On June 13, 2022, the Supreme Court rendered its decision on whether 28 U.S.C. §1782 (“§1782”) extends to foreign private arbitrations. In a consolidated action, the Court addressed two cases and unanimously held that only governmental or intergovernmental adjudicative bodies constitute a “foreign or international tribunal” under §1782. The first case involved an allegation of fraud in a billion-dollar M&A deal. Luxshare, LTD. (“Luxshare”) initiated a proceeding against ZF Automotive US, Inc. (“ZF”) for allegedly concealing information regarding business units. As a result, Luxshare alleges it overpaid by hundreds of millions of dollars. The second case involved a dispute between Lithuania and a Russian investor in SNORAS, a failed Lithuanian bank. The Fund, a Russian corporation and assignee of the Russian investor, initiated an investment treaty arbitration against Lithuania alleging that Lithuania expropriated certain investments from SNORAS. After reviewing the two separate actions together, the SCOTUS held that “neither of the arbitral panels involved in these cases” fits within §1782.
To reach that conclusion, the Court determined what constitutes a “foreign or international tribunal” under §1782. The Court acknowledged that the word “tribunal” without accompanying adjectives would provide “a good case for including private arbitral panels.” However, they held that “tribunal” as attached to the words “foreign or international” is best understood as an adjudicative body that exercises governmental authority. The Court noted that the phrase “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.” A tribunal that belongs to a foreign nation must possess sovereign authority conferred by that nation. Similarly, an “international tribunal” involves two or more nations conferring to the tribunal the official power to adjudicate disputes.
Next, the Court determined whether the private arbitration between Luxshare and ZF or the investment treaty arbitration between The Fund and Lithuania were being conducted under governmental authority.
The Luxshare arbitration was a straightforward determination as the parties agreed that DIS, a private dispute-resolution organization, would arbitrate any disputes. The Court held that DIS does not qualify as a governmental body since it operated under its own privately established rules. Furthermore, it rejected Luxshare’s contention that DIS qualifies as governmental so long as the law of the country in which it would sit governs some aspects of arbitration. The Court explained that “private entities do not become governmental because laws govern them and courts enforce their contracts.”
The ad hoc arbitration panel issue in The Fund’s dispute with Lithuania presented a harder question. Under Article 10 of the applicable treaty between the countries, the parties had a choice of four forums to resolve disputes, including the option of a “competent court or court of arbitration of the Contracting Party.” The Fund suggested that this language rendered the panel governmental as it reflected the nations’ intent to give investors the option of bringing their disputes before a pre-existing governmental body. The Court rejected such interpretation explaining that “an ad hoc arbitration panel . . . is not a pre-existing body, but one formed for the purpose of adjudicating investor-state disputes.” The Court ruled that the relevant determination was whether Russia and Lithuania intended that the ad hoc panel exercise governmental authority.
To that end, the Court considered the following factors: the ad hoc panel “functions independently” of and is not affiliated with either nation; the panel receives no government funding, the proceedings maintain confidentiality, and the award may be made public only with the consent of both parties; the ad hoc panel at issue is “materially indistinguishable in form and function” from the DIS panel between Luxshare and ZF; and the panel derives its authority in essentially the same way as private arbitration—from the parties’ consent to arbitrate. The Court ruled that all of these factors indicate that Russia and Lithuania did not intend for the ad hoc panel to exercise governmental authority.
To the SHOCK of many international arbitration practitioners, the Court held that “neither the private commercial arbitral panel in the first case nor the ad hoc arbitration panel in the second case qualifies” as a “foreign or international tribunal” under §1782. Some in the industry felt that the Court was likely to draw the line at private commercial arbitrations, but that treaty-based arbitrations would still afford parties the right to seek federal court assistance on third party discovery. There is still room for such decision, as despite this holding, the Court left open the possibility that sovereign nations might empower an ad hoc arbitration panel with “official governmental authority” since “governmental and inter-governmental bodies may take many forms.”
Retroactive Application
This Court’s decision that only governmental or intergovernmental adjudicative bodies constitute a “foreign or international tribunal” under §1782 equally applies to cases pending and open for direct review. Pursuant to Harper v. Virginia Dep’t of Tax’n, when a court applies a rule of federal law, “that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate the announcement of the rule.” [1] Moreover, silence on the issue of retroactivity indicates that the Court’s decision is to be given a retroactive effect.[2] In, ZF Automotive US, Inc., et al. v. Luxshare, LTD., the Court did not explicitly address whether this decision has a retroactive effect. Therefore, this opinion “is properly understood to have followed the normal rule of retroactive application” and must be “read to hold… that its rule should apply retroactively to the litigants then before the Court.” [3]
Implications [4]
This Court’s decision limits parties’ ability to obtain federal court assistance to compel crucial evidence to be produced or provided particularly from third parties. Generally, international arbitration tribunals are only empowered to compel discovery against the parties to the arbitration, on the basis of consent. However, some evidence may be in the hands of third parties. Now, if those third parties are in the U.S., they are not going to be compelled to provide evidence for arbitration matters. Some in the industry felt this decision still furthers a key principle of international arbitration by limiting broad discovery and preserving confidentiality—It ensures that international businesses will not be subject to an “American-style” discovery process, which is often more liberal compared to other nations.
Moreover, this ruling does not affect the availability of Section 7 of the Federal Arbitration Act as a discovery tool in international arbitrations seated in the United States. It may still permit parties to be required to comply with discovery in some investment treaty arbitrations, perhaps such as the International Centre for Settlement of Investment Disputes (“ICSID”). Other investor-state arbitrations may qualify given that the opinion suggests that a “competent court or court of arbitration of the Contracting Party” is “clearly governmental.”
An argument on the other side is that parties may be too limited in the evidence available to them, to the point where the non-prevailing party may not be able to present its case (a due process issue), which is a valid ground for vacating an arbitration award under the New York Convention. However, the international arbitration community is more accustomed to the limited discovery afforded generally and may not feel the impact of this decision outside the U.S. Certainly, for the firms who were handling §1782 applications in federal court in favorable jurisdictions, this decision means the end of those proceedings.[5]
Article written with assistance from Cranfill Sumner LLP clerk Shivani Motamarri.
[1] Harper v. Virginia Dep’t of Tax’n, 509 U.S. 86, 86, 113 S. Ct. 2510, 2512, 125 L. Ed. 2d 74 (1993).
[2] Campos v. Fresno Deputy Sheriff’s Ass’n, 535 F. Supp. 3d 913, 920 (E.D. Cal. 2021).
[3] Harper, 509 U.S. at 97-98 (quoting Beam, 501 U.S., at 539, 111 S.Ct., at 2445 (opinion of SOUTER, J).
[4] https://www.troutman.com/insights/scotus-resolves-section-1782-controversy-courts-cannot-order-discovery-in-most-international-arbitrations.html
https://www.hklaw.com/en/insights/publications/2022/06/supreme-court-issues-ruling-regarding-section-1782
https://www.law.cornell.edu/uscode/text/9/7
[5] ZF Automotive US, Inc., et al. v. Luxshare, LTD.
