By: Kunal Jhaveri

  

Entrepreneurs, both foreign and domestic, conducting business transactions in the United States tend to benefit from private international arbitration for dispute resolution purposes. In many instances, emerging companies, especially those engaged in transnational transactions, lack both the significant financial and temporal resources to litigate cross-border disputes in courts, making private international arbitration an attractive alternative.[1] Private international arbitration helps emerging companies avoid costly litigation in U.S. courts by offering a simple, inexpensive, and streamlined way to resolve private legal disputes.[2] Additionally, such arbitration provides (1) greater confidentiality in contrast to the often public nature of litigation, (2) opportunities for subject matter experts to serve as specialized arbitrators, and (3) more flexible scheduling for hearings since arbitrators are not government officials.[3]

 

 

28 U.S.C. § 1782 and the Circuit Split

 

However, as the number and complexity of cross boarder and multi-jurisdictional disputes increase, this calculus may soon change. Indeed, companies embroiled in such disputes may start taking advantage of 28 U.S.C. § 1782 to discover evidence from U.S.-based entities in foreign proceedings.[4] Specifically, Section 1782(a) permits entities “interested in” a foreign proceeding to obtain discovery from a U.S.-based entity using U.S. District Courts.[5] It allows the federal district court in the district in which an entity resides to compel that entity to produce documents or give testimony.[6] In order for an emerging company to move for district court-compelled discovery under Section 1782(a), the party seeking discovery needs to demonstrate that: (1) the request has been made either “by a foreign or international tribunal,” or by “any interested person”; (2) that the discovery must be “for use in a proceeding in a foreign or international tribunal”; and (3) the entity from whom discovery is sought resides or is found in the jurisdiction of the U.S. district court being petitioned for assistance.[7]

 

Originally enacted by Congress over three decades ago to provide assistance to foreign tribunals, Section 1782(a) may become a powerful tool for foreign-based emerging companies engaged in private international arbitration proceedings with a U.S.-based entity. Foreign-based emerging companies could be able to obtain documents and testimony for use in private international arbitration through court-compelled discovery, even though the arbitration panel is seated in a foreign country.[8] Section 1782(a) can be of particular relevance in intellectual property disputes, for example, since disputes in this area often have cross-border elements that bring this statute into focus.[9] On the other hand, the prospect of court-compelled discovery is concerning for U.S.-based entrepreneurs and emerging companies. Discovery undermines the utility of arbitration both in terms of cost and time. Section 1782(a) also does not guarantee an equitable discovery process. A U.S. district court may compel the U.S.-based entity to comply with discovery requests, but it has no authority to compel foreign entities not residing or found in the district court’s jurisdiction to participate in discovery processes. This is especially true for “interested person[s]” who could be an entirely distinct entity separate from the companies involved in transactional relationship.

 

At present, the extent of U.S. discovery in foreign international arbitrations pursuant to Section 1782(a) remains uncertain as the Courts of Appeals are split on what qualifies as a “foreign or international tribunal.”[10] A recent decision by the Seventh Circuit’s ruling provides the latest Court of Appeals decision interpreting the scope of tribunals under Section 1782(a).  In Servotronics, Inc. v. Rolls-Royce PLC, the Seventh Circuit held that a district court may not order discovery under Section 1782(a) for use in private international arbitration proceedings as they are not included in the meaning of  “foreign or international tribunal.”[11] The Seventh Circuit decision comes after Fourth Circuit held in March that a private arbitration tribunal seated in the United Kingdom constituted a “tribunal” within the meaning of the statute.[12] As it stands, the Second, Fifth, and Seventh Circuits, interpreting the language of Section 1782(a) narrowly, reject the use of the statutory section to obtain discovery in support of foreign-seated private arbitration, while both the Fourth and Sixth Circuits, liberally interpretating the statute, permit such applications.[13]

 

This circuit court split arrives after the Supreme Court’s decision in Intel Corp. v. Advanced Micro Devices Inc. The Court in Intel ruled that Section 1782(a) provided federal courts broad discretion to obtain discovery in the United States subject to certain guidelines, but it did not address whether Section 1782(a) extended to private international arbitration.[14] With the Seventh Circuit breaking the 2–2 deadlock among the circuit courts, the circuit split is likely to widen.[15] At least two other circuit courts are likely to take up the question.[16] A federal district court in California, which had uniformly followed the reasoning of the Second and Fifth Circuits in rejecting requests for Section 1782(a) discovery in aid of private international arbitration, recently rejected prior California district court decisions and allowed discovery in aid of a private international arbitration pending in China.[17]  That case is currently on appeal with the Ninth Circuit where it is scheduled for oral arguments this month. A Ninth Circuit decision that liberally interprets the scope of Section 1782(a) would undoubtably have significant implications for startups and emerging companies within the jurisdiction, most notably those operating in the Silicon Valley tech space.[18] Further, two appeals pending before the Third Circuit also present the same interpretation question.[19]

 

 

Implications for Emerging Companies

 

While a Supreme Court decision that settles the contrasting decisions of the Circuit Courts is likely in the coming years, the circuit split should put emerging companies on notice. Until the Supreme Court dictates a uniform rule that applies across all federal circuits, emerging companies engaged or have the potential to engage in foreign-seated private arbitration proceedings should be aware that seeking discovery under Section 172(a) is a possibility in a greater number of jurisdictions in the United States than ever before. All emerging companies with arbitration agreements that allow for foreign-seated proceedings that are either U.S.-based or are engaged with U.S.-based parties should understand how various jurisdictions within the U.S. interpret Section 1782(a). Companies that are considering negotiating for such arbitration agreements should also make note of the practical implications for international arbitrations.

