The U.S. Supreme Court this week resolved an important issue regarding international arbitrations by ruling that, contrary to two previous appellate court rulings, a U.S. statute that authorizes federal courts to order discovery “for use in a proceeding in a foreign or international tribunal” does not apply to proceedings in foreign and international arbitrations before private adjudicatory bodies.

In its unanimous decision in ZF Automotive US, Inc. v. Luxshare, Ltd., Case No. 21-401, the Court ruled that the statute, 28 U.S.C. § 1782(a), applies only to proceedings before foreign governmental or intergovernmental adjudicative bodies. By narrowing the application of Section 1782(a) in federal courts, the Court reduced the potential tension between Section 1782(a) and the Federal Arbitration Act (FAA), which governs domestic arbitration, because Section 1782(a) provides for broader discovery than the FAA allows.

The ruling dealt specifically with an arbitration proceeding before the German Institution of Arbitration e.V. (DIS), a private dispute resolution organization in Berlin, and an ad hoc arbitration conducted in accordance with arbitration rules of the United Nations Commission on International Trade Law. The Court found that neither of those arbitral bodies is the type of governmental or intergovernmental adjudicatory body that falls within the scope of Section 1782.

The Court did not directly address whether parties arbitrating before the International Centre for Settlement of Investor Disputes (ICSID), where many sovereign countries resolve disputes with private parties pursuant to bilateral investment treaties, can obtain discovery in federal courts under Section 1782. At the very least, the Court’s decision casts doubt on whether federal courts will permit discovery in aid of such arbitrations going forward.

The Cases

The Court’s ruling involved appeals in two consolidated cases. One case involved an arbitration between Luxshare, Ltd., a Hong Kong-based company that alleged fraud in a sales transaction with ZF Automotive US, Inc., a Michigan-based automotive parts manufacturer and subsidiary of a German corporation, before the German Institution of Arbitration. Luxshare sought discovery in federal court in the United States pursuant to Section 1782, and the U.S. Court of Appeals for the 6th Circuit denied ZF’s motion to stay the discovery, ruling that the German arbitration panel was a “foreign or international tribunal” under Section 1782.

The other case involved an arbitration between AB bankas SNORAS, a failed Lithuanian bank that had been nationalized by Lithuanian authorities, and a Russian corporation that had been assigned the rights of Russian investors in the bank. Under a bilateral investment treaty between Lithuania and Russia, the parties had four options for dispute resolution, and they chose an ad hoc arbitration under the Arbitration Rules of the United National Commission on International Trade. The Russian corporation sought discovery in a federal court in the United States from a temporary administrator of the bank and Alix Partners, LLP, a New York-based consulting firm where the administrator worked. AlixPartners sought to block the discovery, arguing that the ad hoc panel was not a “foreign or international tribunal” under Section 1782, but the district court rejected that argument and the U.S. Court of Appeals for the 2nd Circuit affirmed.

The Supreme Court finally resolved a disagreement among the circuit courts regarding the ability to obtain discovery in the United States where an arbitration is pending in a foreign country. The federal law, 28 U.S.C. §1782(a), contains 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 foreign country to have a federal discovery mechanism, it creates significant tension with the Federal Arbitration Act (FAA), which governs domestic arbitration, because section 1782(a) provides broader discovery than the FAA allows.

The Decision

In a unanimous opinion authored by Justice Amy Coney Barrett, the Supreme Court reversed the lower court rulings in both cases.

Looking at the language of Section 1782 and the history of the statute and comparing it to the FAA, the Court concluded that the statute was intended to increase cooperation between the United States and foreign countries, not with merely private arbitral tribunals located in foreign countries. Quoting an earlier ruling by the U.S. Court of Appeals for the 7th Circuit, the Court noted that “it’s hard to conjure a rationale for giving parties to private foreign arbitrations such broad access to federal-court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations.”

The Court ruled that applying its interpretation of Section 1782 to the Luxshare/ZF arbitration was straightforward: the German arbitral body there does not qualify as a governmental body and therefore does not fall within the ambit of Section 1782.

The Court admitted that the second case was a closer call, as the option to arbitrate was contained in an international treaty rather than in a private contract. Nonetheless, the Court found that, while the treaty provided the parties an option of arbitrating before a pre-existing governmental body, the parties chose instead to arbitrate before an ad hoc arbitral panel that was not cloaked with governmental authority and therefore did not fall within the ambit of Section 1782.

The Court noted: “None of this forecloses the possibility that sovereigns might imbue an ad hoc arbitration panel with official authority. Governmental and intergovernmental bodies may take many forms, and we do not attempt to prescribe how they should be structured. The point is only that a body does not possess governmental authority just because na­tions agree in a treaty to submit to arbitration before it. The relevant question is whether the nations intended that the ad hoc panel exercise governmental authority. And here, all indications are that they did not.”

This publication also appeared in Association of Corporate Counsel.

For more information on this and other issues related to international arbitration, contact co-authors Sarah Biser at sbiser@foxrothschild.com or Craig Tractenberg at ctractenberg@foxrothschild.com.