I. Servotronics background
Servotronics concerned a dispute between a parts manufacturer (Servotronics), an aircraft engine manufacturer, and an aircraft designer/manufacturer. In relevant part, Servotronics manufactured a servo valve that was placed in an aircraft engine that faced mechanical difficulties during testing in an aircraft engine that was installed in a passenger aircraft. The mechanical failure resulted in a fire that started in the aircraft engine and eventually spread to the aircraft itself.
Following the fire, the aircraft designer/manufacturer sued the engine manufacturer for damages, and those two parties settled for $12.8 million. The engine manufacturer then demanded that Servotronics indemnify it for the $12.8 million loss the engine manufacturer suffered.
Servotronics rejected the engine manufacturer’s indemnity demand, and the aircraft engine manufacturer commenced an arbitration against Servotronics pursuant to an arbitration clause in a contract between those parties. The arbitration clause seated the arbitration in Birmingham, England, and required the arbitration to be conducted in accordance with the Rules of the Chartered Institute of Arbitrators (Arbitration).
After the Arbitration was commenced, Servotronics filed an ex parte application pursuant to section 1782 in federal district court in South Carolina asking for the right to serve subpoenas on former and current employees of the aircraft designer/manufacturer. The requested subpoenas sought oral evidence from those employees that Servotronics intended to use in the Arbitration.
The federal district court before which Servotronics filed its section 1782 application denied the application on grounds that private arbitral tribunals seated outside the United States are not foreign tribunals within the meaning of section 1782. To reach that conclusion, the federal trial court relied on two nonbinding pre-Intel decisions from the Second Circuit Court of Appeals (which has jurisdiction over federal courts in New York, Connecticut, and Vermont) and the Fifth Circuit Court of Appeals (which has jurisdiction over federal courts in Texas, Louisiana, and Mississippi).
Servotronics subsequently appealed the trial court’s decision to the Fourth Circuit, which had not previously ruled on whether an arbitral tribunal seated outside the United States constitutes a foreign tribunal for section 1782’s purposes.
II. Section 1782 and discovery in aid of foreign proceedings
Section 1782 is a United States federal statute that allows federal courts to order persons or entities within their jurisdiction to provide documentary and testimonial evidence to be used in proceedings conducted outside the United States before a “foreign or international tribunal.” 28 U.S.C. section 1782(a) (2020).
While versions of section 1782 have existed for over 150 years, the statute’s usage has increased dramatically since the U.S Supreme Court’s seminal 2004 decision in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004), which reinvigorated interest in section 1782 by clarifying the circumstances in which it could be employed. The Intel decision left several open questions, however, with which lower federal courts have grappled, including whether a private commercial arbitral tribunal seated outside the United States constitutes a foreign tribunal within the meaning of section 1782.
III. Section 1782 applications in international arbitration
Section 1782 applications are useful in international arbitrations seated outside the United States because: (1) arbitral tribunals seated outside the United States generally lack the ability to issue subpoenas or to compel third parties to provide evidence; and (2) evidentiary gathering procedures in international arbitration can be more limited than in many common law court systems.
Section 1782 can only be used in support of an arbitration seated outside the United States though if the arbitral tribunal qualifies as a “foreign tribunal” for section 1782’s purposes. To date, this unsettled question has turned on whether the arbitration at issue is an investor-state arbitration or a private commercial arbitration, as well as the court to which the section 1782 application is brought.
A. Investor-state arbitrations
Federal courts in the United States have generally agreed that investment treaty arbitrations satisfy section 1782’s foreign tribunal requirement because “arbitrations pursuant to…Investment Treaties are not merely private arrangements,” but are arbitrations that are “sanctioned by their governments.” Islamic Republic of Pakistan v. Arnold & Porter Kaye Scholer LLP, No. MC 18-103 (RMC), 2019 WL 1559433, at *7 (D.D.C. Apr. 10, 2019); see Nat’l Broad. Co. v. Bear Stearns & Co., 165 F.3d 184, 190 (2d. Cir. 1999) (explaining that section 1782 was meant to apply to governmental and intergovernmental tribunals); Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880, 882 (5th Cir. 1999) (concluding same); see also In re Mesa Power Group, LLC, 878 F. Supp. 2d 1296, 1307 (S.D. Fla. 2012) (allowing section 1782 application in support of a NAFTA arbitration).
B. International commercial arbitrations
Federal appellate courts have split on whether section 1782 can be used to support private commercial arbitrations seated outside the United States, because courts have disagreed whether private commercial arbitral tribunals qualify as “foreign tribunals” for section 1782’s purposes.
In decisions upon which the trial court in Servotronics relied, the Second and Fifth Circuits have both held that section 1782 applications cannot be brought in support of private international commercial arbitrations. See Nat’l Broad. Co., Inc. v. Bear Stearns & Co., 165 F.3d 184, 191 (2d Cir. 1999) (denying section 1782 application brought in support of an ICC arbitration); Biedermann, 168 F.3d at 883 (rejecting section 1782 application brought in support of a SCC arbitration). Both courts have held that section 1782’s foreign tribunal requirement does not extend to private arbitral tribunals established by contract. See Nat’l Broad Co., 165 F.3d at 191; Biedermann, 168 F.3d at 883.