 

What are these implications? In classical lawyer-speak, the answer is – it depends. As previously stated, for emerging companies engaged in a foreign-seated arbitration proceeding, Section 1782(a) may be a powerful tool to bolster their legal position.[20] For U.S. based emerging companies seeking to block such discovery, Section 1782(a) can understandably be viewed as being contrary to what was bargained for in arbitration clauses, namely a streamlined arbitration proceeding with many of the aforementioned benefits.[21] Emerging companies in the first bucket, should consider use of Section 1782(a) a valuable option and should consult U.S. counsel for strategic advice as to when, where, and how to deploy it. In contrast, emerging companies in the second category should attempt negotiating a provision in their arbitration agreements that prohibits use Section 1782(a) to compel discovery. In the time of the COVID-19 pandemic, such strategic considerations may be as salient as ever as analysts are projecting increases in international arbitration disputes due to to the pandemic induced economic disruptions.[22]

[1] See generally Michael Fleming, Arbitration: A Double-Edged Sword for Start-Up Employees, Journal of Business & Intellectual Property Law (Aug. 9, 2016), http://ipjournal.law.wfu.edu/2016/08/arbitration-a-double-edged-sword-for-start-up-employees;  (noting that private international arbitration has proven to be particularly useful for emerging companies in the context of intellectual property in which arbitration clauses can limit proceedings to a body law of law determined by parties rather than multiple cross-border proceedings under different laws, with risk of conflicting results).

[2] See Michael Fleming, Arbitration: A Double-Edged Sword for Start-Up Employees, Journal of Business & Intellectual Property Law (Aug. 9, 2016), http://ipjournal.law.wfu.edu/2016/08/arbitration-a-double-edged-sword-for-start-up-employees.

[3] See Allan R. Koritzinsky et al., The Benefits of Arbitration, 14 Fam. Advoc. 45, 45-47, 52 (92) (discussing the advantages of arbitration).

[4] Charlene M. Morrow & Guinevere Jobson, 28 U.S.C. § 1782: A Powerful Tool in Global Disputes, Fenwick Intellectual Property Bulletin Summer 2015 (Sept. 30, 2015), https://www.fenwick.com/insights/publications/intellectual-property-bulletin-summer-2015?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration.

[5] 28 U.S.C. § 1782.

[6] Id.

[7] 28 U.S.C. § 1782(a).

[8] See generally Mark Wegener et al., Obtaining discovery in the US for use in foreign litigation, Practical Law UK (Jan. 1, 2005).

[9] Charlene M. Morrow & Guinevere Jobson, 28 U.S.C. § 1782: A Powerful Tool in Global Disputes, Fenwick Intellectual Property Bulletin Summer 2015 (Sept. 30, 2015), https://www.fenwick.com/insights/publications/intellectual-property-bulletin-summer-2015?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration.

[10] Morrison & Foerester LLP, International Arbitration Update: Widening Circuit Split, Seventh Circuit Joins Second And Fifth Circuits In Refusing To Allow Discovery In Aid Of Private Commercial Arbitration Seated Outside The United States, JDSUPRA (28 September 2020), s://www.jdsupra.com/legalnews/international-arbitration-update-68148/.

[11] Id. See also Servotronics, Inc. v. Rolls-Royce PLC, No. 19-1847, 2020 WL 5640466 (7th Cir. Sept. 22, 2020).

[12] Pillsbury Winthrop Shaw Pittman LLP, U.S. Circuit Rulings Complicate Key International Arbitration Decisions, JDSUPRA (May 1, 2020), https://www.jdsupra.com/legalnews/u-s-circuit-rulings-complicate-key-47057/.

[13] Morrison & Foerester LLP, International Arbitration Update: Widening Circuit Split, Seventh Circuit Joins Second And Fifth Circuits In Refusing To Allow Discovery In Aid Of Private Commercial Arbitration Seated Outside The United States, JDSUPRA (28 September 2020), s://www.jdsupra.com/legalnews/international-arbitration-update-68148/.

[14] Intel Corp. v. Advanced Micro Devices Inc., 542 US 241 (2004).

[15] Morrison & Foerester LLP, International Arbitration Update: Widening Circuit Split, Seventh Circuit Joins Second And Fifth Circuits In Refusing To Allow Discovery In Aid Of Private Commercial Arbitration Seated Outside The United States, JDSUPRA (28 September 2020), s://www.jdsupra.com/legalnews/international-arbitration-update-68148/.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] See Elizabeth B. Sandza & Lindsay M. Betha, U.S. Court Assistance with Foreign Arbitration Discovery: Should it, Will It, Be Allowed?, The National Law Review (30 July 2020), https://www.natlawreview.com/article/us-court-assistance-foreign-arbitration-discovery-should-it-will-it-be-allowed.

[21] Id.

[22] https://www.troutman.com/insights/international-arbitration-experts-discuss-the-impact-of-covid-19-on-arbitration-in-2020-and-beyond.html