Author: Hogan Lovells
The U.S. Supreme Court issued a rare unanimous decision on June 13 in a pair of consolidated cases that will have broad ramifications for international arbitration. In ZF Automotive US Inc. v. Luxshare Ltd. and AlixPartners LLP v. The Fund for Protection of Investors’ Rights in Foreign States, the court held that U.S.-based discovery assistance is available only for “governmental or intergovernmental adjudicative bodies,” severely limiting U.S.-based discovery for most international arbitration.
Case Background
A federal statute, Title 28 of the U.S. Code, Section 1782, permits district courts to order domestic discovery “for use in a proceeding in a foreign or international tribunal.” Since 1964, parties with disputes before international arbitration tribunals have used the statute to obtain discovery in the U.S., including to compel discovery of non-parties, particularly where the foreign tribunal lacked similarly broad powers.
At issue in ZF Automotive and AlixPartners was two different types of arbitration: purely private international commercial arbitration and investor-state arbitration.
Prior to the Supreme Court’s decision, the federal courts of appeals had divided over whether a purely private international commercial arbitral panel qualified as a foreign or international tribunal under Section 1782 — and thus whether U.S.-based discovery was available for those proceedings.
The Decision
The U.S. Court of Appeals for the Second Circuit, the U.S. Court of Appeals for the Fifth Circuit and the U.S. Court of Appeals for the Seventh Circuit had held that U.S.-based discovery is not permitted in private international commercial arbitration, while the U.S. Court of Appeals for the Fourth Circuit and the U.S. Court of Appeals for the Sixth Circuit concluded that it was permitted.
The Federal Courts had largely agreed, however, that U.S.-based discovery was available under Section 1782 for investor-state arbitration, which is typically established by bilateral investment treaties, or BITs, between foreign states.
The Supreme Court slammed the door on Section 1782 discovery in private arbitration, including treaty-based arbitration where the arbitral panel is not a governmental body. In a surprise opinion, the court held that U.S.-based discovery may be unavailable for both private international commercial arbitration and investor-state arbitration.
Writing for the court, Justice Amy Coney Barrett explained that the discovery statute “reaches only governmental or intergovernmental adjudicative bodies,” which means that discovery is available only where countries have “imbue[d] the body in question with governmental authority.”
Neither the private arbitration in ZF Automotive nor the investor-state arbitration in AlixPartners fit the bill.
Because no government created the private panel in ZF Automotive or prescribed its procedures, the Supreme Court held that it was not a governmental body within the scope of Section 1782. That bright-line rule prohibits Section 1782 discovery in purely private arbitration, likely resulting in dismissals of Section 1782 discovery petitions across the country. This aspect of the court’s decision was not entirely unexpected.
The court’s identical treatment of investor-state arbitration, however, went against the consensus view of the lower federal courts as well as Chief Justice John Roberts’ suggestion at oral argument that investor-state arbitration seemed quite different from private arbitration.
Indeed, the court’s opinion admitted that treaty-based, investor-state arbitration presented a harder question. But it ultimately concluded that the test is whether the foreign state intended “to imbue the body in question with governmental authority.”
That focus on intent builds on the court’s 2014 decision in BG Group PLC v. Republic of Argentina, which views treaties as akin to contracts, and which analyses the parties’ intent when interpreting treaties.
The arbitration at issue in AlixPartners involved a BIT between Russia and Lithuania. Examining that BIT, the court held that it did not confer governmental authority because the panel was formed purely to adjudicate investor-state disputes, its members were selected by the parties, and it was not affiliated with any governmental body.
The Court’s Decision Relied on Three Rationales.
First, the court examined the text of Section 1782. Although the court acknowledged that the word “tribunal” broadly encompasses not just formal courts but also private adjudicatory bodies, it concluded that the modifiers “foreign” and “international” meant that the phrase “foreign or international tribunal” referred to an “adjudicative body that exercises governmental authority.”
