FOURTH QUARTER 2008

VOLUME 15 NUMBER 4

In turn, arbitratorsare frequentlyrequired to performacts which, in thepast, remainedexclusively within theprovince of judges.

P A G E 2

David A. AttisaniJennifer A. Brennan

I. INTRODUCTION1

Arbitration remains the most prevalentmethod of dispute resolution in thereinsurance world. One of its principalbenefits continues to be the available supplyof industry professionals who are, unlikemost judges, steeped in the practicalrealities of the reinsurance business. It isfurther lauded as an efficient, economical,and often confidential means of resolvingdisputes — goals frequently shared byparties seeking to perpetuate on-goingbusiness relationships.In recent years, however, as the business hasevolved, and reinsurance relationships havebecome increasingly complex, reinsurancedisputes have been more adversarial. Inresponse to the number of arbitrations, theincreasingly large dollar amounts at stake,and the number of sophisticated partiesinvolved in writing business (and “runningoff” maturing books), arbitrations havebecome more formal and trial-like. As aresult, participants have resorted morereadily to traditional litigation techniquesand strategies.2 In turn, arbitrators arefrequently required to perform acts which, inthe past, remained exclusively within theprovince of judges. Common examplesinclude rulings on motions to compel theproduction of documents, security motions,and disputes involving the participation ofthird-party witnesses. Although the scope ofjudicial authority on such matters isgenerally well-established, the outer limitsof an arbitrator’s powers are less clear,despite the proliferation of industryarbitrations.It is, however, widely acknowledged thatarbitration is a creature of contract, and thatarbitral authority derives from the parties’legally binding agreement to arbitrate. See

First Options of Chicago, Inc. v. Kaplan, 514U.S. 938, 943 (1995). But, when the relevantcontract is ambiguous, silent, or inconclusiveconcerning the scope of arbitrators’ authority,they — or the proponent of their actions —must find extrinsic authority for their (quasi-)judicial acts or run the risk that their awardmay be vacated by a reviewing court. Therelevant statutory repositories of arbitralauthority generally give arbitrators broadlatitude to fashion the relief they areauthorized to award. E.g., Federal ArbitrationAct (the “FAA”), 9 U.S.C. §10(a) (2008)(providing narrow, specific grounds forvacating arbitration awards); Revised Unif.Arbitration Act (the “RUAA”) §21(c) (2000)(“an arbitrator may order such remedies asthe arbitrator considers just and appropriateunder the circumstances of the arbitrationproceeding”). Parties can, of course, alsocontract to follow the rules of privateorganizations, which often specify thespecies of relief arbitrators may award. Anarbitrator’s knowledge of the limitations onhis or her powers is crucial to ensuringjudicial confirmation of awards and toprotecting the integrity and efficacy ofarbitration as a viable alternative tolitigation.The purpose of this article is to discuss the“elephant in the [arbitration] room” — theouter limits of arbitrators’ authority toengage in certain traditionally judicial actswhich are incident to and (perhaps, ironically)requisite to the effective conduct of industryarbitrations. Given the breadth of the topic,this article will be published in two parts.The first installment briefly describes theprincipal sources of arbitral authority in theUnited States and abroad, and it examinesthe question whether they confer onarbitrators the power to award multipledamages, including punitive damages,attorney’s fees, and interest.3 The secondpart, to be published in the next edition ofARIAS•U.S. Quarterly, analyzes whether thesame authorities confer on arbitrators thepower to order injunctive relief, exercisesubpoena powers, and issue confidentiality

David Attisani is Chairman of theInsurance & Reinsurance PracticeGroup at Choate Hall & Stewart LLP,where he has practiced for the pastsixteen years. Jennifer Brennan is asenior associate in the same Group.The authors also wish to acknowl-edge the contributions of AnitaChristy, a 2008 summer associate.

feature An Elephant in the (Arbitration)Room—The Power of Panels andIts Outer Limits (Part I)

David A.Attisani

Jennifer A.Brennan

3 P A G Eorders. The discussion aims both to markthe outer limits of an arbitrator’s power toengage in these functions and to describesome of the practical challenges faced byarbitrators in the exercise of their powers.

II. SOURCES OF ARBITRAL POWERA. The Federal Arbitration Act

The Federal Arbitration Act (the “FAA”), 9U.S.C. §1 et seq. (2008), governs any contractinvolving interstate commerce, which meansthat most reinsurance contracts fall withinits purview. See 9 U.S.C. §2. The FAA wasenacted in 1925, in an effort to reversehistoric judicial hostility towards arbitrationand to ensure that arbitration agreementsare enforced according to their terms. SeeMastrobuono v. Shearson Lehman Hutton,Inc., 514 U.S. 52, 53-54 (1995); Volt Info.Sciences, Inc. v. Trustees of Leland StanfordJunior Univ., 489 U.S. 468, 479 (1989).Although it has largely achieved these goals,the FAA is not without its limitations —some of which emanate from its silenceconcerning the scope of arbitrator power.Although the FAA does not provide expressinstructions concerning the nature andscope of arbitrators’ authority, it does declare“a national policy favoring arbitration whenthe parties contract for that mode of disputeresolution.” See Preston v. Ferrer, 128 S.Ct.978, 981 (2008). In so doing, it “does notallow courts to ‘roam unbridled’ in theiroversight of arbitration awards, but carefullylimits judicial intervention to instanceswhere the arbitration has been tainted inspecific ways.” Marshall & Co. v. Duke, 941 F.Supp. 1207, 1210 (N.D. Ga. 1995) (citationomitted). In brief, arbitral awards can only beoverturned under unusual circumstances —most importantly for present purposes,“[w]here the arbitrators exceeded theirpowers.” 9 U.S.C. §10(a)(4) (2008). Thus,despite its silence with regard to the formsof relief a panel may order, the FAA providesbroad latitude for arbitration panels to act ina manner consistent with the mandateadvanced in the relevant arbitrationagreement.4

B. State Law: The UniformArbitration Act

Arbitration agreements may also begoverned by state law. “Where ... the partieshave agreed to abide by state rules ofarbitration, enforcing those rules accordingto the terms of the agreement is fully

consistent with the goals of the FAA.” VoltInfo. Sci. v. Trustees of Leland Stanford JuniorUniv., 489 U.S. 468, 479 (1989).5 Many statearbitration statutes are modeled on theUniform Arbitration Act (the “UAA”), whichwas originally promulgated in 1955 tobuttress arbitration “in the face of oftentimeshostile state law.” Revised Unif. ArbitrationAct (the “RUAA”), Prefatory Note at p. 1 (2000).The UAA acknowledges the sanctity ofarbitration agreements but, like the FAA, itdoes not adequately address certain realitiesof modern arbitration. To that end, in 2000,the UAA was revised in an effort to provide a“more up-to-date statute to resolve disputesthrough arbitration.” Id. To date, forty-ninejurisdictions have adopted the UAA, the RUAA(or revised UAA), or substantially similarlegislation as their state arbitration statute.Uniform Law Commissioners, A Few FactsAbout the ... Uniform Arbitration Act (2008),http:// www.nccusl.org/ nccusl/ uniformact_factsheets/ uniformacts-fs-aa.asp; CornellUniversity Law School, Law by Source:Uniform Laws (2003),http://www.law.cornell.edu/uniform/vol7.html. See, e.g., Mass. Gen. Law ch. 251, §§1-19. 6

The complexity of modern arbitration (whichoften rivals the intricacy of judicialproceedings), and the sophistication of thelegal arguments raised in those arbitrations,magnifies arbitrators’ need to possessauthority to address the myriad of issues thatmay arise during the course of a protractedproceeding. To that end, unlike the (original)UAA, which — in many cases — failed to armarbitrators with rudimentary powers (forexample, it granted no specific power toaward non-monetary damages), the RUAAempowers arbitrators to “order such remediesas the arbitrator considers just andappropriate under the circumstances of theproceeding.” RUAA at §21(c) (2000).Consistent with the growing importance ofjudicial functions in arbitration, it alsoarrogates to arbitrators express authorizationfor specified quasi-judicial acts. Id. at §§8(injunctive relief); 17(a) (subpoenas); 17(e)(protective orders); 21(a) (punitive damages);21(b) (attorney’s fees). Infra at Part III.

C. International Law:The UNCITRAL Rules

The multinational character of thereinsurance business ensures that not alldisputes will be governed by the FAA or statearbitration statutes. Disputes between a

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An arbitrator’sknowledge of thelimitations on his orher powers is cru-cial to ensuringjudicial confirmationof awards and toprotecting theintegrity and efficacyof arbitration as aviable alternative tolitigation.

domestic party and a foreign party aregoverned by the United NationsCommission on International Trade LawArbitration Rules (the “UNCITRAL rules”),whenever parties agree to their use. SeeUNCITRAL rules at Art. 1.1.The UNCITRAL rules provide a framework inwhich geographically diverse parties canresolve disputes with the aid of procedurallyneutral guidelines.7 Like the FAA, however,the UNCITRAL rules give little guidance withrespect to the scope of arbitrator powers.They state only that,“[i]n addition to makinga final award, the arbitral tribunal shall beentitled to make interim, interlocutory, orpartial awards.” Id. at Art. 32.1.

D. Commercial Rules For Arbitration

In addition to the federal, state, andinternational statutes governing arbitratorconduct, a few trade groups and othercommercial organizations have promulgatedarbitration codes that parties may agree tofollow. For example, the AmericanArbitration Association (the “AAA”) andARIAS•U.S. (“ARIAS”) have issued guidelineswhich, in part, seek to define the scope ofarbitrator authority. See AAA, CommercialArbitration Rules and Mediation Procedures(amended and effective Sept. 1, 2007) (“AAARules”), available athttp://www.adr.org/sp.asp?id=22440; ARIAS-U.S., Practical Guide to ReinsuranceArbitration Procedure (2004) (“ARIAS PracticalGuide”), available at http://www.arias-us.org/pdf/Practical_Guide.pdf. Similarly, in1997, an insurance and reinsurance industrytask force comprised of international anddomestic representatives of insurers,reinsurers, experienced industry arbitratorsand industry trade associations was formed,in an attempt to formalize the process usedby the reinsurance industry to resolvedisputes. Those efforts culminated in the“Procedures for the Resolution of U.S.Insurance and Reinsurance Disputes” (“RAAProcedures”), which provide a framework forthe conduct of reinsurance industryarbitrations. See RAA Procedures, available inRAA Manual for the Resolution ofReinsurance Disputes (2001 & 2007updates).Parties who elect contractually to importthese (or similar) commercial codes andguidelines may benefit from a more precise

P A G E 4delineation of their arbitrators’ powers thanthose who rely on the baseline guidanceprovided by state or federal law. For instance,the RAA Procedures expressly state:

The Panel is authorized to award anyremedy permitted by the ArbitrationAgreement or subsequent writtenagreement of the Parties. In theabsence of explicit writtenagreement to the contrary, thePanel is also authorized to awardany remedy or sanctions allowed byapplicable law, including, but notlimited to: monetary damages;equitable relief; pre- or post- awardinterest; costs of arbitration;attorney fees; and other final orinterim relief.

