Supreme Court slams door on U.S. discovery in private overseas arbitration

(Reuters) - The U.S. Supreme Court on Monday put an end to what had become an increasingly common tactic in foreign arbitration, ruling that parties in private proceedings taking place overseas cannot turn to U.S. courts to obtain discovery.

The question before the justices in ZF Automotive US Inc v. Luxshare Ltd, as I’ve previously explained, was whether a 1964 law that allows U.S. courts to order discovery in “a proceeding in a foreign or international tribunal” extends to private commercial arbitration. A companion case, AlixPartners LLP v. The Fund for Protection of Investors’ Rights in Foreign States, posed the same question about the 1964 law’s application to U.S. discovery in ad hoc arbitrations authorized under bilateral investment treaties.

As arbitration has proliferated across the world in the last 20 years or so, parties in foreign proceedings have come to rely on the U.S. law to bolster the evidentiary record with documents and testimony obtained from U.S. witnesses. Critics argue, among other things, that this use of the law subverts the efficiency of arbitration by permitting U.S.-style discovery.

Justice Amy Coney Barrett, writing for a unanimous court, said the statutory provision, commonly known as Section 1782, does not permit U.S. discovery in purely private commercial arbitration or even in investment treaty proceedings overseen by private arbitrators who are independent of government authority.

“The statute,” wrote Barret, “reaches only governmental or intergovernmental adjudicative bodies, and neither of the arbitral panels involved in these cases fits that bill.”

To reach that conclusion, the justices had to determine the meaning of the statutory phrase “foreign or international tribunal.” Broadly speaking, the parties that sought discovery from U.S. courts – Luxshare in a soon-to-be-filed arbitration against ZF for alleged fraud in a billion-dollar M&A deal and The Fund, a Russian corporation challenging Lithuania’s expropriation of some investments of a failed Lithuanian bank – argued that private arbitration proceedings are “tribunals,” and therefore encompassed by Section 1782.

ZF and Alix, which opposed 1782 discovery demands by their arbitration opponents, argued (again, broadly speaking) that in order to discern the meaning of “foreign or international tribunal,” the justices should examine the entire phrase.

The court adopted that approach, opting not to disconnect “tribunal” from the accompanying adjectives. “If we had nothing but this single word to go on, there would be a good case for including private arbitral panels,” Barrett wrote. But “'tribunal' does not stand alone — it belongs to the phrase ‘foreign or international tribunal,’” she continued. “And attached to these modifiers, ‘tribunal’ is best understood as an adjudicative body that exercises governmental authority.”

The court then had to decide whether private arbitration between Luxshare and ZF or the ad hoc proceeding between The Fund and Lithuania was actually being conducted under government authority. The Luxshare arbitration, which will take place under the rules of the German Arbitration Institute, was an easy call for the justices, who said the expected case is purely private. Luxshare’s counsel at Alston & Bird had argued that the private case was under government authority because it’s governed by German law. The court rejected that contention as “implausible.”

“Private entities do not become governmental because laws govern them and courts enforce their contracts,” Barrett said.

The Supreme Court had to think harder about The Fund’s case. Its proceeding is overseen by private arbitrators who were appointed under the terms of a bilateral investment treaty between Russia and Lithuania. Lithuania itself is the defendant. But the justices concluded that the ad hoc arbitration panel is nevertheless not a governmental body. The panel, whose members were chosen by the parties, is not affiliated with either Russia or Lithuania and functions independently of both sovereigns, the Supreme Court said. For all intents and purposes, Barrett wrote, the ad hoc panel in The Fund’s case is no different from the private panel that will oversee the Luxshare arbitration.

The Fund’s counsel, Alexander Yanos of Alston & Bird, declined to comment. Luxshare lawyer Andrew Davies of Allen & Overy, didn’t respond to my query.

ZF’s lawyer, Roman Martinez of Latham, said via email that the Supreme Court’s decision will have “immediate impact on a broad range of current and future international arbitrations,” ensuring that parties in international commercial arbitrations “will not be able to improperly take advantage of discovery in U.S. courts.”

Joseph Baio of Willkie Farr & Gallagher, who represented AlixPartners, told me that the Supreme Court averted what would have been a weird imbalance had the other side prevailed. By petitioning U.S. courts for discovery under Section 1782, parties in international cases were able to access not only more documents and testimony than they would have been entitled to under foreign arbitration rules but also more material than they could have obtained in arbitration taking place in the U.S., where Federal Arbitration Act constrains apply. That, Baio said, was surely not what the law intended. (The U.S. Justice Department made the same argument as an amicus at the Supreme Court, which Baio said was immensely helpful for his side.)

AlixPartners is a good example of the vast reach of 1782 petitions, Baio said. More than a decade ago, while at another firm, AlixPartners CEO Simon Freakley served as the administrator of the failed Lithuanian bank at the center of The Fund’s case. Freakley is not a party to The Fund’s claims against Lithuania and would not have been exposed to discovery demands under U.S. arbitration rules. Yet if the Supreme Court hadn’t sided with AlixPartners in Monday’s decision, “the doors would have been open,” Baio said.

One last point about the court’s ruling. I told you in March that proponents of a tool of statutory interpretation known as corpus linguistics — which involves searching vast text databases to determine how words or phrases were actually used at the time they appeared in statutes — had high hopes that the ZF case would be a breakthrough. At oral argument, a couple of justices even asked about ZF’s citation of a corpus linguistics study that concluded the phrase “foreign tribunal” was never used, before 1964, to refer to private commercial arbitration.

The Supreme Court’s opinion on Monday made no reference to the study or to corpus linguistics at all. Study author James Phillips, a law professor at Chapman University, said the case was nevertheless a step forward for corpus linguistics because it was explicitly cited and discussed in briefing and oral argument.

Read more:

Chief Justice Roberts not sure ‘what to make of’ linguistics tool

‘Revolutionary’ linguistics tool awaits star turn in Supreme Court arbitration case

Latham plays 3D chess in bid for SCOTUS to take up new discovery case

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