Section 1782 no longer a discovery tool in aid of private international arbitrations; ICSID in play?

28 June 2022 Reed Smith In-depth

Page d'accueil Perspectives Section 1782 no longer a discovery tool in aid of private international arbitrations; ICSID in play?

On June 13, 2022, the U.S. Supreme Court unanimously held in the consolidated cases of ZF Automotive US, Inc., et al. v. Luxshare, Ltd., No. 21-401, and AlixPartners, LLP, et al. v. Fund for Protection of Investors’ Rights in Foreign States, No. 21-518, that only bodies exercising governmental authority qualify as “foreign or international tribunal[s]under § 1782,” thereby precluding section 1782 discovery sought in support of private international arbitrations. The decision has significant ramifications for international arbitration practitioners, because most will no longer have the powerful U.S. discovery tool at their disposal.

Auteurs: Ed Mullins William W. Russell James P. Duffy IV Steven Cooper Rebeca E. Mosquera

28 U.S.C. section 1782 – assistance to foreign and international tribunals and to litigants before such tribunals

Title 28 U.S.C. section 1782 is a federal statute that permits U.S. district courts to order that subpoenas be issued to parties located in the United States to obtain evidence for use in non-U.S. proceedings. Specifically, section 1782 provides that:

The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation. (emphasis added).

While versions of section 1782 have existed for 150 years, it only began to be widely used after 2004, when the U.S. Supreme Court issued the seminal decision, Intel Corp. v. Advanced Micro Devices, Inc. In Intel, the Supreme Court clarified numerous matters, including the discretionary factors courts should consider when deciding whether to allow a section 1782 subpoena to issue. Notably, however, the Supreme Court did not definitively state whether international arbitration tribunals qualified as foreign tribunals for section 1782’s purposes, which led to a variety of conflicting decisions on the point.

Specifically, the federal appellate courts split on whether section 1782 can be used to support private international commercial arbitrations, with the Fourth and Sixth Circuits expressly answering in the affirmative and the Second, Fifth, and Seventh Circuits maintaining the view that section 1782 cannot be used in that fashion. Importantly, there was no corresponding split with respect to whether section 1782 could be used to support investor-state arbitrations, as federal courts generally agreed that investment treaty arbitrations satisfy section 1782’s foreign tribunal requirement. The open issue, however, is whether section 1782 petitions are still viable for ICSID arbitrations.

ZF Automotive, AlixPartners, and the split among the U.S. courts of appeals

The cases before the Supreme Court – Luxshare, Ltd. v. ZF Auto. US, Inc., No. 2:20-mc-51245, 2021 U.S. Dist. LEXIS 100067 (E.D. Mich. May 27, 2021), and In re Fund for Prot. of Inv’r Rights in Foreign States v. AlixPartners, LLP, 5 F.4th 216 (2d Cir. July 15, 2021) – both involved a party seeking discovery in the United States for use in arbitrations that were seated outside the United States. Yet their facts differ in important ways that help contextualize the split that developed among the U.S. courts of appeals.

The first case, ZF Automotive, presented an instance of a classic commercial arbitration. It originated in a business deal between ZF Automotive US, Inc. and Luxshare, Ltd. Following the execution of the deal, Luxshare claimed that ZF had concealed information, such that Luxshare overpaid for the deal by hundreds of millions of dollars. The parties’ contract provided for all disputes to be settled following the Arbitration Rules of the German Institution of Arbitration e.V. (DIS), a private dispute-resolution organization based in Berlin. In contemplation of a potential DIS arbitration, Luxshare filed a section 1782 application seeking information from ZF in the U. S. District Court for the Eastern District of Michigan. In accordance with Sixth Circuit precedent (see Abdul Latif Jameel Transp. Co. v. FedEx Corp., 939 F.3d 710 (6th Cir. 2019)), the district court granted Luxshare’s application.

Unlike ZF Automotive, the second case, AlixPartners, involved a dispute between an investor and a foreign state. Specifically, it concerned a dispute between Lithuania and a Russian investor in a failed Lithuanian bank, AB bankas SNORAS (Snoras). After finding that Snoras was unable to meet its obligations, Lithuania nationalized it, commenced bankruptcy proceedings, and declared it insolvent. The Russian investor’s interests in Snoras were assigned to a Russian corporation – the Fund for Protection of Investors’ Rights in Foreign States (the Fund) – which, in turn, initiated an ad hoc United Nations Commission on International Trade Law (UNCITRAL) arbitration against Lithuania under a bilateral investment treaty between Lithuania and Russia. After initiating the arbitration, the Fund filed a section 1782 application in the U. S. District Court for the Southern District of New York, seeking information in support thereof. The district court granted the petition, rejecting the argument that the ad hoc arbitration panel did not qualify as a “foreign or international tribunal.” The Second Circuit affirmed.

While the Second Circuit previously had held that a private arbitration panel does not constitute a “foreign or international tribunal” under section 1782, in AlixPartners, it distinguished its previous decisions, employing a multifactor test to hold that the “arbitration between Lithuania and the Fund, taking place before an arbitral panel convened pursuant to the Treaty, a bilateral investment treaty to which Lithuania is a party, qualifies as a ‘foreign or international tribunal’ under § 1782.” AlixPartners, 5 F.4th 216 at 228.

The U.S. Supreme Court: section 1782 reaches only governmental or intergovernmental adjudicative bodies

The Supreme Court granted certiorari “to resolve a split among the Courts of Appeals over whether the phrase ‘foreign or international tribunal’ in § 1782 includes private arbitral panels.” ZF Auto. US, Inc. v. Luxshare, Ltd., Nos. 21-401, 21-518, 2022 U.S. LEXIS 2861, at *11 (U.S. June 13, 2022).