Section 15.3 (emphasis supplied); see alsoARIAS Practical Guide §§4.4 (“The Panel hasthe authority to enter interim awards inappropriate cases.”); 5.3, Comment C (“[T]hepanel may specify a payment date and a rateof interest.”).Despite these various attempts to codifyand/or define the extent of arbitrators’powers, when the applicable rules provide nospecific authority to award various forms ofrelief, and the parties’ contract is silent on theissue, a panel’s authority to act intraditionally judicial capacities is oftenunclear. Case law interpreting the FAA andstate statutes, together with related policyarguments, has been used to help define thescope of arbitral authority and to justifyactions desired by one party over the otherside’s objections. Some of the mostfrequently discussed and disputed powers —the power to award multiple damages,interest, injunctive relief, subpoenas, andconfidentiality strictures — are discussed inthis article.

III. FIVE (QUASI-) JUDICIAL FUNCTIONSA. Multiple Damages

The prerogative of arbitration participants toshape their proceeding includes the jointability to select the menu of remediesarbitrators may award at its conclusion. Forexample, parties can contract to include orexclude multiple or punitive damages andattorney’s fees as available remedies. Whenthe subject contract is silent on the issue ofremedies, case law and legislation fill thegaps to provide the authority needed toensure judicial confirmation of awards

CONTINUED FROM PAGE 3Like the FAA, howev-er, the UNCITRALrules give little guid-ance with respect tothe scope of arbi-trator powers. Theystate only that, “[i]naddition to making afinal award, thearbitral tribunalshall be entitled tomake interim, inter-locutory, or partialawards.”

5 P A G Eprescribing these remedies.

1. The Power To Award “Multiple Damages”

It is not surprising that there is some degreeof confusion over an arbitrator’s authority toaward multiple damages. This uncertaintymay derive, in part, from disagreements overthe purposes and proper characterization ofmultiple damages remedies. If they areviewed as a means to punish and deterparties, they serve the same function aspunitive damages and should be evaluatedaccording to the considerations that informa panel’s authority to award that type ofrelief. If, however, they are compensatory innature, the proper analysis is whether thepanel is imbued with the power to awardcompensatory relief above the principalamount of a contractual loss. In thisconnection, the United States SupremeCourt has recognized that there is often afine line between compensatory multipledamages and punitive damages. SeeVermont Agency of Natural Res. v. UnitedStates ex rel. Stevens, 529 U.S. 765, 785-86(2000) (treble damages under the FalseClaims Act are “essentially punitive innature,” because “the very idea of trebledamages reveals an intent to punish past,and to deter future, unlawful conduct, notto ameliorate the liability of wrongdoers”).The better view is that multiple damages aremore compensatory in nature, which makesthem distinguishable from punitivedamages. E.g., Investment Partners, L.P. v.Glamour Shots Licensing, Inc., 298 F.3d 314, 317(5th Cir. 2002) (“[u]nlike punitive damages,which punish a wrongdoer, treble-damagescompensate an injured party”). Although theFAA does not expressly provide for an awardof sanctions, its broad language recognizes, ifonly by implication, that arbitrators mayissue such awards. 9 U.S.C. §10(a) (providingcourts with limited, specific grounds forvacating an arbitration award). For example,in Glamour Shots, the plaintiff filed a lawsuitin federal court seeking an award of trebledamages under federal antitrust law. Whenthe defendants moved to compel arbitration,the plaintiff responded that the arbitrationclause was void because it prohibitedarbitrators from awarding “punitivedamages.” Glamour Shots, 298 F.3d at 316.The court affirmed the arbitrationagreement and held that the arbitratorswere free to award multiple damages on theground that “[u]nlike punitive damages,

which are designed to punish a wrongdoerand deter future wrongful conduct, treble-damages compensate an injured party.” Id. at317. As a consequence, the court authorizedthe panel to award treble damages inaccordance with federal law, even though theagreement expressly barred punitivedamages. Id. at317-18.In a similar ruling, the Supreme Court ofConnecticut recently confirmed anarbitration award of multiple damageswhere such damages were authorized bystate law and not definitively excluded bythe arbitration agreement. Harty v. CantorFitzgerald & Co., 881 A.2d 139 (Conn. 2005). InHarty, the parties’ employment contractcontained an arbitration clause, stating that“arbitrators are not authorized or entitled toinclude as part of any award rendered bythem, special, exemplary or punitivedamages or amounts in the nature of special,exemplary or punitive damages....” Id. at 144.The award included double damages,attorney’s fees and costs. Id. The courtaffirmed the double damages award on theground that the relevant state statuteallowed them in the circumstances at bar,and because the arbitration clause wasambiguous on the subject of whether suchdamages were excluded. Id. at 155-56. Thecourt, however, vacated the award withrespect to attorney’s fees and costs, findingthat fees and costs were elements ofpunitive damages, which were expresslybarred by the parties’ contract. Id. at 157; seealso infra at Section III.A.2.The RUAA attempts to clarify the parametersof a panel’s power to award multipledamages. The RUAA expressly permitsarbitrators to award “punitive damages orother exemplary relief if such an award isauthorized by law in a civil action involvingthe same claim and the evidence producedat the hearing justifies the award under thelegal standards otherwise applicable to theclaim.” RUAA at §21(a) (emphasis supplied).Even though an arbitration agreement is aform of contract, the parties cannot conferauthority to award multiple damages on anarbitrator by agreement. There must be anindependent legal basis for the award. SeeRUAA at §21, Comment 1.8 In an effort toaddress concerns over excessive orunjustified awards, the RUAA requiresarbitrators to “specify in the award the basis

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The court affirmedthe arbitrationagreement and heldthat the arbitratorswere free to awardmultiple damages onthe ground that“[u]nlike punitivedamages, which aredesigned to punish awrongdoer anddeter future wrong-ful conduct, treble-damages compen-sate an injuredparty.”

P A G E 6

in fact justifying and the basis in lawauthorizing the award and state separatelythe amount of the punitive damages orother exemplary relief” — unless the partieswaive their right to receive these details. Id.at §21(e). As a result, barring some otherserious infirmity, courts do (and, they should)affirm a wide range of arbitral awards inRUAA jurisdictions, including multipledamages awards.

2. Punitive DamagesAlthough once considered to be outside thescope of arbitral power, a number of modernauthorities agree that arbitrators may awardpunitive damages under the FAA, UAA,certain state arbitration statutes and privateprocedural guidelines. See RUAA at §21(a),Comment 1; Mastrobuono v. ShearsonLehman Hutton, Inc., 514 U.S. 52 (1995); seealso Willoughby Roofing & Supply Co. v.Kajima Int’l, Inc., 598 F. Supp. 353, 361 (D. Ala.1984) (“This Court agrees that there is nopublic policy bar which prevents arbitratorsfrom considering claims for punitivedamages.”).The view that only courts should be vestedwith the power to award punitive damagesmay emanate from the perception thatarbitrators, who may not (as a group) be aswell versed in judicial decisions andprocedural safeguards, are unequipped todetermine the appropriate quantum ofpunitive damages to impose. On the otherhand, when a party engages in egregiousconduct, the aggrieved party — regardless ofwhether it seeks relief in court or inarbitration — should be entitled to the fullpanoply of available remedies. Thesecompeting considerations highlight thecontroversy over punitive damages which hasrecently been at the forefront of the debateconcerning the scope of arbitrator power.

(a) State Arbitration LawAs noted above, the RUAA expressly permitsimposition of punitive damages. RUAA at§21(a). State statutes modeled on theoriginal UAA, which does not directlyreference punitive damages, are less clear.See UAA at §§1-25 (1956).For example, in Massachusetts, a UAAjurisdiction, the state’s highest courtaffirmed an award of punitive damages,even though the state arbitration statute did

not expressly authorize them. DrywallSystems, Inc. v. ZVI Construction Co., 761N.E.2d 482 (Mass. 2002); M.G.L. Ch. 251. InDrywall, the Supreme Judicial Court heldthat, since there was no express statutory orcontractual limit on punitive damages ormultiple damages under Massachusetts law,both punitive damages and multipledamages could be awarded in arbitration. Inthe Court’s parlance: “Absent contrarystatutory direction, the strong public policy infavor of arbitration of commercial disputesshould be given effect.” Id. at 486 (citationomitted).Other states have attempted to bar punitivedamages altogether on the ground that oneof the key differences between arbitrationand litigation — the essentially privatenature of industry arbitration — restrictsrelief to purely compensatory damages.“[S]uch damages are a social exemplaryremedy rather than a private compensatoryremedy.” Lee R. Russ & Thomas F. Segalla,Couch on Insurance 3D at §213.45 (2008). Forexample, under New York law, arbitrators lackauthority to award punitive damages, even ifthe parties to an arbitration have privatelyagreed otherwise. Garrity v. Lyle Stuart, Inc.,353 N.E.2d 793, 795 (N.Y. 1976). The UnitedStates Supreme Court has emphasized,however, that the FAA preempts state lawbarring an arbitration award of punitivedamages, unless the parties agree in theircontract that their arbitrator(s) may notaward such damages. See Mastrobuono v.Shearson Lehman Hutton, Inc., 514 U.S. 52, 62-64 (1995). But, when the FAA does not apply,arbitrators bound to follow New York law (forexample) may not award punitive damages.

(b) Federal Arbitration LawIn Mastrobuono, supra, the Supreme Courtupheld an award of punitive damages underthe FAA, in the face of New York’s prohibitionagainst such awards in arbitration. SeeGarrity v. Lyle Stuart, Inc., 353 N.E.2d 793, 794(N.Y. 1976) (“An arbitrator has no power toaward punitive damages, even if agreedupon by the parties.”).9

The Plaintiffs in Mastrobuono had signed acontract including an arbitration agreementwhen they opened a securities tradingaccount with the defendant brokerage firm.Mastrobuono, 514 U.S. at 53. The agreementdid not expressly reference punitivedamages. Instead, it stated only that it wasgoverned by the “laws of the State of NewYork” which, in turn, prohibit arbitrators from

CONTINUED FROM PAGE 5On the other hand,when a party engagesin egregious conduct,the aggrieved party— regardless ofwhether it seeks reliefin court or in arbi-tration — should beentitled to the fullpanoply of availableremedies.

