On June 13, 2022, the U.S. Supreme Court unanimously ruled in ZF Automotive US, Inc. v. Luxshare, Ltd., 21-401, 2022 WL 2111355 (U.S. June 13, 2022) that U.S. discovery cannot be ordered under 28 USC § 1782 in aid of international commercial arbitration and investor-state arbitration. As explained in a previous post, § 1782 is a means by which “an interested person” in non-U.S. proceedings can request an order compelling discovery from a U.S.-based entity “for use in a proceeding in a foreign or international tribunal”. The U.S. Supreme Court held that, under § 1782, “foreign or international tribunals” refers to governmental or intergovernmental adjudicative bodies. The Court’s decision, authored by Justice Amy Coney Barrett, resolves the Circuit split on whether § 1782 can be used in aid of private commercial arbitrations. In finding that investor-state tribunals constituted under the UNCITRAL Rules also do not fall within the scope of § 1782, the Court’s decision departs from prevailing case law in the district courts, such as In re Oxus Gold PLC, MISC 06-82-GEB, 2007 WL 1037387 (D.N.J. Apr. 2, 2007) and In re Chevron Corp., 749 F. Supp. 2d 141, 144 (S.D.N.Y. 2010).
Background
The U.S. Supreme Court issued its unanimous decision after consolidating two cases in which parties sought assistance from U.S. courts to order discovery in aid of international arbitrations under § 1782. The first case involved an international commercial arbitration between Luxshare, Ltd., a Hong Kong-based company, and ZF Automotive U.S., Inc. (ZF), a Michigan-based automotive parts manufacturer and subsidiary of a German corporation. The arbitration, administered under the rules of the German Institution of Arbitration e.V. (DIS) before three arbitrators, involved fraud allegations against ZF in the acquisition of two of ZF’s business units. Luxshare requested discovery under § 1782, seeking evidence from ZF and its officers. The District Court granted the request and ZF moved to quash, alleging that the tribunal was not a “foreign or international tribunal” under § 1782. The Sixth Circuit denied ZF’s motion.
The second case involved an ad hoc arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) between The Fund for Protection of Investors’ Rights in Foreign States (the Fund), a Russian corporation, and the Republic of Lithuania. The arbitration, held under the Lithuania-Russia bilateral investment treaty (BIT), was related to the alleged expropriation of AB bankas SNORAS (Snoras), a Lithuanian bank whose Russian investor assigned its rights to the Fund. The Fund sought discovery under § 1782 from AlixPartners, LLP, a New York-based consulting firm and its CEO, Simon Freakley, who was appointed temporarily as Snoras’ administrator. AlixPartners argued that the ad hoc arbitral tribunal was not a “foreign or international tribunal” under § 1782. The District Court rejected AlixPartners’ argument and granted the Fund’s discovery request. The Second Circuit affirmed the decision.
The opinion of the Court
The U.S. Supreme Court held that, in both cases, the arbitral tribunals were not “foreign or international tribunals”. To reach that decision, the Court first determined the meaning of “foreign or international tribunal” by considering the following:
- A textual interpretation of “foreign or international tribunal”,
- The animating purpose of § 1782, and
- The potential tension with domestic arbitration.
The Court concluded that the statute referred only to governmental or intergovernmental adjudicative bodies. The Court then analyzed whether the arbitral tribunals in either case qualify as governmental or intergovernmental bodies and held that they do not.
A textual interpretation of “foreign or international tribunal”
Starting with “foreign tribunal”, the Court stated that “‘[t]ribunal’ is a word with potential governmental or sovereign connotations, so ‘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”.
The Court considered that such an interpretation is reinforced by the statutory defaults for discovery procedure in § 1782. The Court noted that the statute allows the foreign or international tribunal’s order to establish the procedure to produce evidence, which may be “the practice and procedure of the foreign country or the international tribunal, for taking the testimony or statement or producing the document or other thing”. According to the Court, “[t]he reference to the procedure of ‘the foreign country or the international tribunal’ parallels the authorization for district courts to grant discovery for use in a ‘foreign or international tribunal’ mentioned just before in § 1782. The statute thus presumes that a ‘foreign tribunal’ follows ‘the practice and procedure of the foreign country’”. The Court considered that this would be an odd assumption regarding a private adjudicatory body, as usually the parties agree on their own rules. As a result, this suggested that a “foreign tribunal” set out in § 1782 is intended to be a governmental body.
Regarding “international tribunal” the Court stated that “[a] tribunal is ‘international’ when it involves or is of two or more nations, meaning that those nations have imbued the tribunal with official power to adjudicate disputes. So understood, a ‘foreign tribunal’ is a tribunal imbued with governmental authority by one nation, and an ‘international tribunal’ is a tribunal imbued with governmental authority by multiple nations”.
