U.S. Supreme Court Restricts Discovery in Foreign Arbitrations

Abstract

On June 13, 2022, the U.S. Supreme Court held that, under 28 U.S.C. § 1782, federal courts may only assist foreign governmental or intergovernmental adjudicative bodies with evidence gathering. Specifically, in the consolidated case of ZF Automotive v. Luxshare, the Court ruled that private adjudicatory bodies, including private arbitral tribunals, do not count as «foreign or international tribunals» as that term is used in section 1782, the relevant statute.[1] The Court’s ruling resolves a split between certain federal courts that allowed section 1782 discovery for use in private arbitrations and those that did not.[2] Now, section 1782 can no longer be used, or abused, to seek U.S.-style discovery for use in private arbitrations. As explained below, the Court based its interpretation on a textual analysis of the phrase «foreign or international tribunals», the history of the statute, and its relation to the relevant text of the Federal Arbitration Act (FAA), which governs domestic U.S. arbitrations.

A.     The Facts

The Supreme Court’s opinion addresses two underlying cases in which the lower courts permitted discovery under section 1782. Both cases involved a party seeking discovery in the U.S. for use in arbitral proceedings abroad. The first involved allegations of fraud in a business transaction. ZF Automotive US, Inc., a Michigan-based subsidiary of a German corporation, sold two business units to Luxshare, Ltd., a Hong Kong-based company. After the deal was concluded, Luxshare claimed that ZF had concealed information about the business units. The parties had agreed to private commercial arbitration in Munich subject to the rules of the German Institution of Arbitration (DIS). Before commencing arbitration, Luxshare filed an ex parte application under section 1782 in the U.S. District Court for the Eastern District of Michigan seeking information from ZF and two of its senior officers. The District Court granted the request. ZF moved to quash the subpoenas, but the Sixth Circuit Court of Appeals denied the request for a stay.

In the second case, a Russian investor claimed that the Lithuanian government improperly expropriated certain investments when it nationalized AB bankas SNORAS, a failed Lithuanian bank. The Fund for the Protection of Investors’ Rights in Foreign States—a Russian corporation and the assignee of the Russian investor—initiated proceedings against Lithuania under a bilateral investment treaty between Lithuania and Russia. The treaty provides that if the parties could not resolve their dispute, it could be submitted to one of four different forums. The Fund chose an ad hoc arbitration pursuant to the UNCITRAL arbitration rules. The Fund then filed a section 1782 application in the U.S. District Court for the Southern District of New York seeking information from third parties Simon Freakley and AlixPartners about Freakley’s role as temporary administrator of SNORAS. The District Court granted the Fund’s request and the Second Circuit affirmed.

B.     The Court’s Reasoning

The Supreme Court first addressed whether the phrase «foreign or international tribunal» in section 1782 includes private adjudicative bodies or only governmental or intergovernmental bodies. Having determined that it only included the latter, the Court then determined that neither of the arbitral panels in the two cases qualified as governmental or intergovernmental bodies.

1.      «Foreign or international tribunal»

Section 1782(a) provides in relevant part 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 […]

Although the Court found that «tribunal» as used in section 1782 refers to any adjudicatory body, and not as a synonym for «court», the word «tribunal» must be read in context with the words «foreign» and «international». Attached to these modifiers, the Court explained, the word «tribunal» should be understood as an «adjudicative body that exercises governmental authority». According to the Court, the word «tribunal» is to be interpreted as referring to governmental authority because it is a word with «potential governmental or sovereign connotations» and, therefore, «foreign tribunal» refers to a tribunal of a foreign nation.

Further, section 1782, said the Court, presumes that the «tribunal» will follow «the practice and procedure of the foreign country», which would be an odd assumption to make about a private adjudicatory body. The Court found that «international tribunal» refers to a tribunal involving or comprising two or more nations, «meaning that those nations have imbued the tribunal with official power to adjudicate disputes»; therefore, the terms «foreign tribunal» and «international tribunal» complement each other.