7 P A G Eawarding punitive damages. Id. A few yearsafter opening their account, the plaintiffssued the defendant brokerage firm formismanaging their assets. Id. Thebrokerage successfully moved to compelarbitration, and the arbitration panelawarded both compensatory and punitivedamages. Id. The respondent brokeragelater argued on appeal that the panel wasnot authorized to award punitive damages,and the issue ultimately reached the UnitedStates Supreme Court.The Supreme Court held that the generalchoice of laws provision in the agreementwas not sufficient to limit the availability ofpunitive damages. Id. at 62. Rather,“thebest way to harmonize the choice-of-lawprovision with the arbitration provision is toread ‘the laws of the State of New York’ toencompass substantive principles that NewYork courts would apply, but not to includespecial rules limiting the authority ofarbitrators.” Id. at 63-64. Noting that theFAA was enacted to preempt state lawsprohibiting arbitration, the Court reasonedthat “when a court interprets [choice of law]provisions in an agreement covered by theFAA,‘due regard must be given to the federalpolicy favoring arbitration, and ambiguitiesas to the scope of the arbitration clauseitself resolved in favor of arbitration.’” Id. at62 (quoting Volt, 489 U.S. at 476).The Court further intimated that, even instates where punitive damages areprohibited, the parties must specificallystate in their agreement that punitivedamages are outside the scope of arbitralauthority if they wish to avoid imposition ofpunitive damages. The holding highlights,among other values, the judicial deferenceto an arbitrator’s power to fashioncircumstantially appropriate relief which hasbecome a regular feature of modern U.S.jurisprudence. See also Bonar v. Dean WitterReynolds, Inc., 835 F.2d 1378 (11th Cir. 1988)(affirming the ability of arbitrators to awardpunitive damages in an employmentarbitration governed by the FAA and theAAA Rules even though the dispute was alsogoverned by New York law, which prohibitspunitive damages in arbitration); Am. Trust v.United Int’l Ins. Co., 1991 U.S. Dist. LEXIS 18412(N.D. Ill., Dec. 31, 1991) (affirming an arbitralaward of punitive damages assessed againsta reinsurer when the arbitration agreementstated that “arbitrators are relieved from alljudicial formalities and may abstain fromfollowing the strict rule of law”).

Interestingly, at least one court has takenMastrobuono a step further. See Ex parteThicklin, 824 So.2d 723, 730-33 (Ala. 2002). InThicklin, the Alabama Supreme Court ruledthat an arbitration agreement specificallyprohibiting an award of punitive damages inarbitration could not be enforced becausesuch a provision was “unconscionable.” Inother words, an arbitrator had the power toaward punitive damages, even though theparties’ own arbitration agreement — fromwhich the arbitrators derived theirappointment and their authority — evincedtheir joint intention to bar that form ofrecovery. Id. The impetus for this extremeruling was a fact pattern involving “gross,oppressive, or malicious fraudulent actscommitted intentionally.” Id. at 732. Thecourt reasoned that “[i]f parties to anarbitration agreement waive an arbitrator’sability to award punitive damages, the doorwill open wide to rampant fraudulentconduct with few, if any, legal repercussions.”Id. at 733. The court struck the provisionbarring punitive damages from thearbitration agreement, but otherwise upheldthe agreement and compelled arbitration. Id.at 734.Taken together, the Mastrobuono andThicklin decisions, plus the RUAA — whichnow expressly authorizes punitive damages— demonstrate the growing acceptance of apanel’s power to award punitive damages.Many industry panels, of course, remainreluctant to award punitive damages absentan unequivocal demonstration of knowingand truly egregious conduct. If, however,arbitrators specify in their award a colorablebasis in law and fact for a punitive damageaward, it will likely be upheld by the courts.This kind of specification of an award’sunderpinnings, of course, comes close to a“reasoned award,” which parties may elect toavoid for other reasons.

(c) Commercial RulesEven absent statutory guidance, some courtshave confirmed arbitrators’ authority toaward punitive damages in arbitrationsgoverned by commercial rules, provided thatthe parties’ contract does not specificallyproscribe this form of relief. For example,notwithstanding the silence of Wisconsinlaw on the subject of a panel’s authority toaward punitive damages, a Wisconsin courtnonetheless affirmed a punitive damages

The Court furtherintimated that, evenin states wherepunitive damagesare prohibited, theparties must specif-ically state in theiragreement thatpunitive damagesare outside thescope of arbitralauthority if theywish to avoid impo-sition of punitivedamages.

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P A G E 8

award in an arbitration governed by the AAARules. See Winkelman v. Kraft Foods, Inc.,693 N.W.2d 756, 758 (Wis. Ct. App. 2005).10

In Winkelman, the court held that “anarbitrator may award punitive damages ifpermitted to do so under the rules adoptedby the parties, so long as the award is nototherwise proscribed by the parties’agreement.” Id. at 765. It is worth observingthat the punitive damages awarded inWinkelman were not statutorily mandated;instead, they were fabricated by the panel to“fill in the interstices in the existing relevantlaw.” Id. at 764 (citations omitted). The courtadded that punitive damages promote goodconduct in commercial dealings, and thatpunitive damages cannot possibly be inviolation of any law, since there is no suchproscription against them in Wisconsin. Id.at 764.The ARIAS guidelines are silent on this topic.Nevertheless, given the preponderance ofstate and federal authority upholdingpunitive damage awards by arbitrators, suchawards are likely to be upheld, as long asthey are reasonable and do not conflict withthe remedies or other principles adopted bythe parties.

3. Attorney’s FeesRising counsel fees and more complex andprotracted arbitration proceedings haveintensified the efforts of prevailing parties torecoup legal fees expended in arbitration. Apanel’s authority to award attorney’s fees,however, is generally more limited than itspower to award multiple and punitivedamages. According to the weight ofauthority, counsel fees are available inarbitration when the parties’ contract sospecifies, or when there is a statutory basis(such as a civil rights violation or a finding ofbad faith) that mandates fee-shifting. Thereis nothing surprising about theselimitations, which reflect U.S. reinsurancearbitration practice and which are consistentwith the so-called “American Rule” — absentspecial legislation or a contract that providesotherwise, each party must pay its owncounsel fees. See, e.g., Rosati v. Bekhor, 167 F.Supp.2d 1340, 1347 (M.D. Fla. 2001).But, where arbitrators can ground theiraward in an exception to the American Rule,courts have concluded that arbitrators donot exceed their powers in awardingattorney’s fees. See Marshall & Co. v. Duke,

941 F. Supp. 1207 (N.D. Ga. 1995), aff’d, 114 F.3d188 (1997). In Marshall, the losing partysought to vacate an arbitration award thatincluded over $600,000 in attorney’s fees,awarded after plaintiffs established that thedefendants’ contentions were frivolous andthat they had conducted the underlyinglitigation in bad faith and for improperpurposes. See id. at 1214. The federal trialcourt found that the arbitrators did notexceed their powers in awarding fees andconfirmed the award. Id. at 1215; see also 9U.S.C. at §10. In reaching its conclusion, thecourt noted both that the parties had agreedto submit the fee issue to the panel, and thatthe “bad faith exception to the AmericanRule” extends to arbitration. Id. at 1213. Seealso Todd Shipyards Corp. v. Cunard Line, Ltd.,943 F.2d 1056, 1064 (9th Cir. 1991) (“In light ofthe broad power of arbitrators to fashionappropriate remedies and the accepted ‘badfaith conduct’ exception to the AmericanRule [of paying one’s own fees], we hold thatit was within the power of the arbitrationpanel in this case to award attorneys’ fees”).The statutory authorities are mixed. The FAA(again) fails to supply any independentauthorization for an award of attorney’s fees.Likewise, the UAA permits an award ofattorney’s fees only upon agreement of theparties. See UAA at §10. Courts in UAAjurisdictions have nonetheless concludedthat a fee award may fall within a panel’spowers if there is a statutory or common lawbasis for it. See LaRoche v. Flynn, 771 N.E.2d792 (Mass. App. Ct. 2002) (attorney’s fees arepermitted if allowed under a statutory claimsubmitted to arbitration); Kolar v. ArlingtonToyota, Inc. 675 N.E.2d 963, 966 (Ill. App. Ct.1996), aff’d, 688 N.E.2d 653 (Ill. 1997) (becausea panel has power to dispose of all requestsfor relief, it had the power to awardattorney’s fees). In Drywall, theMassachusetts Supreme Judicial Court heldthat an arbitrator may award attorney’s fees— despite the lack of a fee-shiftingagreement between the parties and thepresence of a general statutory prohibitionagainst awarding attorney’s fees inarbitration under M.G.L. Ch. 251, §10 —because claims under the Massachusettsconsumer protection statute (M.G.L. Ch. 93A)“override[] the general unavailability ofAttorney fees.”11 Drywall Systems, supra, at482. At least a few other courts have reachedsimilar conclusions. E.g., David v. Abergel, 54Cal. Rptr.2d 443, 445 (Cal. Ct. App. 1996)(confirming an award including attorney’sfees, because the award was based on aCalifornia rule of civil procedure, which

CONTINUED FROM PAGE 7The statutoryauthorities aremixed. The FAA(again) fails to sup-ply any independentauthorization for anaward of attorney’sfees. Likewise, theUAA permits anaward of attorney’sfees only uponagreement of theparties.

9 P A G Eensure that their award is economicallyreasonable. As noted above, however, courtsgenerally defer to an arbitrator’s judgmentwith respect to the components of his or heraward. E.g., Softkey, Inc. v. Useful Software,Inc., 756 N.E.2d 631 (Mass. App. Ct. 2001)(arbitrator had not exceeded his powerswhere attorney’s fee award was based on thearbitrator’s assessment of the degree towhich each party had prevailed in thearbitration and their conduct therein).

B. InterestIt is widely acknowledged that a panel’sauthority to award damages includes thepower to impose both pre- and post-awardinterest. See, e.g., InterDigitalCommunications Corp. v. Nokia Corp., 407 F.Supp.2d 522 (S.D.N.Y. 2005) (award ofprejudgment interest was necessary tocompensate patent holder and did notmanifestly disregard New York law); UnitedStates v. Praught Constr. Corp., 607 F. Supp.1309 (D. Mass. 1985) (confirming award ofinterest to promote policy favoringarbitration). Although not expresslyarticulated in the FAA, the Act has beeninterpreted to support interest awards. E.g.,Sun Ship, Inc. v. Matson Navigation Co., 785F.2d 59, 62-63 (3d Cir. 1986) (confirmingaward made under the FAA, which wasinterest-bearing from the date of issuance);see also Holz-Her U.S., Inc. v. MonarchMachinery, Inc., No. 3:97CV56-P, 1998 U.S.Dist. LEXIS 15394, at *29 (W.D.N.C. July 24,1998) (“numerous courts have held thatarbitrators have the power to awardinterest”).The RUAA may also be interpreted toauthorize interest awards, even though theissue is not addressed squarely. The RUAAstates, in relevant part:

[A]n arbitrator may order suchremedies as the arbitratorconsiders just and appropriateunder the circumstances of thearbitration proceeding. The factthat such a remedy could not orwould not be granted by the courtis not a ground for refusing toconfirm an award ... or for vacatingan award.