The animating purpose of 28 USC § 1782
In the Court’s opinion, the textual interpretation of “foreign or international tribunal” is confirmed by the purpose and history of § 1782. “From the start, the statute has been about respecting foreign nations and the governmental and intergovernmental bodies they create”. The Court considered that Congress broadened the scope of § 1782 from “foreign courts” to “foreign or international tribunals” not to include private bodies, but to include other sorts of governmental and intergovernmental bodies, such as quasi-judicial agencies to improve the assistance and cooperation between “the United States and foreign countries”. Thus, the Court concluded: “After all, the animating purpose of § 1782 is comity: Permitting federal courts to assist foreign and international governmental bodies promotes respect for foreign governments and encourages reciprocal assistance. It is difficult to see how enlisting district courts to help private bodies would serve that end”.
The potential tension with domestic arbitration
In the Court’s opinion, its reading of “foreign or international tribunal” is also confirmed by a comparison to the Federal Arbitration Act (FAA). The Court noted that the FAA, which governs domestic arbitration, allows for much narrower discovery than § 1782. For instance, while only the parties can request discovery under the FAA, courts can grant discovery to “any interested person” under § 1782. Further, the FAA does not allow pre-arbitration discovery, but § 1782 does. Hence, citing the Seventh Circuit’s decision in Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689 (7th Cir. 2020), the Court concluded that “[i]t’s hard to conjure a rationale for giving parties to private foreign arbitrations such broad access to federal-court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations”.
The Court’s application of the notion of “foreign or international tribunal” to the two cases
Having determined that “foreign or international tribunal” is limited to adjudicatory bodies imbued with governmental authority, the Court then concluded that the arbitral tribunals in the cases at hand did not fall within the statute.
Regarding the tribunal in the ZF v Luxshare case, the Court held that its private origin excludes the application of § 1782. As no government is involved in creating the tribunal or establishing its rules, it does not qualify as a governmental body.
The Court recognized that assessing whether the arbitral tribunal in Fund v Lithuania fell within the statute was a much harder task, because “[a] sovereign is on one side of the dispute, and the option to arbitrate is contained in an international treaty rather than a private contract”. However, the Court reasoned, the bottom line is whether the two states agreed to give the ad hoc tribunal intergovernmental authority. The Court concluded that they did not, as the tribunal’s authority derives from the agreement of the parties and not from any governmental authority conferred by Lithuania and Russia. For instance, according to the BIT, the parties and not Lithuania and Russia created the tribunal. Furthermore, the tribunal is unaffiliated with Lithuania or Russia or any intergovernmental authority. Additionally, the proceedings are confidential, and the award may only be made public with the parties’ consent. Finally, the Court cited the amicus curiae by Professor George Bermann stating that “the ad hoc panel is ‘materially indistinguishable in form and function’ from the DIS panel resolving the dispute between ZF and Luxshare”. Therefore, the Court concluded that the ad hoc tribunal was not a “foreign or international tribunal”.
The U.S. Supreme Court’s decision reversed the District Court’s decision providing Luxshare discovery from ZF and the Second Circuit decision granting the Fund’s petition for discovery against AlixPartners and Simon Freakley.
Comment
While the Court’s decision provides certainty and consistency – both in resolving the Circuit split in respect of commercial arbitration, and as between international commercial and investment arbitrations – it is a game-changer for the gathering of evidence in international arbitration and will likely impact the way in evidentiary strategies in international arbitrations with a US nexus are structured. However, it is worth noting that U.S. courts can still provide some degree of assistance in proof-gathering in arbitrations governed by the FAA.
In reaching its decision, the Court’s statutory interpretation and reasoning is somewhat more circumscribed than the decision in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004). In Intel, the Court recognized the “possibility of U.S. judicial assistance in connection with administrative and quasi-judicial proceedings abroad”, holding that § 1782 gave United States District Court judges broad discretion to permit foreign parties to obtain discovery in the United States. The Court provided guidance to District Courts in their consideration of applications under § 1782, including whether such a request conceals an attempt to circumvent foreign proof-gathering limits or other policies of a foreign country or the United States. The Luxshare decision distinguishes Intel in a footnote on the basis that Intel involved the Commission of the European Communities (which indisputably exercises governmental authority) and therefore did not consider the question of whether a private arbitral body qualifies as a “foreign or international tribunal”.
It may be noted, too, that Fund v. Lithuania involved an ad hoc tribunal. However, it remains to be seen if the Court would consider that the factors to determine whether a tribunal is a governmental or intergovernmental adjudicative body also apply to tribunals constituted under the auspices of international treaty-based institutions such as ICSID, and that § 1782 is not applicable to such tribunals either. With § 1782 now definitively held to preclude application to international commercial and a significant investment arbitration, the Court’s decision could be the final word on this remarkable and much debated feature of U.S. discovery in the context of international arbitration.
For further information, please contact:
Christian Leathley, Partner, Herbert Smith Freehills
Christian.Leathley@hsf.com