Citing the U.S. government’s brief, the court explained that the phrase “foreign leader” most naturally refers to an official government leader, so foreign tribunal should likewise be understood as a body “imbued with governmental authority by one nation.” And, as the complement to foreign tribunal, an international tribunal is “imbued with governmental authority by multiple nations.”
Second, the court looked to history. For more than a hundred years, the discovery statute and its predecessors applied only to foreign courts. Congress later broadened the scope to foreign and international tribunals, but the statute’s animating purpose remained the same: international comity.
The court concluded that providing discovery assistance to foreign and international governmental bodies “promotes respect for foreign governments and encourages reciprocal assistance,” but aiding “purely private bodies” did not — a point that the U.S. government had heavily emphasized at argument, and whose view Justice Elena Kagan indicated the court would afford significant weight.
Third, the court justified the decision under the Federal Arbitration Act, which significantly limits the availability of discovery in domestic arbitration. Extending Section 1782 to reach private international arbitration would thus result in significant tension with the FAA and “create a notable mismatch between foreign and domestic arbitration.”
The Impact
The decision leaves the status of other arbitral bodies involving treaties or intergovernmental elements in flux.
Under the court’s decision, U.S.-based discovery is unavailable for investor-state arbitration resembling the investor-state arbitration in AlixPartners.
The court reserved the possibility, however, “that sovereigns might imbue an ad hoc arbitration panel with official authority,” meaning that Section 1782 might entitle parties to discovery assistance depending on “whether the nations intended that the ad hoc panel exercise governmental authority.”
The court offered little guidance for courts evaluating whether that has occurred. At oral argument, AlixPartners and the U.S. government conceded that an arbitral panel selected by an international body like the World Trade Organization might qualify as governmental, but that issue remains open.
Lower courts will be left to determine the status of various arbitral bodies including, for instance, disputes between states before tribunals established by the World Trade Organization, free trade agreements, investment treaties or standing investment courts created by European Union agreements. The lack of clarity raises the specter of case-by-case litigation, a concern that Justice Stephen Breyer voiced at argument.
The court likewise failed to address international commercial arbitrations involving state or state-owned parties, including investor-state arbitrations before the International Centre for Settlement of Investment Disputes which was unavailable in the BIT underlying this case.
Although ICSID investor-state arbitration involves a private party who appoints one of the arbitrators, a factor the court viewed as suggesting a lack of governmental authority, ICSID arbitrations are governed by an intergovernmental institution under the auspices of the World Bank as well as by an additional treaty between participating countries — the ICSID Convention.
The Supreme Court did not address ICSID investor-state arbitrations, despite far greater indicia of sovereign authority and amicus briefs specifically addressing the issue.
The court’s decision will increase the importance of selecting the forum and adjudicative body to resolve potential disputes.
The decision may result in increased gamesmanship for both private parties and foreign governments entering into international contracts and treaties.
The decision places substantial significance at the outset on international arbitration practitioners’ strategy in selecting the forum and adjudicative body to resolve potential disputes.
Investors should evaluate forum selection clauses in the treaties’ arbitration clauses to best decide which treaty and which forum to use. Parties seeking to preserve the option of obtaining domestic discovery may prefer foreign courts and other bodies imbued with governmental authority, or U.S.‑based litigation, while those wishing to avoid broad discovery may prefer a foreign arbitration clause.
For foreign states that support Section 1782 arbitration for transparency or other reasons, the court’s decision may be a reason to choose the infrequently used state-to-state arbitration clauses in investment treaties to facilitate discovery. States may also attempt to use the court’s language when negotiating new treaties to clarify their intent to imbue arbitral panels with sovereign authority to qualify as international or foreign tribunals within Section 1782.
However, some states may support the court’s limitation of U.S. discovery, which many states view as overly burdensome and out of line with their own legal systems. It is yet to be seen whether U.S. courts would accept statements of intent where other evidence indicates a dearth of sovereign power.
Ultimately, the court’s decision severely curtails court-enforced discovery proceedings, particularly against non-parties in international arbitration. That result will significantly transform the landscape of international commercial arbitration, although the full ramifications remain to be seen.