RUAA at §21(c). By contrast, the most recentversion of the AAA Commercial Rules leaveslittle room for dispute. They expresslyauthorize awards of interest, permitting

authorized awards of attorney’s fees for badfaith or frivolous claims); Todd Shipyards, 943F.2d 1056, 1064 (arbitrator could awardattorney’s fees under the “bad faith”exception to the American Rule).Other states have acknowledged butcircumnavigated the American Rule byprohibiting an award of attorney’s feesaltogether, unless the relevant arbitrationagreement provides otherwise. See Md. CodeAnn. Cts. & Jud. Proc. §3-221(b) (2002) (“Unlessthe arbitration agreement providesotherwise, the award may not includecounsel fees.”); see also UBS Warburg, LLC v.Auerbach, Pollak & Richardson, Inc., No.119163-00, 2001 N.Y. Misc. LEXIS 1324, *7-8(Sup. Ct. Oct. 2, 2001) (“Absent any basis forthe award in the parties’ agreement or bystatute, the award of attorneys’ feesexceeded the authority of the arbitrators”).In one of several areas where the RUAAattempts to address the realities of modernarbitration with greater precision, it expresslyadopts the statutory and contractualexceptions to the general rule againstcounsel fee-shifting: “An arbitrator mayaward reasonable attorney’s fees and otherreasonable expenses of arbitration if such anaward is authorized by law in a civil actioninvolving the same claim or by theagreement of the parties to the arbitrationproceeding.” RUAA at §21(b).12

Leaving aside the various written repositoriesof arbitral authority, the parties and thepanel may (on their own) seek to leverageone of the traditional benefits of arbitration:self-help. If both parties request a specificform of relief, the panel is likely to considergranting it — even where it is not expresslyauthorized by the contract at issue — unlessits imposition would violate applicable law. Ajoint request for an award of attorney’s fees,for example, may reflect the parties’ intentwhere the contract is silent or ambiguous onthe issue. In the alternative, the parties maysimply wish to confer broader authority onthe panel during an arbitration proceeding.In either scenario, a panel may consider itselfempowered to award the type of reliefrequested, even though a court would likelydemand some evidence of authority for itsactions beyond the mandate of the partiesthemselves.Even when a panel has authority to awardattorney’s fees, the award must bereasonable and devoid of “corruption, fraud,or ... evident partiality.” FAA at §10(a).Arbitrators should, among other availableprecautions, review counsel’s bills in order to CONTINUED ON PAGE 10

[A]n arbitrator mayorder such remediesas the arbitratorconsiders just andappropriate underthe circumstances ofthe arbitration pro-ceeding. The factthat such a remedycould not or wouldnot be granted bythe court is not aground for refusingto confirm an award... or for vacating anaward.

P A G E 1 0

arbitrators to award “interest at such rateand from such date as the arbitrator(s) maydeem appropriate.” AAA Commercial Rule43(d)(i). See also ARIAS Practical Guide, Ch.5.3, Comment C (“the Panel may specify apayment date and a rate of interest ifpayment is not made by the specified date”).The rationale for permitting interest awardsin arbitration is closely linked to the policiessupporting enforcement of arbitrationagreements and promoting an arbitrationprocess insulated from judicial interference.As one court framed the issue:

Given the current policy ofencouraging arbitration, the trendof allowing arbitrators to awardinterest makes sense ... If interestwere only to be awarded by courts,then either successful parties willbe forced to spend more time andmoney to recover interest orunsuccessful parties will beunjustly enriched by the use ofsomeone else’s money. Theincentive to dispute a contract andto delay resolution of any disputeis greater if interest is not part ofthe arbitrator’s award. Therefore,allowing arbitrators to awardinterest is not only in line withcurrent case law but also helps tostreamline the arbitration processand save court resources.

United States v. Praught Constr. Corp., 607 F.Supp. at 1309, 1312 (D. Mass. 1985).These principles must, however, beunderstood in light of the arbitrationagreement itself. Since an arbitrator’spowers ultimately derive from privateagreement, parties can (of course) specificallypreclude a panel from awarding interest byprohibiting interest awards in theiragreement. See, e.g, Holz-Her U.S., Inc. v.Monarch Machinery, Inc., 1998 U.S. Dist. LEXIS15397, at *29 (W.D.N.C. July 24, 1998)(confirming AAA panel’s award of interest,because “neither party specifically objectedto the award of interest”). If, as is common,the agreement is silent, the existing statutesand rules support interest awards, as long asthe rate of interest is reasonable. If aninterest award appears to be excessive, itmay be subject to vacatur on the groundthat the arbitrators exceeded their powers.See FAA at §10; UCO Terminals, Inc. v. Apex OilCo., 583 F. Supp. 1213, 1217 (S.D.N.Y.) (arbitrators’

award of interest at an annual rate of 12%was not “irrational”), aff’d, 751 F.2d 371 (1984).State statutes prescribing the rate applicablein the relevant jurisdiction(s) are frequentlyused as a metric for the reasonableness ofarbitral interest awards.The next installment of this article willaddress the authority of panels to orderinjunctive relief, exercise subpoena powers,and issue confidentiality orders.▼1 The views expressed in this article do not necessarily

reflect the views of Choate Hall & Stewart LLP or any ofits clients.

2 The American Arbitration Association reported 20,711commercial arbitration filings in 2007, a 46 percentincrease over the previous year. See AAA, NationalNews, available at http://www.adr.org/sp.asp?id=34719.

3 Although there are certainly many other quasi-judicialacts that could potentially fall within the purview ofthis article, we have elected to focus on these recurringproblems in an effort to stake the bounds of arbitralauthority in the areas most germane to modern indus-try arbitrations.

4 In other words, the framework for analyzing arbitralauthority is predicated on judicial deference. In order tovacate an arbitration award, a court must find that theaward falls within one of the four categories enumerat-ed in Section 10 of the FAA, or shows a “manifest disre-gard of the law.” Houdstermaatschappij v. StandardMicrosystems Corp., 103 F.3d 9, 12 (2d Cir. 1997) (citingWilko v. Swan, 346 U.S. 427, 436-37 (1953)). Thus, arbitra-tion awards are almost impregnable to attack, andcourts generally affirm them, thereby promoting andsustaining arbitrators’ authority to fashion appropriaterelief.

5 A state arbitration statute will only be preempted bythe FAA to the extent that state law may conflict withthe FAA and restrict the rights of parties who haveagreed to arbitrate. Volt, 489 U.S. at 477-79.

6 According to The National Conference ofCommissioners on Uniform State Laws, thirteen statesadopted the RUAA between 2000 and 2007 — fourothers introduced it in 2008. Uniform LawCommissioners, A Few Facts About the ... UniformArbitration Act (2008), www.nccusl.org/nccusl/unifor-mact_factsheets/uniformacts-fs-aa.asp.

7 Some countries, like Bermuda, have adopted the UNCI-TRAL rules in their entirety. See Bermuda InternationalConciliation and Arbitration Act at §§2, 23 (1993). Anarbitration seated in Bermuda is, therefore, governed bythe UNCITRAL rules, to the extent that it is not gov-erned by other rules invoked through a choice-of-lawprovision in the parties’ agreement or otherwise.

8 Similarly,“there is doubt whether [the contracting par-ties] can eliminate the right to ... punitive damages orother exemplary relief” under the RUAA. See RUAA at§21, Comment 2 (citing cases).

9 New York has a broad arbitration statute, which is simi-lar in scope to the original UAA. It provides that awardscan be vacated when an arbitrator has “exceeded hispower.” N.Y. C.P.L.R. at §7511(b)(1)(iii).

10 The AAA Rules do not expressly grant arbitrators theauthority to award punitive damages. Instead, theygive an arbitrator authority to issue “any remedy orrelief” he or she deems appropriate. See AAACommercial Arbitration Rule 43.

11 Chapter 93A is intended to address “unfair or deceptiveact[s] or practice[s].”

12 In addition to bad faith claims, certain statutes suchas those targeting employment discrimination, civilrights, and antitrust violations permit courts to orderattorney’s fees in appropriate circumstances.

These principlesmust, however, beunderstood in lightof the arbitrationagreement itself.Since an arbitrator’spowers ultimatelyderive from privateagreement, partiescan (of course)specifically precludea panel from awarding interest byprohibiting interestawards in theiragreement.

CONTINUED FROM PAGE 9

FIRST QUARTER 2009

VOLUME 16 NUMBER 1

Beyond the “Discretion of the Arbitrator”: Applying the Standard of “Reasonable Necessity” to Determine the Appropriate Scope of Discovery inInsurance / Reinsurance Arbitration

The Role of Mediation in Dispute Resolution

Reinsurance Arbitration Clauses – Where theCourts Find Problems

Beyond the “Discretion of the Arbitrator”: Applying the Standard of “Reasonable Necessity” to Determine the Appropriate Scope of Discovery inInsurance / Reinsurance Arbitration

The Role of Mediation in Dispute Resolution

Reinsurance Arbitration Clauses – Where theCourts Find Problems

This installment…analyzes the practical challengesfaced by arbitratorswho exercise those powers.

P A G E 2

David A. AttisaniJennifer A. Brennan

In Part I of this article, published in the lastedition of ARIAS Quarterly, we endeavored toexamine the outer limits of arbitrators’authority to perform certain traditionallyjudicial acts in the context of an industryarbitration. The first installment describedthe principal sources of arbitral authority inthe United States and abroad — the FederalArbitration Act (“FAA”), state law (the Uni-form Arbitration Act (“UAA”) or Revised UAA(“RUAA”)), international law (the “UNCITRALrules”), and various commercial rules, includ-ing those promulgated by the AmericanArbitration Association (“AAA Rules”) andARIAS (the “ARIAS Practical Guide”) — andwhether these principles confer on arbitra-tors the power to award multiple damages.This installment advances the analysis byexamining the extent of an arbitrator’s pow-er to order injunctive relief, exercise subpoe-na powers, and issue confidentiality orders,and it analyzes the practical challenges facedby arbitrators who exercise those powers.

