Justices will tackle discovery puzzle with high stakes for international commercial litigation
on Mar 22, 2022 at 8:27 pm
On Wednesday, the Supreme Court will hear argument in two consolidated cases, ZF Automotive US Inc. v. Luxshare Ltd. and AlixPartners LLP v. The Fund for Protection of Investors’ Rights in Foreign States, that will allow it to finally resolve the issue of whether 28 U.S.C. § 1782 permits U.S. district courts to order discovery for use in foreign arbitration proceedings.
In answering the question, the court will also have to decide whether there is a difference under Section 1782 between private commercial arbitration and investor-state arbitration. With the continuing globalization of commerce and the inevitable resulting litigation across national borders, the use of Section 1782 has surged in recent years, with approximately 200 petitions being filed annually. The statutory section is a powerful tool that allows foreign litigants to use American-style discovery to obtain evidence that is generally unobtainable under the law of the foreign forum. The global arbitration bar and the international business community will therefore welcome the clarity the court will provide.
What is Section 1782?
First enacted in 1948, Section 1782 provided initially that discovery assistance was available to “any judicial proceeding in any court in a foreign country.” Sixteen years later, Congress amended the operative language to allow a U.S. district court to order a person who “resides or is found” in its jurisdiction to provide document discovery or deposition “for use in a proceeding in a foreign or international tribunal.” The statute does not define the term “tribunal.” It is clear that by replacing the term “court” with the term “tribunal” Congress intended to widen the application of Section 1782. But whether Congress widened the term enough to include arbitration proceedings is the gist of the dispute before the Supreme Court.
The Intel decision
Up to now, the Supreme Court has addressed Section 1782 in only one decision, Intel v. Advanced Micro Devices, Inc. One of the issues before the Intel court was whether an arm of the European Union tasked with investigating potential violations of antitrust law qualified as a tribunal within the meaning of Section 1782. Answering in the affirmative, the court cited with approval to a law review article which explained that “[t]he term ‘tribunal’ includes investigating magistrates, administrative and arbitral tribunals, and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts.” (emphasis added) Proponents of the inclusion of arbitration proceedings within the scope of Section 1782 have relied heavily on this reference in dictum to arbitration.
Facts of the present disputes
Luxshare, Ltd., a Hong Kong company, acquired a business unit from ZF Automotive US, Inc., a Michigan subsidiary of a German corporation. Luxshare alleges that ZF had fraudulently inflated the sale price. The parties’ asset purchase agreement required arbitration in Germany. Luxshare filed a 1782 application seeking discovery from ZF and two of its officers. The district court granted the application because, under precedent of the U.S. Court of Appeals for the 6th Circuit, private arbitration qualified as a “tribunal” within the meaning of Section 1782. The Supreme Court stayed compliance with the subpoena and granted a petition for a writ of certiorari before judgment.
The court’s decision to review the issue was not a surprise. A three-way split had developed among the federal courts of appeals on the treatment of private arbitration for purposes of Section 1782. The 4th Circuit held that an arbitral body sitting in the United Kingdom qualified as a “tribunal” under Section 1782. But its reasoning was slightly different than that of the 6th Circuit: The British arbitration was the “product of government-conferred authority” under both U.S. and U.K. law given both countries’ liberal recognition of arbitration awards. The court did not base its decision on the theory that an arbitration panel was automatically a “tribunal” within the meaning of Section 1782. On the other hand, the 2nd, 5th and 7th Circuits all held that private arbitration was not entitled to Section 1782 assistance because private arbitral bodies are not “tribunals.” And the Supreme Court was prepared to decide the issue earlier this term in Servotronics Inc. v. Rolls-Royce PLC, but the parties settled the matter after briefing was complete.
The Fund for Protection of Investors’ Rights in Foreign States is a Russian corporation and the assignee of an investor in a Lithuanian bank. In 2011, the government of Lithuania forced the bank into bankruptcy. In response, the fund commenced an arbitration against Lithuania pursuant to a bilateral investment treaty signed by the Russian and Lithuanian governments. The arbitration panel was not subject to any governmental supervision. The fund filed an application under Section 1782 seeking discovery from Simon Freakley, the bankruptcy administrator, and his current employer, AlixPartners. The 2nd Circuit upheld the discovery order. It reasoned that while private commercial arbitration was outside the scope of Section 1782, arbitration proceedings conducted under the auspices of an investment treaty signed between sovereign countries met the definition of a “tribunal.” The 2nd Circuit employed a multi-factor test to determine whether a proceeding was sufficiently official to fall within the scope of Section 1782.