In September 2019, in a groundbreaking decision, the Sixth Circuit federal court of appeals in In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d 710 (6th Cir. 2019) (FedEx) rejected the Second and Fifth Circuit decisions. In the FedEx decision, the Sixth Circuit (which has authority over federal courts in Michigan, Ohio, Kentucky, and Tennessee) held that section 1782 can be employed in support of private commercial arbitrations seated outside the United States on grounds that there is “no reason to doubt that the word ‘tribunal’ includes private commercial arbitral panels established pursuant to contract and having the authority to issue decisions that bind the parties.” Id. at 723.
While the Sixth Circuit was the first federal appellate court in the United States to uphold that conclusion, it was not the first to reach it. In 2012 and 2014, in an interesting series of decisions, the Eleventh Circuit court of appeals first held that section 1782 could be used in support of private commercial arbitrations seated outside the United States, see In re Consorcio Ecuatoriano de Telecomunicaciones S.A., 685 F.3d 987, 990 (11th Cir. 2012), but later vacated and superseded its own decision with one that allowed the section 1782 application, but did so in support of a foreign court proceeding rather than an arbitration. Id., 747 F.3d 1262, 1269–70 (11th Cir. 2014), leaving section 1782’s status in the Eleventh Circuit in this regard unsettled.
District courts around the country have also reached opposing conclusions. Many have allowed section 1782 applications in support of private arbitrations. See, e.g., In re Owl Shipping, LLC, No. CIV.A. 14-5655 AET, 2014 WL 5320192, at *2 (D.N.J. Oct. 17, 2014); In re Babcock Borsig, 583 F. Supp. 2d 233, 238–40 (D. Mass. 2008); Comision Ejecutiva, Hidroelectrica del Rio Lempa v. Nejapa Power Co., LLC, 2008 WL 4809035, at *1 (D. Del. Oct. 14, 2008); In re Hallmark Capital Corp., 534 F. Supp. 2d 951, 952 (D. Minn. 2007); In re Roz Trading Ltd., 469 F. Supp. 2d 1221, 1222 (N.D. Ga. 2006); In re Pinchuk, No. 13-22857-MC-GOODMAN, 2013 U.S. Dist. LEXIS 147864, at *5–6 (S.D. Fla. Sept. 20, 2013).
Many others, however, have held that private international arbitrations do not satisfy section 1782’s foreign tribunal requirement. See, e.g., Norfolk Southern Corp. v. Gen. Sec. Ins. Co., 626 F. Supp. 2d 882, 884–86 (N.D. Ill. 2009); In re Dubey, 949 F. Supp. 2d 990, 993–96 (C.D. Cal. 2013); In re Application of Operadora DB, 2009 WL 2423138, at *8–12 (M.D. Fla. Aug. 4, 2009); In re Arbitration in London, England, 626 F. Supp. 2d 882, 885–86 (N.D. Ill. 2009).
In some instances, district courts within the same circuit have even reached conflicting conclusions. Compare, e.g., In re Ex Parte Application of Kleimar N.V., 220 F. Supp. 3d 517, 521 (S.D.N.Y. 2016) (“The Court also finds that the LMAA is a ‘foreign tribunal’ within Section 1782 [notwithstanding that] the Second Circuit has previously excluded private foreign tribunals from the scope of qualifying Section 1782 proceedings.”) with In re Petrobas Sec. Litig., 393 F. Supp. 3d 376, 385 (S.D.N.Y. 2019) (holding private international arbitral tribunals are not foreign tribunals under section 1782).
Consequently, the viability of a section 1782 application in support of a private commercial arbitration has generally depended upon the state of the law in the jurisdiction in which the application is made, as well as the views of the individual judge to whom the application is presented.
IV. Impact of Servotronics
Given the unsettled state of the law regarding section 1782 applications in support of private commercial arbitrations seated outside the United States, the Servotronics decision will offer further authority for the proposition that section 1782 can be used to support tribunals in foreign-seated arbitrations. This ability will be particularly important in the future, as the COVID-19 pandemic is likely to spawn a number of international arbitration claims globally.
The Servotronics decision also brings to two the number of federal appellate courts that have expressly held that section 1782 applications can be brought in support of arbitrations seated outside the United States, and therefore puts the Fourth and Sixth Circuits in direct conflict with the Second and Fifth Circuits (both of which addressed the issue before the 2004 Intel decision). This equally weighted conflict increases the likelihood that the U.S. Supreme Court will finally settle the issue in the future.
Lastly, the Servotronics decision increases the possibility that parties will try to employ section 1782 in support of private arbitral tribunals seated outside the United States to obtain evidence that is also located outside of the United States by relying on decisions from the Second and Eleventh Circuits that have allowed extraterritorial discovery in section 1782 proceedings. See In re del Valle Ruiz, 939 F.3d 520, 524 (2d Cir. 2019) (finding no bar to extraterritorial discovery under section 1782); Sergeeva v. Tripleton Int’l Ltd., 834 F.3d 1194 (11th Cir. 2016) (concluding same). Whether courts will be persuaded by decisions from circuits that do not expressly permit section 1782 applications in support of private commercial arbitrations remains to be seen though.
V. Conclusion
Section 1782 is a valuable tool in any non-U.S. proceeding, and will undoubtedly become a more common feature of arbitrations seated outside the United States.
Client Alert 2020-235