I. FIVE (QUASI-) JUDICIALFUNCTIONS

A. Interim Relief/Pre-Hearing Security

An arbitrator’s authority to grant injunctiverelief remains an unsettled issue, which thecourts continue to address on a case-by-casebasis. See Gilmer v. Interstate/Johnson LaneCorp., 500 U.S. 20, 32 (1991) (if permittedunder the terms of the parties’ arbitrationagreement, an arbitrator may order injunc-tive relief).1 In the reinsurance context,when the financial condition of one party isprecarious or unknown, relief is generallyrequested in the form of a motion seekingpre-hearing security. In these financiallytroubled times, such requests have begun toproliferate based — not only on the respon-

dent’s condition, but also — on perceptionsof vulnerability associated with their busi-ness partners and the market(s) in whichthey operate. The scope of a panel’s authori-ty to issue security awards must be defined,so that parties know whether a court willlikely enforce them. This is particularly truewhen a party seeks to attach its adversary’sassets. This section generally describes thesources of an arbitrator’s authority to awardinterim relief — with emphasis on requestsfor pre-hearing security.

1. Sources of AuthorityIf a contract expressly authorizes arbitratorsto award interim relief, the courts will gener-ally enforce the award. See, e.g., Mas-trobuono v. Shearson Lehman Hutton, Inc.,514 U.S. 52, 57 (1995) (“courts are bound tointerpret contracts in accordance with theexpressed intentions of the parties”). If therelevant contract is silent with respect tointerim relief, however, the panel may lookelsewhere for guidance.

Although the FAA and UAA are silent on theissue, the RUAA expressly states that an “arbi-trator may issue such orders for provisionalremedies, including interim awards, as thearbitrator finds necessary ... to promote thefair and expeditious resolution of the contro-versy, to the same extent and under the samecondition as if the controversy were the sub-ject of a civil action.” See Section 8(b). Thereis, however, no express reference to “securitymotions.”

Article 26 of the UNCITRAL rules also providesfor broad interim relief, which expresslyincludes security orders. It says, in pertinentpart:

INTERIM MEASURES OF PROTECTION

(1) At the request of either party, thearbitral tribunal may take any inter-im measures it deems necessary inrespect of the subject-matter of thedispute, including measures for the

David Attisani is Chairman of theInsurance & Reinsurance PracticeGroup at Choate Hall & Stewart LLP,where he has practiced for the pastsixteen years. Jennifer Brennan is asenior associate in the same Group.The authors also wish to acknowl-edge the contributions of AnitaChristy, a 2008 summer associate.

feature An Elephant in the (Arbitration)Room — The Power of Panels and Its Outer Limits (Part II)

David A.Attisani

Jennifer A.Brennan

3 P A G Econservation of the goods formingthe subject-matter in dispute, suchas ordering their deposit with a thirdperson or the sale of perishablegoods.

(2) Such interim measures may beestablished in the form of an interimaward. The arbitral tribunal shall beentitled to require security for thecosts of such measures.

(3) A request for interim measuresaddressed by any party to a judicialauthority shall not be deemedincompatible with the agreement toarbitrate, or as a waiver of thatagreement.

Id. (Emphasis supplied).

Interim relief is also expressly authorized by afew of the private commercial codes. Forexample, the ARIAS Practical Guide states, inChapter 4.4, that “[t]he Panel has the author-ity to enter interim awards in appropriatecases.” The ARIAS Guidelines also contain asample form Pre-Hearing Security Order, andthey note that security orders are commonlyutilized in appropriate cases. The AAA Com-mercial Arbitration Rules arm panel mem-bers with even broader authority:

(a) The arbitrator may take whateverinterim measures he or she deemsnecessary, including injunctive reliefand measures for the protection orconservation of property and dispo-sition of perishable goods.

(b) Such interim measures may takethe form of an interim award, andthe arbitrator may require securityfor the costs of such measures.

Id. at R-34 (emphasis supplied). The broadlanguage of the AAA Rules articulates therole of interim measures in maintaining thestatus quo, and it also provides specificexamples of authorized forms of relief. TheAAA Rules add that an “arbitrator may grantany remedy or relief that the arbitratordeems just and equitable and within thescope of the agreement of the parties, includ-ing, but not limited to, specific performanceof a contract.” R-43(a).

Finally, procedural guidelines recommendedby industry professionals expressly authorizepanel members to award interim relief, con-cluding that the decision to do so is “almost

CONTINUED ON PAGE 4

Reinsurance arbitrators are generally interested inthe location of an arbitration proceeding only in thecontext of making travel plans or deciding which juris-diction’s law will apply. For the lawyers involved, how-ever, the issues are a little more complex, including theissue of whether or not he or she is engaging in theunlicensed practice of law. While most jurisdictions donot consider the participation in an arbitration pro-ceeding in a state where the lawyer is not admitted tobe the unlicensed practice of law, there are someexceptions.

The Committee on Arbitration of the Association ofthe Bar of the City of New York prepared an excellentpaper recently that has been published in the Bar Asso-ciation’s publication, The Record, entitled “Unautho-rized Practice of Law and the Representation of Partiesin Arbitrations in New York by Lawyers Not Licensed toPractice in New York.” Although focused on New York,it includes an excellent state-by-state summary of thelaw in each jurisdiction, which might be of significantinterest to the lawyer members of ARIAS. The articlecan be accessed from the Bar Association’s web site(2008 Issue 3, at p. 700) at: http://www.nycbar.org/Pub-lications/THERECORD.htm.

Sincerely,Peter H. BickfordNew York

To the Editor…

Letters to the Editor may be sent to T. Richard Kennedy at

trk@trichardkennedy.com

exclusively within the discretion of the panelof arbitrators.” See RAA Procedures at §8.1 (“APanel may issue orders for interim relief,including pre-award security.”).

2. Pre-Judgment Security and The Courts

Given the silence of the FAA and UAA — andthe failure of many jurisdictions to adopt theRUAA — the question whether a panel hasauthority to grant injunctive relief in arbitra-tions not governed by commercial rules(absent express authorization from the par-ties’arbitration agreement) remains one forthe courts. The current weight of judicialauthority — and industry practice — sup-ports an arbitrator’s discretion to award equi-table relief, including pre-hearing securityorders.

In general, this broad discretion to preservethe status quo is rooted in a pragmaticrecognition of the parties’ limited ability toenumerate every possible problem (and therelated undertakings) a panel may need toaddress in the future. E.g., Yasuda Fire &Marine Ins. Co. v. Continental Cas. Co., 37 F.3d345 (7th Cir. 1994). The arbitration clausesfound in older reinsurance contracts oftenspecify without elaboration, for example,that the arbitrators are “free from all judicialformalities.” Faced with this kind of omnibushonorable engagement provision, a numberof courts have construed it as a talismanmeaning “inherent authority.” As one courtsaid:

Courts in this Circuit have firmlyestablished the principle thatarbitrators operating pursuant to[honorable engagement clauses]have the authority to orderinterim relief in order to preventtheir final award from becomingmeaningless.

British Ins. Co. of Cayman v. Water Street Ins.Co., 93 F. Supp.2d 506, 516 (S.D.N.Y. 2000) (cita-tions omitted); see also Forum Ins. Co. v. FirstHorizon Ins. Co., 1989 WL 65041, at *3 (N.D. Ill.June 8, 1989) (panel had “inherent power,aside from any treaty, to order ... security”).More broadly, the Seventh Circuit Court ofAppeals has explained the need for flexibleinterpretation of a panel’s inherent powers:

[W]e would be remiss if we did notemphasize how important a widerange of remedies is to successful

P A G E 4arbitration. Although parties toarbitration agreements may notalways articulate specific remedies,that does not mean remedies arenot available. If an enumeration ofremedies were necessary, in many“cases the arbitrator would bepowerless to impose any remedy,and that would not be correct.Since the arbitrator ‘derives all hispowers from the agreement, theagreement must implicitly granthim remedial powers when there isno grant.’”

Yasuda, 37 F.3d at 351 (citations omitted).2 Inother words, if arbitrators are to be chargedwith stewardship over this form of adjudica-tive process, then the courts will not deprivethem of the tools needed to run it and todeliver meaningful remedies, even if thosepowers need to be implied in the parties’agreement.

3. The UnauthorizedInsurers’ Process Act

Although the import of state UnauthorizedInsurers Process Acts (the “UIPA”) on the arbi-tration process is debatable, parties in arbitra-tion have argued from time to time that theUIPA bears, in certain circumstances, on apanel’s authority to issue security. The UIPA isa model statute adopted, in varying forms, byall fifty states.3 It provides, among otherthings, that pre-appearance security isrequired from unauthorized insurers beforethey may file a pleading in court. A commoniteration of that restriction provides:

Before any unauthorized foreign oralien insurer files any pleading inany proceeding against it, it shalleither: (A) deposit with the clerk ofthe court in which the proceeding ispending, cash or securities ... suffi-cient to secure payment of anyfinal judgment which may be ren-dered in the proceeding....

N.Y. Ins. Law at §1213(c) (emphasis supplied);see also, e.g., Del. Code Ann. tit. 18 at §2107(a);Me. Rev. Stat. Ann tit. 24-A at §2107(1); Mass.Gen. Laws Ch. 175B at §3(a). In some states,reinsurers are exempted from the securityrequirement, if they “designat[e] the commis-sioner of insurance or his successor in office[as the reinsurer’s] true and lawful attorneyupon whom may be served all lawful processin any action, suit or proceeding instituted.”See, e.g., Del. Code Ann. tit. 18 at §2107; Me.

CONTINUED FROM PAGE 3As a general matter,and within reason,an arbitration panelmay establish thescope of discovery ina reinsurance arbi-tration, subject toany agreementbetween the parties.In the absence ofstatutory authority,however, neither theparties nor the arbi-trators control theflow of informationfrom third parties.

5 P A G ERev. Stat. Ann tit. 24 at §2106; Mass. Gen.Laws Ch. 175B at §3A.

There is an ongoing debate over theapplicability of these statutes, if any, toindustry arbitration. On one hand, thestatutes specifically point to judicialproceedings — as opposed to arbitra-tions — in their reference to a “filing”with the “clerk of the court”and by not-ing that “the court”may dispense withsecurity orders in certain circumstances.Others argue, however, that thestatutes may be applied, if only by anal-ogy, to the arbitration context, becausestate legislatures clearly recognized —when they adopted the UIPA — thatpre-hearing security was essential toprotect their citizens in disputes involv-ing foreign insurers. See N.Y. Ins. Law at§1213(a) (“The legislature declares that itis a subject of concern that many resi-dents of this state hold policies of insur-ance issued or delivered in this state byinsurers while not authorized to dobusiness in this state ....”).4

At least one court faced with this issuehas held that the New York UIPA did notundermine or otherwise affect an arbi-tration panel’s authority to order pre-award security. See British Ins. Co. ofCayman v. Water Street Ins. Co., 93 F.Supp.2d 506 (S.D.N.Y. 2000); see alsoGeneral Reinsurance Corp. v. Underwrit-ing Members of Lloyd’s, No. 103047/02,at 6, 10 (N.Y. Sup. Ct. Oct. 8, 2002) (whenan arbitrating party petitioned the courtto obtain pre-hearing security under theNew York UIPA, the court denied thepetition because the UIPA does not nec-essarily apply to arbitrations, and “thequestion of whether petitioner is enti-tled to security should rest with thearbitration panel”). Still, because thelanguage of each state statute varies,each one must be examined individual-ly in order to determine whether itarguably addresses an arbitrator’s abili-ty to manage the subject proceedingand to award pre-hearing security.

