The Supreme Court Restricts Access to U.S. Discovery for International Arbitration Litigants
On June 13, 2022, the United States Supreme Court (the “Supreme Court”) unanimously determined that 28 U.S.C. §1782 (“Section 1782”), which allows litigants in foreign proceedings to subpoena evidence from U.S. parties, only applies to governmental or intergovernmental arbitration proceedings – to the exclusion of private international arbitration. At issue was whether the latter amounted to “a proceeding in a foreign or international tribunal,” one of the three statutory requirements. In its decision, the Supreme Court explicitly excluded private commercial and certain investor-state arbitration panels from the ambit of Section 1782, holding that “only a governmental or intergovernmental adjudicative body constitutes a ‘foreign or international tribunal’ under Section 1782.” 596 U.S __, 16-17 (2022).
Section 1782 allows “any interested person” to petition a U.S. district court for an order requiring a party who “resides or is found” within that district to produce evidence for use in proceedings before “a foreign or international tribunal.” In essence, this statute allows foreign litigants to avail themselves of the United States’ notoriously liberal and expansive discovery regime. In recent years, there has been a notable increase in Section 1782 discovery applications relating to foreign arbitration proceedings, resulting in a circuit split, with the Fourth and Sixth Circuits granting such requests and the Second, Fifth and Seventh Circuits denying them.
The Cases: ZF Automotive U.S., Inc v. Luxshare, Ltd. and Alixpartners, LLP v. The Fund for the Protection of Investors’ Rights in Foreign States
The Supreme Court reversed two decisions:
In ZF Automotive, Hong Kong-based Luxshare alleged that ZF Automotive, the U.S. subsidiary of a German automotive parts manufacturer, committed fraud in relation to a sales transaction between them. Their sales contract provided that all disputes would be resolved by a private dispute-resolution organization based in Berlin. A U.S. District Court granted Luxshare’s Section 1782 application for discovery. ZF Automotive moved to quash, arguing that the private arbitration panel was not a “foreign or international tribunal” under Section 1782. The District Court denied the motion and the Sixth Circuit denied a stay.
In Alixpartners, the Fund for Protection of Investors’ Rights in Foreign States (a Russian corporation) brought a proceeding against Lithuania under a bilateral investment treaty. The Fund claimed that Lithuania had expropriated investments by declaring insolvent and nationalizing a Lithuanian bank in which its Russian assignor had invested. Under the treaty, any dispute between “one Contracting Party and an investor of the other Contracting Party concerning investments in the first Contracting Party’s territory” may be resolved in one of four forums: a competent court in the territory where the investments were made, the Arbitration Institute of the Stockholm Chamber of Commerce, the Court of Arbitration of the International Chamber of Commerce, or an ad hoc arbitration in accordance with Arbitration Rules of the U.N Commission on International Trade Law. The parties chose the ad hoc panel. The Fund’s Section 1782 application was granted by a federal district court despite Alixpartners’ argument that the ad hoc panel was merely a private adjudicative body. Though the Second Circuit had previously held that a private arbitration panel is not within the scope of Section 1782, it distinguished the ad hoc panel based on a “multifactor” inquiry into whether the panel “possess[ed] ‘the functional attributes most commonly associated with private arbitration.’” The Second Circuit found it did not and “concluded that the ad hoc panel was ‘foreign or international’ rather than private,” affirming the lower court’s decision.
The Decision: Private Adjudicatory Bodies are not Covered by §1782
The Supreme Court noted that Section 1782 originally provided the framework for discovery assistance in proceedings in “any court in a foreign country.” In 1964, Congress expanded the scope to include proceedings in a “foreign or international tribunal.”
The Supreme Court opined that that the word “tribunal” on its own would clearly include private arbitration panels, but then placed its focus on the textual significance of the word “foreign.” The Court found that when “foreign” modifies a word with “potential governmental or sovereign connotations” it takes on the meaning of “belonging” to a foreign nation, rather than simply connoting where the adjudicatory body sits. Affirming that “tribunal” is one such word, the Court held that “for a tribunal to belong to a foreign nation,” it must “possess sovereign authority conferred by that nation.” Otherwise, it is simply “located in a foreign nation.”
Turning to the mechanisms for discovery under Section 1782, the Supreme Court quoted the statute, emphasizing the district court’s authority to “prescribe…in whole or part the practice and procedure of the foreign country or the international tribunal.” However, private arbitration panels are “the creature of an agreement between private parties who prescribe their own rules.” Per the Court, that distinction means that a tribunal that defaults to governmental procedures is governmental in itself; tribunals that set their own rules are not.
The opinion applies the same logic for “international” tribunals, finding “foreign” and “international” complementary: the former is a tribunal imbued with governmental authority of a nation, the latter imbued with governmental authority by multiple nations.
Finally, the Supreme Court noted that expanding Section 1782 to include private bodies would be in significant tension with the Federal Arbitration Act (“FAA”), which governs domestic arbitration. The FAA restricts discovery requests to the arbitration panel, rather than opening it up to the parties. Agreeing with the Seventh Circuit, the Court could not find a rationale for giving foreign arbitration parties such broad access to federal-court discovery assistance while denying the same assistance in domestic arbitrations.
The Supreme Court found the dispute between ZF and Luxshare straightforward. Though the law of Germany governed some aspects of the arbitration and German courts may play a role in enforcing agreements, no government was involved in creating the panel or prescribing its procedures. As such, the panel did not qualify as a governmental adjudicative body and the litigants could not avail themselves of §1782.
Though one of the parties in Alixpartners is the country of Lithuania, the Supreme Court asserted that Russia and Lithuania were free to structure investor-state dispute resolution as they saw fit. Interpreting the treaty “as a contract…between nations,” the Court relied heavily on the substance of the document to determine whether the two nations intended to confer governmental authority on a panel formed pursuant to their contract. The Court found that the parties did not intend for the ad hoc panel to exercise governmental authority for several reasons. Among other things, the rules that governed the panel’s formation and procedure were distinct from sovereign practice and instead were established by the treaty. In addition, the arbitration clause allowed for resolution by court or arbitral panel, and the parties selected the panel. Moreover, the panel lacked “indicia” of governmental involvement: it consisted of “individuals chosen by the parties and lacking any official affiliation” with any governmental entity, functioned independently from both countries, was not government funded, and proceedings and awards remain confidential unless both parties consent. Ultimately, the ad hoc panel was “indistinguishable” from the panel in ZF Automotive.
This 9-0 decision makes clear that merely because a sovereign is party to an arbitration, the adjudicatory body does not automatically fall under §1782. However, the Supreme Court does not foreclose the possibility that sovereigns could imbue a panel with governmental authority, so long as nations intend to do so at the time of treaty formation. Such intent may be evinced by governmental involvement in the formation of arbitral bodies, funding, or the ability to appoint officers to assist in any future proceedings. This leaves open the question of whether other types of arbitral bodies could amount to “foreign or international tribunals.”
Further, the Supreme Court took care to note that the parties did not dispute whether the bodies at issue were “sufficiently adjudicatory” so as to amount to a tribunal under Section 1782. As a result, this decision does not precisely define the “outer bounds” of the term “tribunal”, leaving the question open for further litigation.
The narrower scope of Section 1782 means that parties contracting for binding arbitration abroad will not be able to directly apply for U.S. discovery practice and procedure through federal courts, and instead must follow the arbitrator’s guidelines. As such, potential parties to international arbitration agreements should carefully evaluate whether they might seek to avail themselves of such expansive discovery mechanisms in future disputes and contract accordingly.