Common law requirements and restrictions
Before getting into the requirements and potential rewards available from a discovery application under 28 U.S. Code section 1782, it is important to first understand the limitations of common law remedies, not all of which are present in a section 1782 discovery application:
Necessity
Among the various common law requirements set out in our client alert the idea of necessity is key in both a Bankers Trust Order and Norwich Pharmacal Order. A claimant needs to demonstrate that they must obtain certain information to advance their case, and that the order for disclosure is no wider than absolutely necessary.
Balance of convenience
Courts in common law jurisdictions are required to take into account the burden of disclosure placed upon the party ordered to give disclosure. While the balance heavily favours victims of fraud, if the ambit of disclosure is too wide and burdensome, a common law court might limit disclosure.
To tip the scale, victims often have to show they have sufficient assets to meet any expenses incurred (including legal fees) by a third party ordered to give disclosure.
Precise identification of documents
In Hong Kong litigation, as a matter of general principle, the court will not order production of documents unless it is necessary in order to either dispose fairly of the case or save costs.1 This means that applicants generally have to identify with precision the documents they are seeking to be disclosed.2 Anything less would lead to the court refusing on the grounds that the applicant was ‘fishing’.
Identifying the documents you are seeking under the ‘no fishing’ rule is often very difficult because how are victims supposed to know what type of documents cryptocurrency exchanges hold about their customers? Is the information in a database, meaning it requires extraction before it can be properly read?
It is not uncommon for recipients of disclosure orders to simply say they do not have the class or type of documents ordered by the court and accordingly, there is no disclosure to be provided. A fine balance needs to be struck between drafting the disclosure order with enough precision and casting the net as wide as possible to capture information so that the disclosure order is not completely pointless. This is a delicate art.
No depositions
Depositions are not an option in most common law jurisdictions, including Hong Kong, where witnesses can only be cross-examined at trial (there is no pre-trial mechanism for cross-examination). Imagine, however, being able to ask questions and follow up on answers given as part of a discovery process. Common law practitioners around the world can only dream of such superpowers.
The nuclear option – section 1782 discovery
Section 1782 has become a weapon of choice for foreign litigants seeking discovery from companies and individuals located in the United States in aid of their claims in other countries.
In general, a foreign litigant seeking discovery pursuant to section 1782 must initiate proceedings in the federal district court where the person or entity from whom discovery is sought is located. Foreign litigants must satisfy three statutory requirements, and a court must consider four discretionary factors.
Statutory requirements
The three statutory requirements are as follows:
- The person or entity from whom discovery is sought “resides or is found” in the federal district where the federal district court is located.
- The discovery is “for use in a proceeding in a foreign or international tribunal”.
- The application is made by an “interested person” (which includes, but is not limited to, foreign litigants).
Much of the litigation regarding the statutory requirements has focused on the “for use” requirement.
In general, courts have held that the “for use” requirement is satisfied where the discovery is being sought in connection with an existing foreign proceeding or an anticipated foreign proceeding that is within “reasonable contemplation”.
A party seeking section 1782 discovery must show “some objective indicum that the action is being contemplated”. Mere speculation or “subjective intent to undertake some legal action” is insufficient.3
Discretionary factors
In addition to the statutory requirements, the U.S. Supreme Court4 articulated four discretionary factors that courts must consider:
- Whether the party from whom discovery is sought is a participant in the foreign proceeding.
- The nature of the foreign proceeding, and the receptivity of the foreign court to judicial assistance from a U.S. federal court.
- Whether the discovery sought is an attempt to circumvent foreign-proof gathering restrictions.
- Whether the discovery requests are unduly intrusive or burdensome.
Deposition testimony
Significantly, as part of the section 1782 discovery, a foreign litigant can obtain not only documents but also deposition testimony. A deposition is a witness’s sworn testimony made out of court and is a usual and standard process for discovery in the United States.
Unless otherwise prescribed, a section 1782 order will generally require discovery to be conducted in accordance with the Federal Rules of Civil Procedure, which allow a foreign litigant to obtain deposition testimony from the person or entity from whom discovery is sought. In comparison to discovery in common law jurisdictions, the depositions process widens the net significantly in terms of what information can be obtained.
Final remarks
In cryptocurrency fraud cases, the choice of jurisdiction is often not easy or obvious. In many cases, bringing a cryptocurrency tracing, freezing and recovery action in a foreign jurisdiction like Hong Kong will allow both the benefits of common law remedies and also U.S. style discovery against relevant individuals and entities. The potency of the section 1782 discovery is not to be underestimated.
- FBC Construction Company v. Ben Lee [2014] 2 HKLRD 1054.
- Cyberworks Audio Video Technology Ltd v. Mei Ah (HK) Co Ltd [2016] HKEC 1032.
- In re Hansainvest Hanseatische Inv.-GmbH, 364 F. Supp. 3d 243, 249 (S.D.N.Y. 2018).
- Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004).
Client Alert 2021-243