In short, arbitrators are generallyauthorized to order injunctive relief. If,however, the proceedings are not gov-erned by a source of authority expresslyarrogating this authority to the panel,and the parties’arbitration agreementis silent on the subject of injunctiverelief, a panel’s authority to award

injunctive relief may be (and, it some-times is) subject to dispute.

B. Subpoena PowerAs a general matter, and within reason,an arbitration panel may establish thescope of discovery in a reinsurance arbi-tration, subject to any agreementbetween the parties. In the absence ofstatutory authority, however, neither theparties nor the arbitrators control theflow of information from third parties.See Matter of the Arbitration betweenIntegrity Ins. Co. v. Am. Centennial Ins.Co., 885 F. Supp. 69, 71 (S.D.N.Y. 1995) (non-parties “never bargained for or voluntari-ly agreed to participate in an arbitra-tion”). Because relevant information isoften in the possession of non-parties toa reinsurance arbitration — includingbrokers, MGA’s, and other participants inthe disputed reinsurance program —the ability of a panel to issue depositionor document subpoenas may be criticalto its final disposition.

Arbitral authority to subpoena non-par-ties must be found in sources extrinsicto the contract that launched the arbi-tration and enabled the arbitrators. See,e.g., Hay Group, Inc. v. E.B.S. AcquisitionCorp., 360 F.3d 404, 406 (3d Cir. 2004)(“[a]n arbitrator’s authority over partiesthat are not contractually bound by thearbitration agreement is strictly limitedto that granted by the Federal Arbitra-tion Act”); National Broadcasting Co.,Inc. v. Bear Stearns & Co., 165 F.3d 184, 187(2d Cir. 1999) (“If discovery were to beobtained from ...Third Parties ... theauthority to compel their participationwould have to be found in a source oth-er than the parties’arbitration agree-ment”).5 Because reinsurance contractsoften involve risks and cedents locatedin different states, most reinsurancecontracts are interpreted according tothe FAA, absent the parties’selection ofa specified state’s law. Under the FAA,“arbitrators ... may summon in writingany person to attend before them or anyof them as a witness and in a propercase to bring with him or them anybook, record, document, or paper whichmay be deemed material as evidence inthe case.” Id. at §7 (emphasis supplied).The UAA,6 RUAA,7 the UNCITRAL rules,8and the AAA Rules9 each authorize someform of arbitral subpoena power.

The FAA, UAA and RUAA allow panels tocompel attendance of non-parties at ahearing, but they do not directly addressthe scope of a panel’s power to order pre-hearing discovery from third parties.Similarly, although AAA Rule 31(d) may beinterpreted to authorize pre-hearing dis-covery from non-parties, if a non-partyrefuses to comply with the subpoena,the party seeking discovery must enforcethe subpoena in court. The federal cir-cuits called upon to consider the issueare split — some permit discovery sub-poenas to be issued; some require ashowing of “special need”; and, a thirdgroup has ruled out arbitral discoverysubpoenas altogether. Moreover, there isno consensus as to whether these sub-poenas may be used to compel theappearance of deponents or, in the alter-native, whether they may be used only toobtain documents.

A recent decision by the Court of Appealsfor the Second Circuit, however, may sig-nal “an ‘emerging rule’ that [an] arbitra-tor’s subpoena authority under FAA § 7does not include the authority to sub-poena nonparties or third parties for pre-hearing discovery.” Life Receivables Trustv. Syndicate 102 at Lloyd’s of London, No.07-1197, 2008 WL 4978550 (2d Cir. Nov. 25,2008) (citation omitted).

1. Pre-Hearing Discovery Not Allowed

In adopting reasoning previously appliedby the Court of Appeals for the Third Cir-cuit, the Life Receivables court took astrict constructionist view of the FAA andstaked the outer bounds of permissible,non-party discovery in arbitrations gov-erned by the FAA. See id.; see also HayGroup, Inc. v. E.B.S. Acquisition Corp., 360F.3d 404 (3d Cir. 2004). In Hay Group, theThird Circuit held that Section 7 of theFAA (“Section 7”) did not authorize a pan-el to order pre-hearing document pro-duction from non-parties. See HayGroup, 360 F.3d at 407. In reversing thefederal trial court’s ruling below, theCourt in Hay Group held that “Section 7’slanguage unambiguously restricts anarbitrator’s subpoena power to situa-tions in which the non-party has beencalled to appear in the physical presenceof the arbitrator and to hand over the

CONTINUED ON PAGE 6

P A G E 6

documents at that time.” Id. at 407; see alsoIntegrity Ins. Co., v. Am. Centennial Ins. Co.,885 F. Supp. 69, 72-73 (S.D.N.Y. 1995) (arbitra-tors were free to order pre-hearing docu-ment discovery, but had no power to issuedeposition subpoenas, because the burdenwas too high for non-parties who “never bar-gained for or voluntarily agreed to partici-pate in the arbitration”).Applying the same reasoning, the Life Receiv-ables court strictly construed the language ofthe FAA,noting that“[w]hen a statute’s lan-guage is clear,our only role is to enforce thatlanguage according to its terms.” Life Receiv-ables, 2008 WL 4978550,at *5 (citations omit-ted). Because Section 7 only permits docu-ment discovery from non-parties if theyappear before members of the panel, thecourt concluded that the FAA does not author-ize arbitrators to compel pre-hearing docu-ment discovery from non-parties. As a result, ifan arbitrator were to issue a third-party sub-poena, the subpoena likely would not beenforced by a court in the Second Circuit.Although arbitrators may be limited in theirability to compel discovery from non-parties,they are not powerless. In fact, the LifeReceivables court expressly noted that Sec-tion 7 of the FAA is not restricted to meritshearings — a panel could order a witness toappear at a preliminary hearing with therequested documents in hand. See id. at *6.10Of course, such orders sometimes inducenon-party witnesses to produce their docu-ments, in order to avoid the inconvenience ofappearing in person. Id. At a minimum, thelimitations of Section 7 should cause bothparties and arbitrators to consider moreclosely the scope of discovery requests andtheir relevance to the issues in dispute. Seeid. In this respect, the FAA provides somemeasure of control on the elephantineexpansion of arbitration proceedings.

2. Pre-Hearing Discovery Permitted

In contrast to these more recent decisions,the Sixth Circuit Court of Appeals ruled, in1999, that a panel could compel not only athird party’s attendance at an evidentiaryhearing, but also pre-hearing production ofdocuments from non-parties. Am. Fed’n ofTelevision and Radio Artists v. TJBK TV, 164F.3d 1004, 1009 (6th Cir. 1999). The courtdetermined that the FAA’s authorization ofdocument subpoenas for production at an

evidentiary hearing “implicitly include[s] theauthority to compel the production of docu-ments for inspection by a party prior to thehearing.” A similar rationale has beenemployed by courts with respect to an arbi-trator’s authority to issue deposition subpoe-nas. See Amgen Inc. v. Kidney Ctr. ofDelaware County, Ltd., 879 F. Supp. 878 (N.D.Ill. 1995). Like the court in American Federa-tion, the Amgen court held that the FAA-granted authority to compel testimony at ahearing also included the power to compeltestimony prior to an evidentiary hearing.

In 2000, the Eighth Circuit offered a morenuanced approach to the problem of arbitralsubpoenas to produce documents. SecurityLife Ins. Co. of Am. v. Duncanson & Holt Inc.,228 F.3d 865, 870-71 (8th Cir. 2000). In SecurityLife, the Court paid special attention to thenon-party’s involvement in the issues underreview. It held that an arbitrator could com-pel pre-hearing discovery of a non-party whowas “not a mere bystander pulled into [a]matter arbitrarily, but is a party to the con-tract that is the root of the dispute, and istherefore integrally related to the underlyingarbitration, [even] if [it is] not an actual party.”Id. at 871; see also Meadows Indemnity Co. v.Nutmeg Ins. Co., 157 F.R.D. 42, 45 (M.D.Tenn.1994) (pre-hearing discovery of non-partiesallowed, because the subpoenaed recipientswere “intricately related to the partiesinvolved in the arbitration and [were] notmere third-parties who [had] been pulledinto this matter arbitrarily”); Festus & HelenStacy Foundation, Inc. v. Merrill Lynch, PierceFenner, & Smith Inc., 432 F. Supp.2d 1375, 1379(N.D. Ga. 2006) (the FAA impliedly permitsarbitrators to order pre-hearing discoveryfrom non-parties). Most of these rulings pre-date the Hay Group and Life Receivables deci-sions. As a result, it is an open questionwhether these courts would rule the sameway if the question were presented today.

3. Pre-Hearing Discovery Permitted Based on a Showing of “Special Need”

A middle ground approach forged by theFourth Circuit, but rejected by the Second Cir-cuit in Life Receivables, applies a balancing test— arbitral orders for pre-hearing discovery ofa non-party are enforceable, if the requestingparty can demonstrate a “special need orhardship.” COMSAT Corp. v. Nat’l Sci. Found.,190 F.3d 269, 275 (4th Cir. 1999). Although thecourt declined to define its standard in the

CONTINUED FROM PAGE 5For these reasons,confidentiality provi-sions are viewed bysome as an essentialcomponent to theformula that hasmade arbitration theprincipal means ofresolving formalreinsurance dis-putes. In fact, somepractitioners arguethat confidentialityshould be consid-ered an impliedterm of reinsuranceagreements (espe-cially older con-tracts), even if it isnot expressly setforth in the parties’contract.

7 P A G Eabstract, it did require that,“at a mini-mum, a party must demonstrate thatthe information it seeks is otherwiseunavailable.” Id. at 276.

The circuit split highlights the judiciary’sschizophrenic efforts to mark the outerlimits of arbitral powers, or (morespecifically) to balance the need to armarbitrators facing litigation problemswith judicial tools, on the one hand,against the bench’s pervasive suspicionthat these devices are best left in thecharge of judges, on the other. Some ofthe key benefits to arbitration, includingefficiency and economy, would ulti-mately be jeopardized if arbitratorswere permitted to arrogate to them-selves complete authority to order anysubpoena, deposition, or other discoverywithout selective but meaningful judi-cial oversight. Furthermore, limitlesssubpoena power would permit a panelto reach non-parties who never agreedto participate in the relevant arbitration,and who otherwise have the right toplace their objections before judges —instead of being subjected to industry“judges”selected by private entitieswith interests potentially inimical totheir own.

