Over the years, increasingly more potential litigants have turned to alternative dispute resolution processes, including arbitration, to resolve their disputes.  This trend is likely to continue in the face of a pandemic that has put even more strain on already stretched judicial resources.  When it comes to arbitrations, there has always been some uncertainty about the right to prehearing discovery, but the California Court of Appeal recently gave some guidance in Aixtron, Inc. v. Veeco Instruments Inc., 52 Cal. App. 5th 360 (2020).  In Aixtron, the court decided that neither the Federal Arbitration Act (“FAA”) nor the California Arbitration Act (“CAA”) allow for parties to issue deposition or document subpoenas to obtain prehearing discovery from third parties, unless the parties provide for such discovery rights in their arbitration agreement.

Aixtron Case Facts

An employee, Miguel Saldana, resigned from Veeco Instruments, Inc. and went to work for Aixtron, Inc.  As an employee of Veeco Instruments, Saldana had signed an employee confidentiality agreement which contained an arbitration clause.  Pursuant to the arbitration clause, Veeco initiated arbitration proceedings against Saldana alleging breach of contract and various torts.  During discovery, the arbitrator granted Veeco’s application for a pre-hearing third party discovery subpoena for Aixtron’s business records and forensic examination of Aixtron’s computers.  Aixtron objected, but the arbitrator granted Veeco’s motion to compel.

Both parties petitioned the trial court—Aixtron for judicial review of the arbitrator’s discovery order and Veeco for an order enforcing the arbitrator’s discovery order.  The trial court sided with Veeco and Aixtron appealed.

Appellate Court Decision

The California Court of Appeal reversed.  As an initial point, the court noted that it was unnecessary to resolve the parties’ dispute as to whether the FAA or the CAA applied to their dispute, because prehearing discovery was not allowed under either set of statutes.

The Court agreed with Ninth Circuit precedent and ruled that the FAA does not grant arbitrators the power to order discovery from third parties prior to a hearing.  As to the CAA, the CAA only allows for pretrial discovery in arbitrations arising out of wrongful death personal injury disputes.  Outside of that context, an arbitrator has no power to order third party discovery unless the parties explicitly agree to grant such power through their arbitration agreement.

However, the Aixtron Court noted that the CAA does allow an arbitrator to order third parties to give testimony and produce documents at the arbitration hearing itself.  In sum, the CAA only grants arbitrators the right to compel third parties to give testimony or documents at the arbitration hearing.  That power does not extend to prehearing discovery from third parties.

Lessons

The Aixtron case provides a bright line rule regarding discovery rights in arbitrations.  Where an arbitration agreement does not provide for discovery rights explicitly or by reference to Code of Civil Procedure section 1283.05 (which describes the circumstances under which depositions may be taken and discovery obtained in arbitration proceedings), then a party’s right to discovery from third parties will be severely limited.  As part of any early case analysis, attorneys should consider what third party discovery rights their client will have.  The impact of these limitations can vary depending on the complexity of the dispute.  For example, where the bulk of the necessary evidence is within the possession of parties to the arbitration, then the Aixtron case limits may matter very little.  In contrast, where necessary evidence is only in the possession of a third party, such as business or financial records, then the Aixtron case limits can prove quite influential.  Of course, attorneys drafting arbitration agreements should also take Aixtron into consideration and allow for whatever discovery procedures are likely to be needed in a potential arbitration.

Moreover, in another very recent case dealing with arbitration agreements called Moritz v. Universal City Studios, LLC 2020 WL 5228531 (Sep. 2, 2020), the court confirmed that arbitration agreements only apply to disputes stemming from the contracts which contain that arbitration agreement.  The fact that the same parties have agreed to arbitration in other contracts is of no consequence if those contracts are not at issue.  Therefore, it is important to confirm that each contract and arbitration agreement is complete in and of itself, including any grants of prehearing discovery powers.