The Second Circuit confirmed this week that within the circuit, parties may not ask federal courts to order discovery for use in private arbitrations. The Second Circuit’s ruling, In re Application and Petition of Hanwei Guo, No. 19-781 (2d Cir. July 8, 2020), confirms an existing split with the Fourth and Sixth Circuits, which allow such discovery, and means it will be harder for parties in private arbitrations to obtain evidence from people and companies residing within the Second Circuit1. This decision will have far-reaching consequences considering the number of companies headquartered within the Second Circuit and particularly in New York.
Background of 28 U.S.C. §1782
28 U.S.C. § 1782 (§1782) authorizes U.S. district courts to enforce discovery requests to gather evidence “for use in a proceeding in a foreign or international tribunal.” The law, passed in 1948 and revised in 1964, was originally primarily used to allow U.S. courts to assist parties in obtaining evidence for use in foreign court proceedings.
In recent years, parties have increasingly turned to §1782 to seek discovery in the U.S. for use in private commercial arbitrations outside of the U.S. These attempts were initially rejected by the courts.
In 1999, the Second Circuit in National Broadcasting Co. v. Bear Stearns & Co., 165 F.3d 184 (2d Cir. 1999) (NBC) held that an ICC administered private commercial arbitration was not a “proceeding in a foreign or international tribunal,” and therefore §1782 did not apply. The court found that although the statutory language in §1782 was ambiguous, the legislative history showed that the term “tribunals” was meant to refer only to “intergovernmental arbitration and other state sponsored dispute resolution mechanisms,” and not private arbitrations.
The Fifth Circuit2 came to the same conclusion that year, holding in Republic of Kazakhstan v. Biedermann Int‘l, 168 F.3d 880, 881 (5th Cir. 1999) that a Tribunal constituted under the Stockholm Chamber of Commerce was not an “arbitral tribunal” under §1782.
The Supreme Court's decision in Intel
In 2004, the Supreme Court issued a decision in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004) (Intel) that raised questions about the scope of §1782. The question before the Court was whether the Directorate General-Competition of the Commission of the European Communities constituted a “foreign or international tribunal” under §1782. The Court held that because it was a public entity, it “qualifie[d] as a tribunal ‘to the extent that it acts as a first instance decision maker,’ with its decisions reviewed by the Court of First Instance and the European Court of Justice.” In doing so, the Court stated that Congress intended §1782 to cover not only proceedings before foreign courts, but also “quasi-judicial proceedings,” and cited a contemporaneous law review article stating that the term “international tribunal” was intended to encompass “arbitral tribunals.”
Following the Supreme Court’s decision in Intel, the Fourth3 and Sixth4 Circuits held that §1782 could be used to obtain discovery for private commercial arbitrations. In In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d 710 (6th Cir. 2019), the Sixth Circuit found that the term “tribunal” in §1782 included private arbitrations. Similarly, the Fourth Circuit in Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 210 (4th Cir. 2020) found that private arbitrations in the U.K. were within the scope of §1782 because the English Arbitration Act of 1996 confers government authority on private arbitrations. With the number of recent and contradictory decisions coming down from different circuits this year, it is possible that the Supreme Court could grant a petition for certiorari to resolve this issue in the coming year.
The Second Circuit's Hanwei Guo decision
Following these decisions, district courts within the Second Circuit diverged, with some rejecting §1782 applications for use in arbitration based on the Second Circuit’s NBC decision, and others granting such applications based on the more recent post-Intel decisions in the Fourth and the Sixth Circuits.
The Second Circuit’s ruling this week in Hanwei Guo confirms that NBC is still good law and courts within the Second Circuit are bound to follow it. In Hanwei Guo, the Second Circuit was asked whether an international private commercial arbitration tribunal constituted “a foreign or international tribunal” for the purposes of §1782.