More broadly, and for the same reason,arbitral power to order pre-hearing dis-covery of third parties may both exceedand stand at odds with the source of apanel’s authority — a private contractthat binds only consenting parties. Inlight of the mixed messages propagat-ed by the courts, arbitrators must con-sider and manage the tension betweentheir role in “safeguard[ing] the rights ofthird parties while insuring that there issufficient disclosure of information toprovide for a full and fair hearing.”RUAA at §17, Comment 8 (2000).

C. Imposing ConfidentialityConfidentiality and the technicalexpertise of industry arbitrators wereonce considered the hallmarks of “pri-vate”arbitration. The benefits of confi-dentiality are palpable. Sealing the arbi-tration record may encourage parties tocommunicate candidly and promotecompromise. In addition, confidentialityallows parties to avoid disclosure oftheir claim handling and payment prac-tices which, in some cases, could invite

third parties to seek discovery in aneffort to advance their own interests.The veil of confidentiality also arguablyprevents honorable arbitration positions— which may, in fact, be driven by thecircumstances of a specific case, or by anongoing business relationship — frombeing mis-characterized as “corporatepositions.” And, absent confidentialityrequirements, a third party’s generalknowledge of arbitration proceedingsand the positions taken therein couldunfairly refract public perception of acompany, which could (in turn) inhibitits sale of new business. For these rea-sons, confidentiality provisions areviewed by some as an essential compo-nent to the formula that has made arbi-tration the principal means of resolvingformal reinsurance disputes. In fact,some practitioners argue that confiden-tiality should be considered an impliedterm of reinsurance agreements (espe-cially older contracts), even if it is notexpressly set forth in the parties’con-tract.

Most U.S. arbitrations still do remainconfidential. In the past half decade,however, some parties and their counselhave selectively withheld their agree-ment to confidentiality provisions, in aneffort to use disclosure as settlementleverage against adversaries who maywish to avoid public scrutiny, includingdisclosure to business partners (or thereinsurance community, writ large) ofthe relevant facts or the fact of a disputeitself. Other reasons for eschewing con-fidentiality may include a party’s wish torely on a favorable result for its prece-dential effect in later arbitrationsagainst the same party, or as a means toencourage future opponents to resolvethe same issue in their favor. Regardlessof their motivation, a small but growingnumber of disputes turn on the parties’incompatible wishes with respect to theconfidentiality of a reinsurance arbitra-tion, which is typically governed by anarbitration clause that fails to addressthe issue.

1. Authority To Issue Confidentiality Orders

If only one party wishes to maintain con-fidentiality,does a panel have the authori-ty to order it? If so,what is the source ofthat mandate? Although there is little

authority available to answer these ques-tions definitively, industry practice,statestatutory regimes,and the parties’expressagreement may be (and often are) mar-shaled in an effort to do so.11

The “customary”U.S. practice is, of course,to maintain the confidentiality of a rein-surance arbitration and the informationand testimony created during its penden-cy. Unless parties can show that priorarbitrations under the relevant contractswere not confidential,“confidentiality”isoften viewed as an implied contract term,which is implemented through theissuance of a confidentiality order. Thehistorical industry expectation of confi-dentiality suggests that, if a party wantedits dispute to be public, it would (and,should) have articulated that predilectionin its contract. Absent express terms or acourse of dealing to the contrary, mostpanels will likely continue to interpretreinsurance contracts to include confi-dentiality provisions. Given the factualnature of a custom and practice inquiry,arbitrators may feel empowered to orderconfidentiality with little risk that theirorder will be found to “manifestly disre-gard”existing law, or that they will haveexceeded their powers.12

If, however, one party successfully chal-lenges a custom and practice finding,confidentiality mores may not survivejudicial review, absent some form ofstatutory authorization. See, e.g., Nation-wide Mut. Ins. Co. v. Randall & QuilterReins. Co., 2007 WL 2326878, at *2 (S.D.Ohio Aug. 10, 2007). In Randall, the courtdeclined to enforce a panel’s confiden-tiality order on its own merits. Instead,the order was “simply one factor in theCourt’s calculus and not outcome-deter-minative”with respect to its decisionwhether to maintain, during a confirma-tion proceeding, the confidentiality ofdocuments originally produced in arbi-tration. Id. at *2The FAA, the UAA and the UNCITRALRules are all silent on the subject of con-fidentiality. The RUAA authorizes arbitra-tors to preserve confidentiality, but theirdiscretion is not unfettered: “An arbitra-tor may issue a protective order to pre-vent the disclosure of privileged informa-tion, confidential information, tradesecrets, and other information protected

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P A G E 8remain confidential, a party may suc-cessfully demonstrate that this putativeindustry practice does not apply to itsmodern contracts — a plausible sce-nario given the number of recententrants into the reinsurance market.Absent agreement of the parties or astatutory mandate, a panel is arguablynot inherently authorized to order confi-dentiality. As one court said: “There isno confidentiality privilege precludingdisclosure of the [arbitration] materialrequested.” Galleon Syndicate Corp. v.Pan Atl. Group, Inc. 223 A.D.2d 510, 511(1996). A party that wishes to keep itsdisputes out of the public domainshould take care to insert confidentialityprovisions in its contracts. If arbitrationis brought under a contract that is silenton the issue, the party desiring confi-dentiality should raise the issue with itsopponent in an effort to reach a com-promise.To date, few courts have been calledupon to review confidentiality ordersissued over one party’s objection —those courts which have addressed theissue have focused on protection of aspecific cache of documents, as opposedto the confidentiality of the entire pro-ceeding. E.g., Galleon, 223 A.D.2d at 511.In view of the FAA’s celebrated deferenceto arbitration, and the widely-heldunderstanding that confidentiality isone of the chief benefits traditionallyassociated with industry arbitration,most courts will be loath to expose theparties’dispute to the public withoutappropriate safeguards.

3. Post-Award PracticeEven if both parties agree that their arbi-tration is confidential, disclosures oftenoccur at the close of a case when oneparty moves to confirm or vacate anarbitration award in court. In theseinstances, despite the existence of a con-fidentiality order, some facts concerningthe arbitration are likely to become amatter of public record. See, e.g., GlobalReinsurance Corporation-US Branch v.Argonaut Insurance Company, 2008 WL1805459 (S.D.N.Y 2008).In Global, the court was called upon toseal a petition to confirm an arbitrationaward. By necessity, such petitions oftencontain confidential facts disclosed dur-ing the arbitration. After balancing the

competing considerations and acknowl-edging that it was a “close question,”the Court concluded that the petitionshould be sealed. It reasoned:

Arbitration remains a speciesof contract and, in theabsence of some governingprinciple of law . . . parties arepermitted to keep their pri-vate undertakings from theprying eyes of others. The cir-cumstance changes when aparty seeks to enforce in fed-eral court the fruits of theirprivate agreement to arbi-trate, i.e. the arbitrationaward.... [D]isclosure of thedecretal portions of theawards does present the riskthat it will impair [a party’s]negotiating position with oth-er reinsurers and that suchinterest outweighs the pub-lic’s right of access.

Global, 2008 WL 1805459, at *1. But seeNationwide Mut. Ins. Co. v. Randall &Quilter Reins. Co., 2007 WL 2326878, at *2(S.D. Ohio Aug. 10, 2007) (declining tokeep arbitration materials under sealwhere one party voiced no concernregarding injury to its reputation if theybecame public).

Upon a request for reconsideration bythe party seeking disclosure, however,the Court in Global found no evidencethat disclosure would cause immediateharm to either party. A party’s reliance“upon its assessment of the danger of aslippery slope that might impair theexchange of information between par-ties to a reinsurance agreement”wasinsufficient to overcome the presump-tion favoring public access. Despiteacknowledging that the federal policysupporting arbitration is promoted byimposing confidentiality, the court inGlobal observed that,“in the ordinarycourse,”a petition to confirm or vacatean award will not publicize all testimonyand documentary evidence that wasplaced before a panel. Global, 2008 WL1805459, at *1.

Confirmation and vacation proceedings,however, often deviate from the “ordi-nary course”adumbrated by the court.The extended arbitration proceedings,and subsequent litigation, between

from disclosure to the extent a courtcould if the controversy were the subjectof a civil action in this State.” Id. at §17(e)(emphasis supplied). On its face, theRUAA does not confer omnibus authori-ty to seal an entire proceeding, but itdoes permit an arbitrator to protectspecified information. Of course, thefocus on specific items invites argumentthat any unspecified item was notintended to (and cannot) be protectedfrom disclosure. Because most stateshave not yet adopted the RUAA, formalauthorization to order confidentiality inarbitration is not available, unless therelevant arbitration agreement is gov-erned by a state statute that expresslyprovides for it.13

Commercial arbitration codes, to theextent that they may apply, ofteninclude only a placeholder for a confi-dentiality agreement — a state of affairswhich may reflect the uncertainty creat-ed by challenges to the industry pre-sumption of confidentiality. The ARIASPractical Guide advises, for example, thatconfidentiality “should be memorializedin either an agreement by the partiesand the Panel, or an order entered by thePanel, setting forth the terms and scopeof the confidentiality.” Id. at Ch. 3.8(2004). Although the Practical Guideintimates that confidentiality orders areappropriate, it refrains from expresslyauthorizing an arbitrator to impose con-fidentiality without the parties’bilateralconsent, and it does not identify thesource of any such authority.14 Similarly,while expressly providing that meetingsand hearings of the panel are private,the RAA Procedures state only that par-ties shall use their “best efforts to main-tain the confidential nature of the arbi-tration proceedings and the Award.”RAA Procedures at §7.2 (emphasis sup-plied). The failure of these commercialcodes to address squarely a panel’sauthority to issue confidentiality ordersmay simply reflect the view of thedrafters that confidentiality is animplied term of reinsurance agree-ments.

2. What Is A Party To Do?Despite the view of some industry play-ers that reinsurance arbitrations should

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9 P A G Ely to undertake acts of a judicial character, inorder to preserve and adapt the benefits ofarbitration to this more challenging climateof high-stakes disputes. At the same time,they have been called upon to confront theelephant (or, perhaps, the herd of elephants)in the room — the question whether, in eachcase, the urged or contemplated, quasi-judi-cial action is not only warranted but alsoauthorized by the parties’agreement or bylaw. In the past, arbitrators were (believed tobe) entrusted with broad authority to decideall of the issues before them. The currenttrend reflecting more frequent resort to judi-cial review, however, enhances the risk thatarbitration rulings issued without expressauthority will be vacated.

Some traditionally “judicial”acts, includingawards of multiple and punitive damages,imposition of interest, and certain kinds ofsubpoenas are legally authorized undertak-ings, as long as they are not expressly barredby the applicable arbitration agreement or bystate law. Other familiar forms of relief, suchas awards of attorney’s fees, are not toolscommonly available to arbitration panels,despite their mandate to tailor awards to thecircumstances they face. An arbitrator’s pow-er to provide injunctive relief and to imposeconfidentiality strictures on arbitration pro-ceedings remain unsettled issues, lurking atthe margins of authorized action, despite theprofound need for clarity.

