Many commercial disputes, including franchise disputes, are resolved by arbitration. Section 7 of the Federal Arbitration Act (the FAA) allows the arbitrator to issue a subpoena to a third-party witness, and that subpoena may be enforced by a federal court. As will be discussed, this rarely suffices as a discovery device because it has been interpreted narrowly and federal subject matter jurisdiction is challenging. Now the U.S. Supreme Court has eliminated the ability to obtain discovery in international dispute resolution that is not issued by a governmental entity. The challenging question is whether third-party discovery is available in private arbitration as a matter of right.

• The Supreme Court limits discovery to foreign governmental tribunals.

Federal law, 28 U. S. C. Section 1782(a), is a provision authorizing a district court to order the production of evidence “for use in a proceeding in a foreign or international tribunal.” If the provision were interpreted to allow private arbitrations merely held in a foreign country to have a federal discovery mechanism, then the provision would create significant tension with the Federal Arbitration Act (FAA), which governs domestic arbitration, because Section 1782(a) provides broader discovery than the FAA allows.

The Supreme Court unanimously narrowed the application of the law to only apply where the governmental or intergovernmental body requesting the discovery possesses “sovereign authority conferred by that nation.” The court needed to resolve what constituted a “foreign or international tribunal” within the meaning of the statute. Looking at the history of the statute and in comparison to the FAA, the court concluded that the statute was intended to increase cooperation between the United States and foreign countries, and not mere private arbitrable tribunals located in foreign countries.

The opinion in ZF Automotive US v. Luxshare, by Justice Amy Coney Barrett writing for a unanimous court, actually resolved two cases and helped illustrate the tensions resolved by the decision. In the first case, Luxshare, a Hong Kong-based company, alleged fraud in a sales transaction with ZF Automotive US, a Michigan-based automotive parts manufacturer and subsidiary of a German corporation. The sales contract signed by the parties provided that all disputes would be resolved by three arbitrators under the arbitration rules of the German Institution of Arbitration e.V. (DIS), a private dispute-resolution organization based in Berlin. To prepare for a DIS arbitration against ZF, Luxshare filed an application under Section 1782 in federal court, seeking information from ZF and its officers. The court held that this private arbitration would not allow for invocation of the statute.

The court admitted that the second case was a closer call. A failed Lithuanian bank was declared insolvent and nationalized by Lithuanian authorities. The Fund for Protection of Investors’ Rights in Foreign States—a Russian corporation assigned the rights of a Russian investor, initiated a proceeding against Lithuania under a bilateral investment treaty (the BIT) between Lithuania and Russia, claiming that Lithuania expropriated investments. The BIT established a procedure for resolving “any dispute between one contracting party and an investor of the other contracting party concerning” investments in the first contracting party’s territory, and offers parties four options for dispute resolution. The fund chose an ad hoc arbitration in accordance with arbitration rules of the United Nations Commission on International Trade Law, with each party selecting one arbitrator and those two choosing a third. After initiating arbitration, the fund filed a Section 1782 application in federal court, which was resisted, arguing that the ad hoc arbitration panel was not a “foreign or international tribunal” under Section 1782 but instead a private adjudicative body. The court concluded that the parties chose to form an ad hoc panel to resolve a state investor dispute, but the treaty allowing this dispute resolution did not cloak that ad hoc panel with governmental authority sufficient to trigger Section 1782.

For the court, the inquiry is whether the features of the adjudicatory body and other evidence establish the intent of the relevant nations to imbue the body in question with governmental authority. The court did not directly address whether parties before the International Centre for Settlement of Investor Disputes (ICSID), where many sovereign countries resolve investor disputes pursuant to a BIT, would have rights under Section 1782.

• Limitations on Section 7 of the FAA to take third-party discovery.

Section 7 of the FAA governs the issuance of arbitral subpoenas with three important provisions:

• The arbitrators may summon any person to attend a witness and bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case;
• The summons shall issue in the name of the arbitrators and shall be served in the same manner as subpoenas to appear and testify before the court.
• If any person so summoned to testify shall refuse or neglect to obey said summons, upon petition the U.S. district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before the arbitrators or punish said person or persons for contempt in the same manner as in the courts of the United States.

At first glance, it appears that the subpoena power of arbitrators is co-extensive with the power of district court judges, but this is not actually the case. First, Section 7 is generally considered to allow production of the person and the documents at the arbitration hearing, and not as pretrial discovery. Second, Section 7 requires federal subject matter jurisdiction because in most circuits, Section 7 is not interpreted to grant federal subject matter jurisdiction. Third, only the district court where the arbitrators sit can enforce the subpoena under Section 7, whereas Section 45 of the Federal Rules of Civil Procedure allows national enforcement of a subpoena. Some workarounds do exist for these limitations. The arbitration clause at inception may explicitly allow for pre-hearing discovery, and a good argument exists for allowing Section 7 enforcement of the arbitration contract. With respect to geographical limitations where the witness is not located where the hearing is held, the arbitrators can agree to hold the portion of the hearing in the district where the witness is located and thereby take advantage of Section 7 of the FAA and its enforcement in federal court.

In summary, perhaps the policy of efficient arbitration should not allow third-party discovery at all, notwithstanding a tradition of allowing discovery on a case-by case-basis. State arbitration rules may provide greater rights to discovery, but federal policy does little to support third-party discovery in private arbitrations, even for international arbitrations.

Reprinted with permission from the June 16, 2022 issue of The Legal Intelligencer© 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.