Justice Barrett authored the unanimous opinion and reasoned that under section 1782, private adjudicative bodies do not qualify as “foreign or international tribunals.” In reaching this decision, the Court analyzed three main questions.

a. Whether the terms “foreign tribunal” and “international tribunal” refer to a private adjudicatory body or a body “imbued with governmental authority”

The opinion broadly examined the meaning of the words “foreign tribunal” and “international tribunal.” The analysis began with the word “tribunal.” The Court reasoned that an argument could be made that the word “tribunal” standing alone could also include private arbitral panels. However, the Court concluded that attached to the modifiers “foreign or international,” the term “tribunal” “is best understood as an adjudicative body that exercises governmental authority.” Consequently, and without further analysis, the opinion concluded that the term foreign tribunal “more naturally refers to a tribunal belonging to a foreign nation than to a tribunal that is simply located in a foreign nation. And for a tribunal to belong to a foreign nation, the tribunal must possess sovereign authority conferred by that nation.”

Turning to the meaning of “international tribunal,” the Court determined that “[a] tribunal is ‘international’ when it involves or is of two or more nations.” Concluding that a “foreign tribunal” is a body invested with governmental authority by one nation, while an “international tribunal” is a body instilled with governmental authority by multiple nations.

Simply put, the Supreme Court held that commercial arbitration and investor-state tribunals – or at least ad hoc investor-state tribunals – do not fall within the meaning of “foreign or international tribunal” under section 1782 because the arbitrators in these panels are primarily selected by the parties “who prescribe their own rules” with little to no governmental control.

Notably, concerning investor-state arbitration, the Court acknowledged that the question was harder to respond to because one of the parties typically is a sovereign, and the instrument containing the offer to arbitrate is contained in an international treaty. In the end, the Court emphasized that investor-state tribunals “derive[d] [their] authority from the parties’ consent to arbitrate” and that the tribunal “operate[d] like commercial arbitration panels do.” This outcome is surprising in light of current case law.

b. What about ICSID?

Notably, the investor-state proceedings analyzed in the Court’s opinion did not concern an investor-state arbitration governed by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington Convention or ICSID Convention). Instead, the analysis concerned an ad hoc investor-state arbitration conducted under the UNCITRAL Arbitration Rules.

The self-contained legal framework of the ICSID Convention creates a permanent institution, provides that the resulting awards shall have the status of final judgments, and are binding as a matter of public law in all the ICSID member states. As such, under the Court’s analysis, it is possible that future courts will find that ICSID investor-state tribunals may very well qualify as “international tribunals” (tribunals instilled with governmental authority by multiple nations) under section 1782.

c. Whether the historical purpose of the statute is to permit U.S. federal courts to assist and cooperate with foreign or international governmental and intergovernmental bodies

Turning to the second question, Justice Barrett, writing for the Court, stated that “the animating purpose of § 1782 is comity.”

It is worth noting that comity has been the driving purpose of section 1782. Historically, the United States has made substantial efforts to assist foreign courts in discovery procedures. The 1855 Act – the predecessor of section 1782 – authorized federal courts to effect letters rogatory from a foreign court by designating a commissioner to compel witnesses to appear and testify. Section 1782 was enacted with the purpose that possibly other nations would also offer assistance and cooperation to the United States. However, this did not happen.

Remarkably, the opinion held that the 1964 amendments to section 1782 “did not signal an expansion from public to private bodies, but rather an expansion of the types of public bodies covered.” The inclusion of private bodies, the opinion continued, would permit any “interested person” to obtain U.S.-style discovery for use before any private adjudicative body.

d. Whether section 1782 creates tension with the Federal Arbitration Act

The Court noted that extending section 1782 “to include private bodies would also be in significant tension with the FAA, which governs domestic arbitration, because § 1782 permits much broader discovery than the FAA allows,” creating a significant “mismatch between foreign and domestic arbitration.”

This is a significant point. Courts such as the Eleventh Circuit had held that section 7 of the FAA – which gives a tribunal in the United States the authority to subpoena a third-party witness to bring documents and provide testimony at an arbitral hearing – does not permit prehearing discovery in aid of arbitration. Now, it is given in a Supreme Court ruling. The court determined that it would be an odd result if U.S. law were construed to allow greater access to U.S. discovery devices in aid of an arbitration located abroad than in aid of an arbitration situated in the United States. Of course, parties can and often do agree to conduct discovery in arbitration. Furthermore, some states, such as Florida, have statutes permitting discovery.

Conclusion and takeaways

Section 1782 has been a powerful weapon in recent years for those allowed to use it since U.S. courts generally allow for broader discovery than international arbitration tribunals. The Supreme Court decision clarifies whether section 1782 is available to parties appearing before an international commercial tribunal and certain classes of investor-state tribunals – a welcome result. However, its exclusion of any category of investor-state arbitration tribunals under the statute is surprising and inconsistent with current case law.

Indeed, the Supreme Court’s opinion allows room to argue that investor-state arbitrations taking place under the auspices of the ICSID may still qualify for section 1782 relief. As noted, the legal framework of the Washington Convention, which establishes ICSID, is unique in significant ways. For one, the Convention establishes a self-contained system whereby resulting awards are not subject to any remedies except those provided for in the Convention and are automatically enforceable within contracting states as if they were final judgments of the courts in those states. Further, the ICSID system is the result of a multilateral treaty creating a permanent institution for investor-state dispute resolution in which contracting states play a significant role, including by participating in an Administrative Council that meets annually and by designating people to serve on ICSID panels of arbitrators and conciliators. Thus, we may see further litigation in connection with whether such tribunals are imbued with governmental authority.

Finally, it is not clear what effect the decision will have on prehearing discovery in arbitration.

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