An unfortunate, but perhaps essential, out-growth of the search for authorization is therisk that panels may (if only temporarily) bedivested of certain powers. Arbitration claus-es, of course, often contain disengagementprovisions that free reinsurance arbitratorsfrom following strict rules of law. In those cir-cumstances, arbitrators enjoy wider (albeit,not absolute) latitude but, when the parties’contract specifies only that the law of a par-ticular jurisdiction will govern, arbitratorsmust exercise caution with respect to theirgrowing responsibilities. They must, forexample, be circumspect when it comes torequested or seemingly required extensionsof their powers beyond the grant of authorityinherent in a private agreement to arbitrate.Some courts and commentators have, as not-ed above, previously agreed that a panel’sauthority to act is limited when the rights ofnon-parties are implicated by an arbitrator’sorder. Parties must, for their part, also beaware of the practical and legal limits of a

Commercial Union and EMLICO offers a glar-ing example of the limited protectionsoffered by confidentiality agreements, whenone party petitions a court for relief and pub-licizes the facts of its arbitration in theprocess. See Commercial Union Ins. Co. v. Lines,239 F. Supp.2d 351 (S.D.N.Y. 2002), vacated,Commercial Union Ins. Co. v. Lines, 378 F.3d 204(2d Cir. 2004).15 In that case, the confidentiali-ty agreement specified that no party waspermitted to disclose confidential informa-tion to third parties. The panel also issued anorder admonishing that “the parties are notto make any further public statements asrespects this arbitration other than its exis-tence.” Id. at 357, n.7. The parties could, how-ever, use the documents they exchanged,briefs, memoranda, depositions and tran-scripts of legal proceedings involving theconfirmation, modification or vacation of anyaward or ruling. Id. at 354, n.4. As in manyother cases, the petition and subsequentcourt decisions described in detail many ofthe underlying disputed facts, the impetusfor the arbitration itself, and the award. Seee.g. id. at 354-55.In sum, even when an arbitration panelissues a confidentiality order, a motion toconfirm or vacate its award may also vacatethe panel’s confidentiality ruling. In general,the judicial trend is to refuse to seal publiclyfiled documents. We are now at the conflu-ence of this judicial proclivity and theincreased appetite of parties to bring theirarbitration proceedings into the courtroomfor tactical and other purposes — a cross-roads that may irrevocably erode one of thebenefits traditionally associated with indus-try arbitration.

II. CONCLUSIONIndustry arbitration has historically provided— and, in the view of many experienced prac-titioners, continues to provide — an attractivealternative to litigation in many cases.Among the principal benefits participantshave enjoyed are the (relatively) free exchangeof information; in a confidential forum; underthe stewardship of industry professionals,who are empowered to conform suitablerelief to the contours of unique and evolvingproblems. As arbitrations grow in numberand the disputed stakes continue to rise, how-ever, these benefits are often mitigated by thequasi-judicial process required to produce anaward or other definitive result.Arbitrators have been invited more frequent- CONTINUED ON PAGE 10

Among the principalbenefits participantshave enjoyed are the(relatively) freeexchange of infor-mation; in a confi-dential forum; underthe stewardship ofindustry profession-als, who areempowered to con-form suitable reliefto the contours ofunique and evolvingproblems.

P A G E 1 0

panel’s authority, and it behooves theindustry — including trade groups suchas ARIAS — to address by rule recurringissues of authority which require signifi-cant time and expense to decide timeand again.More broadly, with expanded arbitratorpower comes further overlap betweenarbitration and litigation. As the twoprocesses seemingly grow together, andarbitrations become laden with judicialprocedures, arbitration is bound to losesome of its efficiency and, therefore,more than a little of its luster, unlesspractitioners and trade groups succeedin restoring traditional benefits of arbi-tration by appropriately calibrating thepowers of arbitrators to the goals of par-ties to industry arbitration.▼

1 Black’s Law Dictionary defines “equitable reme-dy” as: “A remedy, usu. a nonmonetary one, suchas an injunction or specific performance,obtained when legal remedies, usu. monetarydamages, cannot adequately redress the injury.”Id. at 609 (3d pocket ed. 2006). For purposes ofthis article, the authors consider injunctive relief,including pre-award security orders, to be aspecies of equitable relief.

2 Few cases reject an arbitrator’s power to grantpre-hearing security. But see Recyclers Ins. Group,Ltd. v. Ins. Co. of North America, No. 91-503, 1992WL 150662 (E.D. Pa. June 15, 1992). In Recyclers, afederal trial court vacated an arbitration panel’sorder requiring a reinsurer to place $1 million inescrow as security for a possible award againstit, finding that the panel had exceeded itsauthority. The Recyclers court observed that:“arbitrators cannot require a party to post collat-eral to secure potential liabilities where the par-ties do not provide the arbitrators with thatauthority in the agreement to arbitrate.” Id. at*4.Apparently recognizing flaws in this reasoning,the same court confirmed a security order justfour years later. See Meadows Indem. Co. v.Arkwright Mut. Ins. Co., No. 88-0600, 1996 WL557513, at *2 (E.D. Pa. Sept. 30, 1996). In Meadows,the panel ordered a party to post pre-hearingsecurity in the form of a $1.5 million letter ofcredit. Id. at *1. Although the parties had notexpressly authorized the arbitrators to imposepre-hearing security, the agreement authorizedletters of credit in other contexts. Id. The courtexamined the arbitral award deferentially,expressly rejected the Recyclers holding, andconcluded that the parties had “empowered thearbitrators to award relief in any reasonableform at any stage in the proceeding.” Id. at *4.Ultimately, the court concluded: “the moreappropriate rule is that an arbitration awardordering a party to post security before thepanel will consider the merits may rationallyderive such an award from a contract that doesnot expressly provide that it may impose suchan award.” Id. at *7. This is the rule followed bymost U.S. courts.

3 The UIPA was promulgated by the NationalAssociation of Insurance Commissioners in 1949.

4 At least one state, Illinois, has explicitly includedarbitrations in its process statute. See 215 Ill.Comp. Stat. 5/123(5) (“Before any unauthorizedforeign or alien company shall file or cause to befiled any pleading in any action or proceeding,including any arbitration ...”). Omission of thisclause from other state statutes may suggestthat they did not intend to extend the statute toarbitrations. Of course, as the balance of thisarticle makes clear, the same omission couldsimply represent another example of state legis-latures failing to account for the complexities ofmodern arbitration.

5 When a non-party resists an arbitrator’s subpoe-na, the ability to enforce it resides with thecourts. As a result, venue and jurisdiction maybecome significant considerations in the contextof establishing the parameters of discovery.

6 “The arbitrators may issue (or cause to be issued)subpoenas for the attendance of witnesses andfor the production of books, records, documentsand other evidence, and shall have the power toadminister oaths.” UAA at §7(a) (1955).

7 “An arbitrator may issue a subpoena for theattendance of a witness and for the productionof records and other evidence at any hearing andmay administer oaths.” RUAA at §17(a) (2000).

8 “At any time during the arbitral proceedings thearbitral tribunal may require the parties to pro-duce documents, exhibits or other evidence with-in such a period of time as the tribunal shalldetermine.” UNCITRAL Arbitration Rules Art. at24 (1976).

9 “An arbitrator or other person authorized by lawto subpoena witnesses or documents may do soupon the request of any party or independently.”AAA at R-31(d) (2007).

10 This tactic was previously approved by theSecond Circuit, who ruled that it was permissi-ble to subpoena deponents to “appear and testi-fy in an arbitration proceeding,” which wasscheduled to take place ten months before themerits hearing. See Stolt-Nielsen SA v. CelaneseAG, 430 F.3d 567 (2d Cir. 2005). The SecondCircuit allowed the subpoenas to stand, con-cluding that the Act was intended to ensureonly that arbitrators be present when a non-party is called to provide information.

11 Some commonwealth countries have advancednational standards either authorizing or pro-hibiting confidentiality orders in arbitration. Forexample, Section 10 of the BermudaInternational Conciliation and Arbitration Act of1993 expressly states that arbitration proceed-ings are available as evidence in any other arbi-tration or litigation. Section 46 further providesthat a court may not make public any part of anarbitration proceeding that a party “reasonablywishes to remain confidential.” Id. at §46(b).English courts have held that there is a legalright and duty of confidentiality in arbitrationproceedings, although there is a limited excep-tion for awards and the reasoning behind anaward, which are sometimes “subject to a quali-fied right of disclosure.” See Graydon S. Staring,Law of Reinsurance §22:6[2] (2008). Australiancourts, on the other hand, have found that arbi-trators lack the authority to issue orders impos-ing confidentiality. See, e.g., Charles S. Baldwin,IV, Protecting Confidential And ProprietaryCommercial Information In InternationalArbitration, 31 Tex. Int’l L.J. 451, 482 (1996) (citingEsso Austl. Resources Ltd. v. Plowman (1995) 128A.L.R. 391, 402, 404 (Austl.)).

12 In practice, it would likely be difficult for a partyto establish that a panel of experienced industry

CONTINUED FROM PAGE 9 professionals “exceeded its powers” by findingthat a custom and practice of confidentialityexisted in this industry. See FAA, 9 U.S.C.§10(a)(4).

13 A few states have adopted a detailed approachto orders of confidentiality in arbitration. Texas,for example, extends broad confidentiality pro-tection to arbitrations. See Tex. Civ. P. & Rem.Code at §154.073(a)-(b) (West 2008). The Texasstatute expressly protects communicationsmade by participants to an arbitration, providesthat they may not be used as evidence againstthe issuer, and states that any record made at anarbitration is confidential. Id. Under Missourilaw, all information related to arbitration pro-ceedings is considered confidential, includingcommunications by any participant, arbitrator,or other person present at an arbitration. SeeMo. Rev. Stat. at §435.014 (West 2008); GroupHealth Plan, Inc. v. BJC Health Sys., Inc., 30 S.W.3d198, 203 (Mo. Ct. App. 2000). In Missouri, protec-tive orders signed by arbitrators (for example)receive the same confidentiality protections asarbitral awards. Id. at 204.

14 The AAA Rules do not directly address the ques-tion whether arbitrators have the power toimpose confidentiality. Instead they state onlythat “[t]he arbitrator and the AAA shall main-tain the privacy of the hearings unless the lawprovides to the contrary.” AAA Commercial Rule23.

15 The details of the relevant arbitration proceed-ing were again set forth in a later decision ofthe same court. See Commercial Union Ins. Co.v. Lines, 2008 WL 2234634 (S.D.N.Y. May 30,2008).