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Liberty Mut. Ins. Co. v. White Mountains Ins. Group, Ltd.

Issue Discussed: Third Party Issues

Submitted by Jennifer R. Devery, Margot L. Green

Date Promulgated: February 26, 2007

Issue Decided: Can an arbitration panel subpoena a non-party to produce pre-hearing discovery in connection with an arbitration between the subpoena-seeking party and a subsidiary of the non-party?

In Liberty Mut. Ins. Co. v. White Mountains Ins. Group, Ltd., the United States District Court for the District of Massachusetts dismissed a petition made by Liberty Mutual Insurance Company (“Liberty”) to enforce a pre-hearing subpoena issued by an arbitration panel to White Mountains Insurance Group, Ltd. (“White Mountains”). The Court, in an oral opinion rendered from the bench, held that the subpoena, which called only for the production of documents, did not fall within the scope of Section 7 of the Federal Arbitration Act (“FAA”). That section authorizes arbitrators to “summon in writing any person to attend before them or any of them as a witness . . . .” 9 U.S.C. § 7.

In 2001, Liberty entered into a series of transactions with White Mountains through which Liberty acquired certain of White Mountains’ insurance business operations. In addition to the “Master Agreement,” an ancillary “Pre-Closing Serviced Policy Administrative Services Agreement” (the “PCASA”) was executed under which One Beacon Insurance Co. (“One Beacon”), a subsidiary of White Mountains, along with a number of other parties, appointed Liberty to administer claims made against certain One Beacon entities arising under pre-2001 policies of insurance. One Beacon later initiated arbitration against Liberty in Boston, Massachusetts, alleging that Liberty had failed to administer One Beacon’s claims and had thereby breached the PCASA.

During the course of arbitration, Liberty sought White Mountains documents that Liberty asserted were relevant to the parties’ claims and defenses in the arbitration as indicated by White Mountains’ 2001 Form 10-K filing. One Beacon objected on the ground that White Mountains documents were not within One Beacon’s control, and Liberty moved the arbitration panel to compel production. The panel granted Liberty’s motion. When One Beacon persisted in its objections to the production of White Mountains documents, Liberty asked the arbitration panel to then issue a subpoena to White Mountains, which the panel did in September 2006. The subpoena was served on White Mountains in Hanover, New Hampshire, where White Mountains maintains its principal place of business, and required White Mountains to produce its relevant documents at Liberty’s Portsmouth, New Hampshire location. White Mountains responded to the subpoena by indicating that it would produce all “non-privileged, responsive documents,” and, in October 2006, produced 299 pages of documents at Liberty’s Portsmouth office.

Shortly thereafter, on October 18, 2006, Liberty sought enforcement of the subpoena by the U.S. District Court for the District of Massachusetts, arguing that White Mountains’ production could not possibly comprise all relevant documents required by the subpoena. White Mountains moved to dismiss the petition on the grounds that the subpoena was both issued and served improperly. Specifically, White Mountains argued that Section 7 of the FAA does not authorize an arbitration panel to subpoena documents for pre-hearing discovery and that an arbitral subpoena cannot be issued more than 100 miles beyond the place of arbitration. White Mountains further argued that it had not waived its right to object to the subpoena when it agreed to produce responsive documents.

Although the First Circuit, in which Massachusetts sits, has not addressed the issue, the Court considered the opinions of three other circuits in making its determination. In In re Sec. Life Ins. Co. of Am. , 228 F.3d 865 (8th Cir. 2000),the Eighth Circuit held that Section 7 of the FAA implicitly authorizes an arbitration panel to subpoena the production of relevant documents prior to hearing. Conversely, the Third and Fourth Circuits in Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir. 2004) and Comsat Corp. v. Nat’l Science Found., 190 F.3d 269 (4th Cir. 1999), respectively, concluded that Section 7 precludes issuance of pre-hearing discovery subpoenas, except perhaps where special need or hardship has been shown. Recognizing that split of authority and finding the Third and Fourth Circuit decisions more persuasive, the Court held that the subpoena issued by the arbitration panel was a discovery subpoena and thus not authorized by Section 7.

With regard to the service issue, the Court ruled that service of an arbitral subpoena must be made in accordance with the federal practice – that is, within 100 miles of the place of issuance of the subpoena. In the instant case, the subpoena was served beyond 100 miles of the place of arbitration, and thus the Court found it improperly served. The Court further noted that Liberty’s proposed interpretation of the service provisions was too expansive, allowing a judge to issue or enforce a subpoena so long as the place of production was no more than 100 miles from the location of the subpoenaed party, regardless of where the court or tribunal issuing or enforcing the subpoena sat.

Finally, the Court concluded that White Mountains’ voluntary production of the documents did not constitute a waiver because it was not a “knowing relinquishment of a known right” to oppose the subpoena. The Court accordingly granted White Mountains’ motion to dismiss Liberty’s petition for enforcement of the arbitral subpoena.

* Jennifer R. Devery and Margot L. Green are counsel and associate, respectively, in the insurance/reinsurance group of Crowell & Moring LLP. They each represent insurance companies in insurance and reinsurance disputes involving a broad spectrum of issues.