An interesting precedent was recently set by the Sixth Appellate District of the California Court of Appeals in Aixtron, Inc. v. VEECO Instruments, Inc. One of VEECO’S former employees, Miguel Saldana, went to work for VEECO’s competitor, Aixtron, Inc. VEECO initiated arbitration proceedings against Saldana with JAMS pursuant to the terms of a confidentiality agreement Saldana signed with VEECO based on allegations that Saldana had breached the contract, breached his duty of loyalty owed to VEECO as an employee, and converted VEECO’s confidential data for use by VEECO through data theft.

VEECO sought and received a pre-hearing discovery order from the arbitrator that permitted VEECO to serve a subpoena on Aixtron for VEECO’s business records. Saldana had opposed the order permitting the subpoena on the basis that the arbitrator did not have the authority or power to authorize or enforce the subpoena, the subpoena was overbroad and sought Aixtron’s confidential information.

When served with the subpoena Aixtron objected and, among its objections, it claimed the subpoena was “procedurally deficient” and refused to comply with the subpoena. VEECO moved for the arbitrator to compel Aixtron to respond to the subpoena. Aixtron argued the arbitrator lacked authority to issue and enforce nonparty discovery subpoenas since statutorily such subpoenas are only available in personal injury or wrongful death actions and there was no provision for discovery in the arbitration agreement. It also did not expressly incorporate the discovery rules set forth in California. The arbitrator granted the motion and ordered Aixtron to comply. Aixtron then petitioned the Superior Court for a Protective Order and re-hearing on the arbitrator’s discovery order. The Superior Court denied Aixtron’s Petition and Aixtron appealed.

The Appellate Court held, in part, that the discovery order exceeded the arbitrator’s statutory authority. The Appellate Court held that non-party discovery in arbitrations is generally limited and highly restricted by law and by the rules promulgated by JAMS. The Appellate Court found no authority for issuance of a discovery subpoena (although it did acknowledge an arbitration subpoena to produce at the arbitration proceeding would be valid) and reversed the Superior Court.

If any of your agreement contain arbitration provisions, it is time to contact your business attorney and determine whether they need to be modified to permit discovery from third parties prior to the arbitration hearing.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.