The Court also reasoned that the «animating purpose of § 1782 is comity». That is, «[p]ermitting federal courts to assist foreign and international governmental bodies» to promote «respect for foreign governments» and encouraging «reciprocal assistance». From 1855 until 1964, section 1782 at its antecedents covered assistance only to foreign «courts». Another statute covered assistance to «any international tribunal or commission […] in which the United States participate[d] as a party».

When combining these two laws, Congress established a Commission on International Rules and Judicial Procedure to improve the process of judicial assistance «between the United States and foreign countries» and «the rendering of assistance to foreign courts and quasi-judicial agencies». When, in 1964, Congress adopted the Commission’s proposed legislation, which became section 1782, it did not, according to the Court, «signal an expansion from public to private bodies, but rather an expansion of the types of public bodies covered».

Additionally, the Court found that extending section 1782 to include private bodies would grant parties to foreign arbitrations broader discovery than parties are entitled to under the FAA, which governs domestic U.S. arbitrations. For example, the FAA permits only an arbitral panel to request discovery, whereas section 1782 allows district courts to entertain requests from foreign or international tribunals and any «interested person». Additionally, the FAA largely prohibits pre-arbitration discovery, but section 1782 permits it.

2.      What Constitutes a Governmental or Intergovernmental Adjudicative Body

When deciding whether an adjudicative body is governmental or intergovernmental, the relevant question, said the Court, is whether the nations intended to imbue the body in question with governmental authority. By contrast, it is not dispositive whether an adjudicative body shares features of other bodies that look governmental.

Accordingly, the Court found that the DIS arbitration panel at issue was not a governmental body because no government was involved in creating or prescribing its procedures. Although the ad hoc arbitration panel at issue in the Fund’s dispute with Lithuania presented a «harder question» for the Court, it found that neither Lithuania’s presence nor the treaty’s existence were dispositive because no governmental authority was conferred on the ad hoc panel formed pursuant to the treaty. The Court did not foreclose the possibility that sovereigns might imbue an ad hoc arbitration panel with official authority, or that other forms of arbitration, such as those provided for by the International Centre for Settlement of Investment Disputes, might be considered governmental or intergovernmental adjudicative bodies. Rather, the Court concluded that a body does not possess governmental authority simply because nations agree in a treaty to arbitrate their disputes.

C.     Conclusion

As we noted in a prior Bulletin on this subject, in another section 1782 case, a party resisting discovery argued that the statute should not encompass private adjudicative bodies because parties to arbitration choose it as a «faster, cheaper, and more predictable alternative to litigation», because the arguments, evidence, and even the existence of the arbitration need not be disclosed, and to ensure that predictable rules and procedures to resolve their disputes are set in advance.[3] Yet in that case, as in ZF Automotive, the parties were forced to endure years of public litigation in the U.S.

By providing a clear and conclusive opinion limiting «foreign or international tribunal» under section 1782 to governmental or intergovernmental adjudicative bodies, the Court has reduced the threat that parties to private commercial arbitration will face expensive and protracted discovery or discovery disputes in the U.S. The Court’s opinion prevents parties to private arbitrations from using section 1782 to seek discovery before an arbitration commences and from entities and individuals that are not parties to the arbitration. This determination is likely in keeping with most parties’ intent when they enter into an arbitration agreement, and upholding that intent is one of the bedrock principles undergirding private commercial arbitration.

[1]        ZF Automotive US, Inc., et al. v. Luxshare, Ltd., No. 21–401, Slip Op. 596 U.S. ___ (2022).
[2]        See Felix Dasser, Balz Gross, Jonathan Silberstein-Loeb, and Antonio Ardielli, «U.S. Discovery in Aid of Private Foreign Arbitration» (Jan. 10, 2022), available here.
[3]        See Servotronics v. Rolls-Royce PLC, Brief for Respondent Rolls-Royce, No. 20-794 (U.S. Sup. Ct. Dec. 11, 2020), 48-49.

If you have any queries related to this Bulletin, please refer to your contact person at Homburger or to: