Private Foreign Arbitration: Can U.S. Federal Courts Compel Discovery?

BACKGROUND

Section 1782 of Title 28 defines the “scope of discovery that foreign litigants may seek in the United States for use in foreign proceedings.” Specifically, Section 1782(a) authorizes the district court to compel discovery “for use in a proceeding in a foreign or international tribunal.” 

The Supreme Court encountered a Section 1782(a) dispute in the case of Intel Corp. v. Advanced Micro Devices, Inc. (2004). The Court held that Section 1782(a) “authorizes, but does not require discovery assistance,” and the Court decided to “leave it to the courts below to ensure an airing adequate to determine what, if any, assistance is appropriate.” The Court in Intel, however, only considered whether Section 1782(a) discovery would apply to public foreign tribunals; where it concluded that it would. The Court remained silent on whether Section 1782(a) discovery would also apply to private foreign arbitration, leading to the current division among the Circuit Courts. 

THE ISSUE

Is the definition of “foreign or international tribunal” under 28 U.S.C. 1782(a) limited only to state-sponsored public tribunals; or does the definition include discovery for private foreign tribunals as well? In other words, can district court judges compel discovery for private foreign arbitration?

THE SPLIT

The Seventh Circuit recently joined the Second and Fifth Circuits by adopting a narrow interpretation of “foreign or international tribunal” to only include public tribunals and exclude private ones. These circuits conclude that compelling discovery in private foreign disputes would undermine the speedy and cost-effective nature of the arbitration process. In recent years, however, the Fourth and Sixth Circuits have disagreed, opting for a broad interpretation of Section 1782(a). These circuits posit that the purpose of the Section 1782(a) is to foster international cooperation through discovery processes and conclude that district courts should have the discretion to apply Section 1782(a) to all foreign tribunals, both public and private. 

The Second, Fifth, and Seventh Circuits

In September 2020, the Seventh Circuit joined the Second and Fifth Circuits in affirming a narrow interpretation of Section 1782(a). In Servotronics, Inc. v. Rolls-Royce PLC (2020), (“Servotronics II”), the court held that Section 1782(a) “did not authorize the district court to compel discovery for use in a private foreign arbitration.” There was a separate case arising from the same arbitration that came before the Fourth Circuit in March 2020 and is discussed below. In Servotronics II, Rolls-Royce had manufactured an engine for a Boeing aircraft and incorporated a Servotronics valve in the design. The airplane was then destroyed in a fire during testing, and Rolls-Royce settled with Boeing for the loss of the plane. Subsequently, Rolls-Royce, a UK-based corporation, sought indemnification from Servotronics, which was based in the United States. The two companies had a long-term agreement that mandated binding arbitration in a London-based private tribunal called the Chartered Institute of Arbiters (“CIArb”). Servotronics then applied for a Section 1782(a) discovery request that would compel Boeing to produce documents that would be used in the London arbitration. The district court judge ultimately denied this discovery request, finding for Rolls-Royce and Boeing.

In interpreting Section 1782(a), the Seventh Circuit affirmed the district court ruling, stating that “foreign or international tribunal” should be defined as “a governmental, administrative, or quasi-governmental tribunal operating pursuant to the foreign country’s practice and procedure.” This definition would consequently exclude any private foreign arbitrations. The Seventh Circuit rejected the Fourth and Sixth Circuit’s broad definition of “foreign and international tribunals,” which included private arbitration. The Seventh Circuit noted that if the ambiguity of the word “tribunal” was interpreted broadly, this could expand the ability of federal courts to compel discovery in foreign arbitration past what is normally allowed in domestic arbitration. 

In January 1999, the Second Circuit was one of the first to confront an issue concerning Section 1782(a) in NBC v. Bear Stearns & Co. (1999). In NBC, the plaintiff, US-based news corporation NBC was involved in a Mexican arbitration with Mexican television broadcasting company Azteca, of which Bear Sterns was an investor. In interpreting Section 1782(a), the Second Circuit noted that “although the phrase ‘foreign or international tribunal’ does not unambiguously exclude private arbitral panels, neither does it unambiguously include them.” The court then concluded that the phrase, considered in the context of statutory and legislative history, is limited to public foreign arbitration and not private tribunals. Two months after the Second Circuit’s decision in NBC, the Fifth Circuit adopted this narrow interpretation of Section 1782(a) in Republic of Kazakhstan v. Biedermann Int’l (1999). The Fifth Circuit held that the statute was “not intended to authorize resort to United States federal courts to assist discovery in private international arbitrations.” The court highlighted the concern that allowing for discovery in private arbitrations would “complicate and undermine” the entire international arbitration process. 

