims individually.

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The FAA and California Arbitration Act (“CAA”) were designed to take advantage of the efficiency of the arbitration process.  Both the FAA and CAA give arbitrator(s) relatively broad powers to subpoena documents for and to compel witnesses to attend arbitration hearings, similar to a judge’s power to compel individuals to testify at trial in court.  However, an arbitrator’s power before the actual hearing is limited; while, in court, the parties to a lawsuit have broad powers to seek testimony and documents before trial in a process known as “discovery,” parties engaged in arbitration may not have these abilities before the hearing. A recent California Court of Appeals case shows how important it is for the drafter of the agreement to consider what an actual arbitration may look like, so they do not inadvertently limit what can be done in the arbitration. 

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Former Employee Allegedly Took Confidential Information to New Employer

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In Aixtron, Inc. v. Veeco Instruments, Inc., Appellate Nos. H04516 and H045464 (July 16, 2020), an employee of Veeco resigned and accepted an offer with Aixtron.  As part of his employment with Veeco, the employee signed a confidentiality agreement drafted by Veeco, which contained a clause requiring disputes to be resolved in binding arbitration.  The clause requiring arbitration did not refer to discovery, only the use of an arbitration company’s rules.¹

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Shortly after he began employment at Aixtron, Veeco claimed the employee had retained confidential information because it was copied onto the employee’s personal computer.  Veeco claimed that the employee did not delete the confidential information and that this confidential information may have made its way to Aixtron, a claim that Aixtron and the employee denied. 

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Veeco Sought Discovery from a Nonparty

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During the arbitration, Veeco sought discovery from Aixtron in the form of a subpoena for documents and data.² It is undisputed that Veeco and the employee were parties to both the agreement containing the arbitration clause and the arbitration.  Aixtron was a non-party to the arbitration.  Veeco wanted to review documents and data from Aixtron to determine if Aixtron had received confidential information.  Unlike a lawsuit in court, parties to an arbitration generally must request that the arbitrator sign a subpoena for it to be valid.³ 

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After failed negotiations on the extent of a subpoena, the arbitrator signed off on the subpoena to be sent to Aixtron.  Aixtron objected by claiming that the subpoena was overbroad and sought Aixtron’s confidential information, and that the arbitrator did not have the power to issue the subpoena.  The arbitrator disagreed and issued an order compelling Aixtron to comply.  Aixtron and Veeco both filed motions in the superior court, which were won by Veeco, and Aixtron appealed the rulings.

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The Court of Appeal did not get to Aixtron’s other arguments, because it found that the arbitrator had no authority to issue the subpoena to a nonparty.  In its detailed analysis, the Court identified three different scenarios where an arbitrator could issue a subpoena to a nonparty.  The first scenario is where the governing law, the FAA or CAA, grants the arbitrator this power.  The second scenario is where the arbitration rules are incorporated into the agreement and provide the arbitrator with this power.  The third is where the arbitrator is given that power in the actual arbitration agreement or clause.  However, the third scenario was inapplicable to this case because the arbitration clause at issue made no reference to discovery. 

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The FAA and CAA Did Not Permit Nonparty Discovery for a Misappropriation of Confidential Information Arbitration

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Moving on to the governing law, the Court found that whether using the FAA or CAA, the arbitrator was not permitted to issue a subpoena to nonparties in the case.  Under the FAA, the Ninth Circuit follows the majority rule that an arbitrator is not granted the power to order a nonparty to produce documents as part of pre-hearing discovery.  See CVS Health Corp. v. Vividus, LLC, 878 F. 3d 703 (9th Cir. 2017).  This power is granted to arbitrators to subpoena nonparties and documents only for the arbitration hearing.  The CVS Health court reasoned that permitting pre-hearing discovery to nonparties would encourage fishing expeditions, thus undermining the quicker and cheaper system of arbitration.  878 F. 3d at 708. 

