In a nod to comity, the Supreme Court limits discovery in international arbitrations | Denton
In a unanimous decision in ZF Automotive US, Inc. v. Luxshare, LTD., 142 S. Ct 2078 (2022) (ZF Automotive), the Supreme Court settled the circuit’s long-running split on whether an international arbitral tribunal constitutes a “foreign or international court” under 28 U.S.C. 1782(a). In ZF Automotivethe Court held that the two arbitral bodies before it in the consolidated case, a commercial arbitration and an ad hoc investment arbitration, were not “foreign or international courts” and therefore could not use § 1782 to compel testimony and production of documents.
The Supreme Court has ruled that a “foreign or international court” is a court that exercises governmental authority and that neither private commercial arbitration panels nor ad hoc arbitration panels constituted under international treaties, even with a sovereign as a party, are only admissible under Section 1782. Under the Court’s ruling, parties to arbitration under private adjudicative bodies may not use Section 1782 to seek the assistance of the district courts to obtain testimony or the production of documents in the United States for use in arbitration proceedings abroad.
This decision is significant because for years some circuits have sanctioned the use of § 1782 to allow parties to have a broad discovery to support their case in private international arbitration. Under the Court’s decision, the ability to obtain discovery is significantly reduced in arbitration proceedings. However, § 1782 remains a viable tool for international proceedings unrelated to arbitrations, including cross-border proceedings related to insolvency.
Background and reasoning of the Supreme Court
The case came to the Court as a result of two joined cases, ZF Automotive US, Inc. v. Luxshare, Ltd. (Luxshare) and AlixPartners, LLP c. Foreign States Investor Rights Protection Fund (Alix Partners). The dispute in Luxshare was born from an acquisition that turned sour. ZF Automotive US, Inc. is the American subsidiary of a German company that manufactures automotive parts. ZF Automotive has sold two business units to Hong Kong-based Luxshare, Ltd. for nearly $1 billion. After the deal was completed, Luxshare allegedly discovered that ZF Automotive had fraudulently withheld critical information about the acquired business units, forcing it to overpay hundreds of millions of dollars. The agreement governing the sale of the business units provided that all disputes would be resolved in accordance with the arbitration rules of the German Arbitration Institution eV (DIS), which is a private arbitration organization based in Berlin.
In anticipation of the DIS arbitration against ZF Automotive, Luxshare filed a ex parte petition under Section 1782 to the U.S. District Court for the Eastern District of Michigan, seeking information from ZF Automotive and two of its senior executives. 28 USC § 1782(a) provides in relevant part that: “The district court for the district in which a person resides or is 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 court.” ZF Automotive requested that the subpoenas be quashed, arguing that the DIS panel was not a “foreign or international court” under Section 1782. However, this argument was already precluded by Sixth (and Fourth) Circuit precedent. As a result, the District Court had no alternative, since it was bound by precedent in its Circuit, and denied the motion to vacate. from ZF Automotive.Predictably, the Sixth Circuit declined a reprieve.
The dispute in AlixPartners arose out of a disagreement between Lithuania and a Russian investor in a bankrupt Lithuanian bank, AB bankas SNORAS (Snoras). After discovering that Snoras was unable to meet its obligations, the central bank of Lithuania nationalized Snoras and appointed Simon Freakley, CEO of AlixPartners, LLP, a US-based consulting firm, as temporary administrator. Following Freakley’s publication of a report on Snoras’ financial condition, Lithuanian authorities declared the bank insolvent and initiated bankruptcy proceedings. The Fund for the Protection of Investors’ Rights in Foreign States (the Fund), a Russian company and assignee of the Russian investor, alleged that Lithuania expropriated Snoras’ investments during the proceedings.
The Fund has initiated proceedings against Lithuania under a bilateral investment treaty between Lithuania and Russia. The treaty provides that if the parties fail to resolve their dispute within six months through negotiations, the investor can submit the dispute to one of four forums. The forum chosen by the Fund was ad hoc arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).
In anticipation of the ad hoc arbitration, the Fund has filed § 1782 petition with the U.S. District Court for the Southern District of New York, seeking information from Freakley and AlixPartners about Freakley’s role as temporary administrator of Snoras. AlixPartners offered to rescind the subpoenas arguing that the ad hoc arbitration panel was not a “foreign or international court” under § 1782, but rather a private adjudicative body. Unlike the Sixth Circuit, Second Circuit precedent did not consider a private arbitration panel to be a “foreign or international court under § 1782. However, due to the unique nature of the dispute, which involved a panel with a sovereign as a party, the Second Circuit used a multi-factor test and ultimately found that the panel was in fact a “foreign or international court” under § 1782. The Supreme Court agreed to hear both the Luxshare and Alix Partners case jointly.
The Supreme Court first considered whether the phrase “foreign or international court” in § 1782 includes private adjudicative bodies or only governmental or intergovernmental bodies. In reaching its conclusion, the Court determined that a “foreign court” is one which exercises governmental authority conferred by a single nation, and an “international court” is one which exercises governmental authority conferred by two or more nations, with private adjudicative bodies not falling under § 1782. The court held that:
- A § 1782 “tribunal” need not be a formal “tribunal”, and the broad meaning of “tribunal” does not in itself exclude private adjudicative bodies. Yet, attached to the modifier “foreign or international”, the word is best understood as an adjudicative body that exercises governmental authority.
- The purpose of § 1782 is comity: allowing federal courts to assist foreign and international government agencies promotes respect for foreign governments and encourages reciprocal assistance.
- Expanding § 1782 to include private bodies would also be in significant tension with the Federal Arbitration Act, which governs national arbitration, because § 1782 allows for much broader discovery than the FAA allows.
Applying this reasoning to the DIS arbitration panel in Luxshare, the Court found that there was no government involvement in the creation of the panel or in prescribing its procedures and therefore Section 1782 did not apply. The special group of AlixPartners presented a more difficult question. The difficulty came from the fact that a sovereign was on one side of the dispute and that the possibility of arbitrating was contained in an international treaty rather than in a private contract. Nevertheless, the Court held that the ad hoc arbitration panel was not a pre-existing body, but a body formed for the purpose of adjudicating investor-State disputes. Moreover, nothing in the treaty reflected the panel’s intention to exercise governmental authority. The ad hoc group at issue in the dispute between the Fund and Lithuania was therefore “materially indistinguishable in form and function” from the DIS group and was also a private judicial body.
Takeaways from the Supreme Court decision
The phrase “foreign or international court” has generated much discussion over the years since the word “court” was replaced with “court” in the 1964 amendments to § 1782. The Supreme Court’s decision finally resolved the major division among the Circuits as to whether a private arbitration panel is included within the meaning of “court” for the purposes of § 1782. The Supreme Court has decided that the answer to this question is no.
It should come as no great surprise that § 1782 has been applied in a multitude of other contexts outside of international arbitrations, including in foreign bankruptcy proceedings. See In re Lancaster Factoring Co., 90 F.3d 38 (2d Cir. 1996). Thus, in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), the Second Circuit said that foreign liquidators should consider using this section to assist in discovery relating to foreign insolvency proceedings. In fact, the Supreme Court noted in its ZF Automotive ruling that “the driving purpose of Section 1782 is comity: allowing federal courts to assist foreign and international government agencies promotes respect for foreign governments and encourages reciprocal assistance”. The emphasis on comity is one of the fundamental tenets of cross-border insolvency proceedings, particularly in the United States. Although some may anticipate that reliance on § 1782 may now be restricted in arbitration proceedings, its use will continue in other instances as the need arises.