The Fourth and Sixth Circuits

The Fourth and Sixth Circuits have both held that a broad definition of Section 1782(a) is more appropriate. In March 2020, the Fourth Circuit analyzed the scope of 1782(a) in the Servotronics, Inc. v. Boeing Co. (2020), (“Servotronics I”), a case arising from the same arbitration dispute that would later come before the Seventh Circuit. The Fourth Circuit came to a very different result than the Seventh Circuit, reasoning that the “district court functions effectively as a surrogate for a foreign tribunal by taking testimony and statements for use in the foreign proceeding” under Section 1782(a). The Fourth Circuit concluded that the application of Section 1782(a) should be determined by district courts and not parties, so the district courts should possess the ability to compel discovery for private foreign arbitrations. 

The Fourth Circuit’s decision in Servotronics I aligns with the Sixth Circuit’s September 2019 decision in Abdul Latif Jameel Transportation Co. v. FedEx Corp. (2019). In Abdul, the Sixth Circuit held that the word “tribunal” should be interpreted broadly and the “district court’s authority to compel discovery for use in foreign litigation extends to private foreign arbitrations.” The court stressed that the Supreme Court decision in Intel made the application of Section 1782(a) discretionary, and the broad interpretation would be best for giving this discretion to the district courts. 

LOOKING FORWARD

At this point, Rolls-Royce stated that it intended to file a petition for writ of certiorari to the Supreme Court. Whether or not the Servotronics case moves forward, the Court should review the interpretation of Section 1782(a) at some point, resolving the confusion left by Intel. If the Supreme Court opted for a broad interpretation of Section 1782(a), as given by the Fourth and Sixth Circuits, there would likely be a substantial increase in discovery for foreign private arbitrations, increasing costly litigation and further burdening the courts. 

Additionally, there is a pending case, HRC-Hainan Holding Co., LLC v. Yihan Hu (2020), before the Ninth Circuit that concerns a Section 1782(a) dispute involving discovery into a Chinese in vitro fertilization project that is before a Chinese arbitration commission. So, it will also be interesting to see what the Ninth Circuit decides and whether a decision, in this case, comes before a Supreme Court ruling on this issue.

 

Vacating Your Arbitration Award: A Split About Access to Federal Courts

When a case litigated in court goes horribly wrong, there’s a clear remedy: appeal. But, what happens when your case goes not through court, but arbitration, and the proceedings are grossly unfair? You cannot appeal: that would seriously undermine the purposes of arbitration, to provide a fast resolution of a case at a cheaper cost than litigation. There is only one possible escape hatch: federal law provides that, in a limited set of very unfair situations, you can ask a court to vacate or modify the arbitrator’s award.

But if you bring this petition in federal court, another obstacle lurks in the background: the federal court’s subject-matter jurisdiction to even consider a petition to vacate. A new circuit split has popped up on that question.

Background

The Federal Arbitration Act, passed in 1925, controls arbitration proceedings nationwide. Prior to its passage, arbitration agreements weren’t always enforceable. The Act, however, is binding on all agreements to arbitrate nationwide (no matter what state law says) via the Supremacy Clause of the Constitution. Broadly speaking, the FAA says that (1) if you enter into an agreement to arbitrate disputes, then you have to arbitrate disputes; and (2) the award your arbitrators give is enforceable via converting it into a judgment of a court (which judges are almost always required to enter).

There are only six circumstances where judges can mess with the results of arbitration. Section 11 of the FAA provides two situations that allow an award to be modified. The other four situations, copied from § 10 of the FAA, allow the award to be completely vacated:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

And that’s it.

Is There Federal Subject-Matter Jurisdiction?

Now, the jurisdictional problem.

