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SCOTUS Ruling on Discovery in International Arbitration Has Loopholes

July 7, 2022, 8:00 AM

For decades, the international business community has been confused about whether 28 U.S.C. §1782, a statute that makes US-style discovery available “for use in a proceeding in a foreign or international tribunal,” applies to international arbitration. The US Court of Appeals for the Fourth and Sixth Circuits had said yes, while the Second, Fifth, and Seventh Circuits said no.

The question is critical because US discovery rules are expansive, forcing parties to turn over evidence they wouldn’t be required to provide in lawsuits filed in other countries or in international arbitral proceedings.

Section 1782 can thus provide a backdoor to restrictions on evidence gathering in other places. Unsurprisingly, lawyers and businesses have come to consider it a powerful strategic tool in international dispute resolution.

In ZF Automotive US, Inc. v. Luxshare, Ltd., the US Supreme Court on June 13 took §1782 off the table for international arbitration. In a unanimous opinion, Justice Amy Coney Barrett wrote that only “governmental or intergovernmental adjudicative bodies” come within the ambit of §1782, and that the international arbitrations implicated in the case—a commercial arbitration before the German Institution of Arbitration and an investor-state arbitration before an ad hoc arbitral tribunal—don’t count.

By drawing this line, the decision helps practitioners plan ahead and will create more uniformity in how lower courts rule. However, that line is somewhat dotted, as the decision leaves open loopholes that nevertheless permit §1782 to be used in international arbitration because of how the statute operates as a whole.

2004 Supreme Court Interpretation ‘Astonishingly Broad’

When the Supreme Court addressed §1782 in Intel v. Advanced Micro Devices in 2004, it interpreted the statute to be astonishingly broad and limited only by discretionary factors that rely on judges to conduct unmanageable analyses.

Because of Intel, US-style discovery became available for proceedings that are contemplated, before they are even filed, and regardless of whether the asked-for discovery would be allowed under the rules of the foreign or international tribunal in which it is to be used.

Instead of clear-cut rules, Intel instructed lower court judges faced with §1782 requests to use their discretion and to consider four factors, including whether the tribunal is receptive to US discovery assistance. The problem is that these factors are difficult for judges to apply.

Most requests are made ex parte and seek discovery from a third party that is not involved in the dispute, such as a bank that holds an adversary’s financial information. But a third party is unlikely to know much about the foreign proceeding or the tribunal’s receptivity to US discovery, and so is poorly positioned to resist the request.

Explosion in Use of §1782

Usage of §1782 has exploded since 2004 and lower courts grant requests at very high rates. In my research, I find that the number of requests has quadrupled between 2005 and 2017 and that requests from private actors are granted 90% of the time.

(The statute also permits foreign and international tribunals to ask for discovery. Those requests are granted at a high rate, too, but they are less controversial because the tribunal is obviously receptive to US discovery in those instances.)

Not only is US discovery sought for international arbitrations—these constitute more than 10% of all requests from private actors—but 10% of requests are for contemplated proceedings and nearly 30% are for use in multiple proceedings, according to my research.

These latter types of requests make judges’ analysis of the Intel factors even more complicated. Where a proceeding hasn’t been initiated yet, it’s all but impossible for a judge to predict if the tribunal will be receptive to US discovery. And where a request is for multiple proceedings before multiple tribunals, judges typically simplify the analysis by requiring only one of the tribunals to be receptive.

A private actor involved in an international dispute can therefore claim that they are contemplating initiating a proceeding that is not an international arbitration to obtain §1782 discovery. Once they have the evidence, they can use it anywhere, including in an international arbitration that the Supreme Court has now ruled is off limits.

ZF Automotive opens a window even as the Supreme Court closes a door to private international arbitration. And that window is likely to stay open because the Supreme Court rarely has an opportunity to hear cases involving §1782. Trial court judges have wide discretion to rule on discovery, so these cases are rarely successfully appealed all the way to the Supreme Court.

Section 1782 decisions also quickly become moot because once the foreign proceeding ends, the grant or denial of a request no longer matters. So while requests explicitly for international arbitration will now be denied, private actors may well be able to strategize around this restriction for some time to come.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Yanbai Andrea Wang is an assistant professor of law at the University of Pennsylvania Carey Law School, where she researches and teaches in the fields of civil procedure and transnational litigation, with a focus on the relationship between US and Chinese courts.