The Petitioner in that case, Hanwei Guo, sued music streaming company Tencent Music, alleging that he had been tricked into selling, at below-market prices, his shares in companies that later merged into Tencent. Guo entered into an arbitration against Tencent before the China International Economic and Trade Arbitration Commission (“CIETAC”), seeking compensation and the return of certain shares. In aid of the arbitration, Guo filed a petition under §1782 in the Southern District of New York, seeking discovery from four banks that had underwritten the Tencent Music IPO. The District Court denied Guo’s application, holding that the CIETAC Tribunal was a private arbitral body and that under NBC, §1782 did not apply to private arbitrations.
The Second Circuit affirmed, finding that its holding in NBC was good law after Intel. It held that the Supreme Court had not directly addressed in Intel whether a foreign private arbitral body qualified as an “international tribunal” under §1782. Referring to Intel’s citation of a law review article, the court stated that “[w]e doubt whether such a fleeting reference in dicta could ever sufficiently undermine a prior opinion of this court as to deprive it of precedential force.”
The Second Circuit then proceeded to apply the same test it set out in NBC, and held that the CIETAC tribunal was not covered by §1782 because it was more akin to a private body than a government authority. The Second Circuit emphasized that determining whether or not an arbitration center is private does not turn on its “governmental or nongovernmental origins.” Rather, courts should “consider a range of factors, including the degree of state affiliation and functional independence possessed by the entity, as well as the degree to which the parties’ contract controls the panel’s jurisdiction.” Considering CIETAC, the Second Circuit found that while it was originally formed by the Chinese government, it now functions independently of the government, which does not intervene in the outcome of CIETAC arbitrations. The grounds for setting aside CIETAC’s awards, as well as the ability of Chinese courts to enforce the awards, are similar to the vacatur or enforcement of awards in the U.S. CIETAC’s jurisdiction over its arbitrations stems from party consent, not government authority. And parties are free to select their own arbitrators. The Second Circuit found that these factors weighed in favor of finding that CIETAC was a private arbitral body, placing its arbitrations outside the scope of §1782.
The Circuit split
As the Second Circuit acknowledged in Hanwei Guo, there is a clear circuit split on the question whether §1782 applies to private arbitration. On the one hand, the Fifth Circuit and the Second Circuit have held, both before and after Intel, that §1782 does not permit courts to authorize discovery for use in private arbitration. See also El Paso Corp. v. La Comision Ejecutiva Hidroelectrica Del Rio Lempa, 341 F. App’x 31 (5th Cir. 2009). On the other hand, the Fourth and Sixth Circuits have explicitly permitted such applications. Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 210 (4th Cir. 2020); In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d 710 (6th Cir. 2019). The Eleventh5 Circuit , for its part, initially indicated that discovery in aid of private arbitration would be permitted, and then vacated that decision on other grounds. In re Consorcio Ecuatoriano de Telecomunicaciones S.A. (685 F.3d 987 (11th Cir. 2012), vacated on other grounds, 747 F.3d 1262 (11th Cir. 2014). This issue is also pending before the Third Circuit (In re: Application of Storag Etzel Gmbh, No. 20-1833), the Seventh Circuit (In re Application of: Servotronics, Inc., No. 19-1847), and the Ninth Circuit (In re Application of HRC-Hainan Holding Company, LLC, et al, No. 20-15371).
While Hanwei Guo settles the issue within the Second Circuit, in other circuits it remains unclear whether courts can order discovery for use in private commercial arbitrations. The circuit split will increase the incentive for parties to “forum shop” and seek discovery in jurisdictions where such discovery is permissible and where it can be argued that individuals holding the documents are subject to personal jurisdiction. Until the Supreme Court resolves this circuit split, the availability of such discovery will depend primarily on the circuit in which the documents and their custodians are located.
1 The Second Circuit is comprised of New York, Connecticut, and Vermont.
2 The Fifth Circuit is comprised of Texas, Louisiana, and Mississippi.
3 The Fourth Circuit is comprised of Maryland, Virginia, West Virginia, North Carolina, and South Carolina.
4 The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.
5 The Eleventh Circuit is comprised of Alabama, Florida, and Georgia.