SECTION 1782 UPDATE: U.S. FOURTH CIRCUIT COURT OF APPEALS HOLDS THAT U.S. DISCOVERY CAN BE USED IN AID OF INTERNATIONAL COMMERCIAL ARBITRATIONS AND SUPREME COURT MAY NOW RESOLVE THE CIRCUIT SPLIT

The U.S. Supreme Court may soon have occasion to decide whether parties involved in international arbitrations outside of the U.S. can rely on 28 USC § 1782, “Assistance to foreign and international tribunals and to litigants before such tribunals,” to seek discovery from entities in the United States.

In October 2019, we noted in this post that the U.S. Courts of Appeals for the Fourth and Seventh Circuits were poised to decide the issue.  In March 2020, the Fourth Circuit Court of Appeals decided in the affirmative—consistent with the decision of the Sixth Circuit in Abdul Latif Jameel Transportation Company v. FedEx Corporation—that parties to an international commercial arbitration (in this case seated in the United Kingdom and constituted under the CIArb rules), are authorized to seek discovery orders under Section 1782.  Boeing and Rolls-Royce, which are resisting the application of Section 1782, are expected to file a petition for certiorari with the U.S. Supreme Court by June this year to challenge the decision of the Fourth Circuit’s Court of Appeals and seek to have the Supreme Court resolve the Circuit split over the application of Section 1782 in the context of international commercial arbitration.

Facts

These cases arose in the context of international arbitration over a 2016 aircraft that caught fire in South Carolina. Rolls-Royce manufactured an engine and installed it on the Boeing 787-9 Dreamliner aircraft. The petitioner, Servotronics, was the manufacturer of a valve used in the engine. Rolls-Royce settled with Boeing and brought an arbitration against Servotronics for an indemnity.

Servotronics petitioned the U.S. district court for the service of subpoenas on three South Carolina residents, all current or former Boeing employees, to give testimony. Two of the employees participated in troubleshooting the aircraft engine that caught fire, and the third employee was the chairperson of the Boeing Incident Review Board that investigated the fire.

In the district court proceedings, In re Servotronics, Inc., No. 2:18-MC-00364-DCN, 2018 WL 5810109 (D.S.C. Nov. 6, 2018), the U.S. District Court for the District of South Carolina held that Section 1782 did not apply to international commercial arbitration as the arbitral tribunal was not a “foreign tribunal” for purposes of § 1782. Servotronics appealed to the Fourth Circuit Court of Appeals.

Key arguments on appeal

Before the Fourth Circuit Court of Appeals, Servotronics argued, citing the U.S. Supreme Court’s decision of Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004): first, that an arbitral tribunal is a “foreign tribunal” within the scope of the definition in Section 1782; and second, that Section 1782(a) does not require that a tribunal be public, state-sponsored, or governmental.

Rolls Royce and Boeing argued that granting such a Section 1782(a) order would broaden the procedural scope of arbitration and make available in foreign arbitrations the full discovery process available under the Federal Rules of Civil Procedure. This would inject extraordinary delay and costs into arbitrations, thereby defeating their purpose and undermining the parties’ bargained-for method of dispute resolution.

The decision

On 30 March 2020, the Fourth Circuit Court of Appeals decided that the arbitral tribunal seated in the U.K. and operating under the CIArb rules, met the Section 1782 definition of a “foreign tribunal” and fell within the definition of “entities acting with the authority of the State”.

Providing the foundation for its decision, the Court affirmed Section 1782’s “long-term — over 150-year — policy of Congress to facilitate cooperation with foreign countries”, and this policy’s intent “to contribute to the orderly resolution of disputes both in the United States and abroad, elevating the importance of the rule of law and encouraging a spirit of comity between foreign countries and the United States.”

First, referring to the changes to Section 1782 adopted in 1964, in which the words “in any judicial proceeding pending in any court in a foreign country” were replaced with the phrase “in a proceeding in a foreign or international tribunal”, the Court found that Section 1782 covered “all foreign and international tribunals”.  In support of this finding, the Court also described the enactment of the Federal Arbitration Act (“FAA”) as an endorsement of arbitration as a favoured alternative to litigation.

Second, noting the similarities of the English  Arbitration Act of 1996 to the FAA, the Court of Appeals concluded that under English law, arbitration was clearly a product of “government-conferred authority”. The Court observed that the English Act provides even more governmental regulation and oversight than does the FAA. Citing Sections 23(1), 9, 12, 15, 16, 24, 37, 38, 42, 43, 45, 66, 67-69 of the English Act, the Court concluded that, “even to a greater degree than arbitrations in the United States,” English-seated arbitrations are “sanctioned, regulated, and overseen by the government and its courts”.

In response to concerns that applying Section 1782 to international commercial arbitration would broaden access to information, inflate costs and undermine the benefits of arbitral efficiency, the Court was satisfied that this would not be the case. Striking a balance, the Court noted that the authority of U.S. district courts is relatively limited—Section 1782 does not authorize full discovery, a term absent from Section 1782. The statute only authorizes a U.S. district court to function “effectively as a surrogate” for a foreign tribunal to take statements and receive testimony and documents or other materials intended “for use” in the proceeding before the tribunal.  Viewed in this light, therefore, the District Court would function no differently than the tribunal itself.

Finally, the Court noted that the Supreme Court in Intel had rejected the notion that a Section 1782(a) applicant would have to show that United States law would allow discovery in domestic litigation analogous to the foreign proceeding. Indeed, Section 1782 could possibly apply in proceedings with no comparator  in U.S. domestic litigation.  Thus, any geographical expansion in the scope of a foreign tribunal’s authority under Section 1782 was the result of a purposeful legislative decision to authorize U.S. district courts to provide assistance to foreign tribunals as a matter of public policy.

Conclusion

As we mentioned above, the Seventh Circuit is currently considering a similar appeal arising from the same aircraft fire. In a separate matter, as we mentioned in our previous post, the Second Circuit has before it a similar appeal regarding the definition of  “entities acting with the authority of the State”. It remains to be seen whether the U.S. Supreme Court will issue a definitive ruling on the interpretation of Section 1782 in the context of international commercial arbitration, resolving the split among the Circuits.

For more information, please contact Christian Leathley, Partner, Amal Bouchenaki, Partner, Liang-Ying Tan, Associate, Christine Sim, Associate, or your usual Herbert Smith Freehills contact.