While they use slightly different legal theories, courts across the country are virtually unanimous that investment treaty arbitrations are eligible for discovery assistance under Section 1782. There is no circuit split on this issue. Therefore, it was a mild surprise that the Supreme Court agreed to review the decision in conjunction with ZF.
The competing arguments
Because as noted Congress did not supply a definition for “foreign or international tribunal,” the court is likely to look to dictionaries in the first instance for guidance. But that exercise will not yield a conclusive answer. Black’s Law Dictionary and The Concise Oxford Dictionary of Current English, both published in 1964, seemed to equate a tribunal with an official court. On the other hand, various editions of New Webster’s dictionaries from that era suggested that a tribunal could simply be a body of persons having authority to decide a dispute, which would appear to cover an arbitration tribunal.
The parties disagree on the significance of the modifier “foreign.” ZF’s position is that “foreign tribunal” means the tribunal of a foreign government just as the phrase “foreign leader” means a foreign government official, not an official of a private club located outside the United States. Luxshare counters that the adjective “foreign” does not necessarily have a governmental connotation, citing “foreign films, foreign cars, or foreign cuisine” as illustrative examples.
The parties also disagree on the part of Section 1782 providing that a “foreign tribunal” may apply the “practice and procedure of [a] foreign country.” This arguably excludes an arbitral body because that body is not bound by the practice and procedure of any country. Luxshare and the fund counter that this language is not meant to impose a substantive limitation on the scope of discovery. ZF and AlixPartners also point out that other provisions of Title 28, also enacted in 1964, state that a “foreign or international tribunal” can issue “judgments and decrees.” But the power of an arbitration tribunal is limited to issuing awards. As a non-governmental body, it cannot enter judgments and decrees.
ZF and AlixPartners also emphasize legislative history of Section 1782. There is no indication that when Congress enacted the term “tribunal” in 1964 it had arbitration panels of any kind in mind. Indeed, international commercial arbitration was in its infancy in 1964 and investor arbitration did not really exist yet. Congress merely sought to expand the range of governmental investigative and adjudicatory entities that were eligible for 1782 assistance. Luxshare and the fund ask the court to ignore this legislative history because in their view, Congress’s use of broad language was tantamount to a dispositive intent to include arbitral bodies.
ZF and AlixPartners also point out that Congress has seriously restricted of availability of discovery in domestic arbitration. Under the Federal Arbitration Act, only the arbitrator can apply to a federal court for limited discovery assistance and only in the district in which the arbitrator sits. Parties to a domestic arbitration proceeding cannot directly apply to federal court for discovery assistance. In this view, it would have been incongruent for Congress to give parties in foreign arbitration proceedings more expansive discovery rights in a U.S courtroom than parties to domestic proceedings. Luxshare and the fund argue in response that the court held in Intel that Section 1782 discovery should not be contingent on what discovery would be available in analogous domestic legal proceedings. More fundamentally, they argue that any distinction between domestic and foreign arbitrations reflects Congress’s “strong pro-arbitration policy in the context of international-commercial disputes” and is not a reason to restrict discovery available to aid a foreign arbitration proceeding.
The parties also debate the policy implications of their respective positions. ZF and AlixPartners argue that opening the U.S. discovery floodgate to foreign arbitrations would undermine the efficiency of arbitration by imposing burdensome U.S. discovery requirements and negating the promise of a streamlined adjudication timeline. Luxshare and the fund counter that arbitral bodies (by rules) and the parties (by contract) could expressly exclude 1782 discovery. The fact that no major international arbitral body has asked the court to adopt a policy of categorical exclusion is, in their view, evidence that petitioners’ parade of horribles is overstated.
In an amicus brief, the Biden administration supports the positions of ZF and AlixPartners and repeats most of their argument. The administration contends that Section 1782 discovery cannot be used with respect to any type of foreign arbitration cases. Its brief criticizes the 6th Circuit for relying on out-of-context cases and history. It also contends that the multi-factor test used by the 2nd Circuit to determine whether an arbitration was state-sponsored was too “amorphous.” The administration urges the court to foreclose a result that would be an invitation to endless litigation on the threshold issue of whether a particular tribunal would pass such a test. The administration instead prefers a bright-line rule that excludes arbitration of any kind from Section 1782 discovery. The solicitor general has been granted permission to participate in oral argument. Because the United States as a country is a party to multiple investor arbitration treaties, its view on whether arbitration under such treaties falls within the purview of Section 1782 may be accorded significant weight.
Both sides have strong arguments in their favor. It is not easy to forecast the court’s decision on the merits based on the briefing alone. But by resolving the circuit split on whether private arbitration proceedings fall within the purview of Section 1782 one way or another, the court will end the incentive for a petitioner to forum shop.