Discovery assistance from US courts

Last month the US Supreme Court handed down its verdict in ZF Automotive v Luxshare. This settled the long-running disagreement between the US circuit courts over whether 28 USC section 1782, a statute which allows US courts to grant discovery assistance to foreign courts, also applies to foreign international commercial or investor-state arbitration. For foreign parties seeking to invoke the assistance of US courts for discovery, the ruling has significant implications.

The issue is important because of the wide scope of US disclosure, particularly by comparison with the very limited disclosure generally available in arbitration, particularly against third parties. Indeed, the discovery procedure in the US can be considered significantly more extensive and onerous than the disclosure process in other jurisdictions, including the English courts. After all, hitherto, section 1782(a) provides that a district court may order discovery ‘for use in a proceeding in a foreign or international tribunal’.

The issue addressed an essential matter regarding commercial arbitration and investor-state arbitration, as demonstrated by two high-profile cases.

The first involved a private commercial arbitration under the Arbitration Rules of the German Institution of Arbitration e.V. (DIS). Luxshare, a Hong Kong corporation, initiated DIS arbitration proceedings against ZF. In support of its arbitration, Luxshare filed an application under section 1782 in the US federal court to seek discovery orders against the Michigan-based subsidiary of ZF, a German company. Luxshare argued that the private arbitration tribunal formed under DIS rules was a ‘foreign tribunal’ within the meaning of the statute. The Sixth Circuit court stayed Luxshare’s application, finding that the statute was intended to extend only to government adjudicational bodies.

The second matter this ruling addressed involved a claim against an insolvent Lithuanian national bank and a Russian fund which had been assigned claims held by various Russian investors against the bank. The fund initiated proceedings under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL), relying also on a bilateral investment treaty between Lithuania and Russia.

The fund filed an application under section 1782 against AlixPartners, a New York-based consulting firm which had been appointed temporary administrator of the bank, seeking information in support of the fund’s claim that the bank had expropriated investments. In contrast with the Sixth Circuit decision, the Second Circuit court allowed the application, finding that an arbitration tribunal appointed under UNCITRAL rules for a claim arising from a bilateral investment treaty was a ‘foreign or international tribunal’ within the meaning of the statute.

The Supreme Court decision put an end to this longstanding split among federal circuit appeal courts and provided clarity on whether 28 USC section 1782 applied to arbitration matters. The court held that the meaning of ‘foreign or international tribunals’ within the statute did not extend to private commercial arbitration tribunals or investor-state dispute tribunals, confirming that US courts could not provide discovery assistance in foreign arbitration proceedings. The Supreme Court’s reasoning was that ‘foreign tribunal’ within the meaning of the statute would naturally refer to a tribunal belonging to a foreign nation, rather than any private tribunal that is simply located in a foreign nation. The court went on to hold that the ‘foreign or international tribunal’ must be one of sovereign authority conferred by a foreign nation rather than one appointed by the parties to a dispute pursuant to a private agreement.

This decision carries significant implications for arbitration outside the US and it is essential that businesses understand how these implications could impact them. The assistance of the US court has often been invoked in bilateral investment treaty arbitrations and has often been considered an important part of strategy in private commercial arbitrations.

In particular, claimants have routinely sought to employ intermediary banking discovery in the US courts pursuant to 28 USC section 1782. This would permit a US court to compel disclosure by a person who either ‘resides’ or ‘is found’ in the court’s district 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’. Since money transfers in international business are usually dollar-denominated, there is usually a point during which the money transfer passes through the US. This leaves a paper trail within the intermediary bank which parties seeking discovery of their opponent’s assets could, and regularly do, try to leverage.  

However, following the Supreme Court’s decision, parties undertaking international arbitration proceedings with a link to the US will no longer be able to rely on the possibility of 28 USC section 1782 disclosure as a tactic. However, the decision does not affect claimants seeking to apply for discovery under section 1782 in aid of proceedings in foreign courts.

While the Supreme Court’s ruling provides welcome clarity, now that the scope of section 1782 has been greatly narrowed, parties entering into arbitration agreements must give greater consideration to the scope of discovery, as well as to its choice of arbitration rules, which will take on a greater importance. Overall, claimants should consider discovery from the outset of arbitration which in turn may, for example, determine their choice of arbitrator – a choice not to be taken lightly.

Deborah Ruff is head of arbitration, Charles Golsong counsel, and Jenna Lim an associate (Tokyo) at Pillsbury Winthrop Shaw Pittman