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Under the CAA, the Court similarly found the arbitrator did not have the power to issue subpoenas to nonparties.  Under the CAA, arbitrations arising from wrongful death or personal injury claims are permitted to use the same discovery as allowed in court.  However, the CAA does not grant arbitrators this power for arbitrations stemming from any other types of claims.  In response, Veeco then argued that the CAA authorized discovery subpoenas whenever signed by the arbitrator.  The Court of Appeal disagreed and found that the CAA only explained the types of subpoenas that could be issued by an arbitrator, and that this power was limited to the arbitration hearing.  This was confirmed by reviewing legislative history, which stated that subpoenas to nonparties were limited to attending the arbitration hearing, not for discovery.

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The JAMS Rules Did Not Provide for Nonparty Discovery

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Lastly, the Court of Appeal reviewed the arbitration company’s rules to determine if they provided the arbitrator with the power to issue a subpoena for a nonparty.  The Court of Appeal found that: first, the arbitration company’s rules explained that limited discovery was available “between the parties;”  second, the arbitration company’s rules allowed for subpoenas to compel attendance at the hearing, but not for purposes of discovery; and third, Aixtron was not a party to the agreement.  The Court noted that an arbitrator’s authority is derived from consent, and Aixtron never consented to be bound by the rules or the agreement to arbitrate the dispute over confidential information.  In its conclusion, since none of the FAA, CAA, the arbitration company’s rules, or the agreement permitted the arbitrator to issue a nonparty subpoena for discovery, the Court held that the subpoena should never have been issued and was rightfully quashed.

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How Does This Apply to Your Business?

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1. The Arbitration Agreement should be separate from any other agreement.  This is especially important in the employment context, because employees often claim they were unaware of the agreement and it is unenforceable.
2. Meet with your legal counsel and think through what an arbitration might look like.  In the above case, Veeco would likely have wanted to take some limited discovery of nonparties to narrow the issues before the arbitration hearing.  The Court signaled that the parties to the arbitration agreement could have agreed to broad subpoena powers in the agreement or by referring to discovery available in court. 
3. Check the company’s rules for arbitration and incorporate them into the agreement if they are adequate for your needs.  If there is specific discovery you may need, consider spelling it out in the agreement, and emphasize that it may be used by both parties.  Remember that for employment-dispute arbitration agreements, the agreement must provide for at least adequate discovery by the employee and the business.
4. Determine if arbitration is really the best forum for the dispute.  By using arbitration, Veeco could use someone as an arbitrator with experience in the field of trade secrets and confidential information.  On the other hand, while arbitration is perceived to be quicker and cheaper, arbitrator fees can quickly make it undesirable.  You will need to determine if avoiding the whims of a jury are more important than the potential costs of an arbitrator.  In some circumstances, it may be preferable to waive the right to a jury trial, and have the case heard in court.

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These are all conversations to have with your legal counsel to make sure arbitration will provide the benefits sought.  While companies generally default to arbitration, a careful analysis of how arbitration will play out in reality and the rights of the parties in an arbitration is necessary to make an informed decision about using arbitration and draft any agreements accordingly.

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About the Author:

Nicholas Grether is an employment attorney in the Employment Law Department at The Maloney Firm, APC. If you have questions regarding this article, contact Nicholas Grether at ngrether@maloneyfirm.com.

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¹ The agreement refers to the American Arbitration Association Rules. However, the Court noted that while the record was not entirely clear, it appeared that Veeco and the employee agreed to utilize the Judicial Arbitration and Mediation Services, Inc. (“JAMS”) rules to arbitrate the dispute.  This was not disputed by the parties to the arbitration, but there was no written agreement on the record that would have superseded the original confidentiality agreement.

² The court noted the distinction between requiring pre-arbitration discovery and requiring witnesses and documents to be present at the actual arbitration hearing.

³ In arbitration, the arbitrator is technically issuing the subpoena.

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