We all know from civil procedure and federal courts that each claim in a federal case must be supported by federal subject-matter jurisdiction—usually § 1331 “federal question” jurisdiction or § 1332 “diversity” jurisdiction—or it cannot be heard in federal court. But, even though § 10 of the FAA is federal law, the Supreme Court has held that § 10 “does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise.” Moses H. Cone Mem’l Hospital v. Mercury Constr. Corp. (1983).

This, by the Court’s own admission, makes § 10 an “anomaly” among federal statutes. Id. And it seriously jeopardizes a party’s ability to bring a § 10 petition in federal court after something goes wrong.

One more thing before we reach the circuit split. The Supreme Court in Vaden v. Discover Bank (2009) addressed federal jurisdiction over petitions brought under a different portion of the FAA, § 4. That section allows a party to ask a court to enforce an agreement to arbitrate disputes. Typically, a party who is sued in court will be demanding that the dispute has to be resolved in arbitration because the parties agreed ahead of time by contract to submit all disputes to arbitration.

Vaden says a § 4 petition itself does not have to be supported by federal jurisdiction. Instead, the court can “look through” the § 4 petition to the underlying dispute; if the federal courts would have jurisdiction over the underlying dispute, they can hear the § 4 petition.

The Court’s holding is textual. The language of § 4 provides that the party wanting to compel arbitration “may petition any United States district court which, save for such agreement [the agreement to arbitrate all disputes], would have jurisdiction” over the dispute.

The Circuit Split: Third, Seventh, and D.C. vs. Second

Now, the split.

In 1996 and 1999, respectively, the Seventh Circuit and D.C. Circuit held that petitions to vacate arbitral awards under § 10 must be independently supported by federal subject-matter jurisdiction.  The courts cannot “look through” the petitions to see if they would have had subject-matter jurisdiction over the underlying case. That’s because § 10 doesn’t have the language quoted above from § 4, and because of the purpose of the FAA: as the Seventh Circuit wrote, “The central federal interest was enforcement of agreements to arbitrate, not review of arbitration decisions.”

This year, the Third Circuit joined the Seventh and D.C. Circuits, writing that Vaden didn’t change anything about the analysis for § 10:

Neither the textual nor practical considerations noted by the Court in Vaden apply in a case relying on § 10 of the FAA. Section 10 lacks the critical ‘save for such agreement’ language that was central to the Supreme Court’s Vaden opinion. It provides that ‘the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration….’ 9 U.S.C. § 10. There is no reference to the subject matter of the underlying dispute. Thus, while § 4 calls for a court to consider whether it would have jurisdiction over the ‘subject matter of a suit arising out of the controversy between the parties,’ § 10 makes no such demand.

The Second Circuit, however, created a circuit split in Doscher v. Sea Port Group Securities, LLC, handed down this August just 11 days before the Third Circuit’s decision.

The Second Circuit said Vaden did change the analysis for § 10, because the FAA can’t expand federal jurisdiction, and if Vaden found federal subject-matter jurisdiction under § 4 without expanding federal jurisdiction, that must mean the “look through” approach is implicitly authorized for the other sections of the FAA:

[T]he necessary result of limiting the look-through approach solely to § 4 petitions is to conclude that the same dispute between the parties would be sufficient to confer § 1331 jurisdiction for the purposes of § 4 petitions but insufficient to confer § 1331 jurisdiction for the purposes of any of the Act’s other remedies. That is simply not logically possible without construing § 4 to expand federal jurisdiction—a conclusion the Supreme Court has expressly forbidden us to draw.

The Second Circuit’s reasoning—a close read of the principles laid out in Vaden—is, by its own admission, “complicated.” But it’s also purposive. The Second Circuit disagreed with the quotation above from the Seventh Circuit that the text of the FAA only gives “look-through” federal subject-matter jurisdiction in § 4 petitions:

[T]here is a certain absurdity to an interpretation that permits parties to file motions to compel arbitration in any case where the underlying dispute raises a federal question but precludes them from seeking the same federal court’s aid under the Act’s other remedial provisions related to the same dispute . . . . If enforcement were Congress’s only goal, however, it would have had no need to pass §§ 10 or 11 at all.

Looking Forward

Ultimately, parties can always bring § 10 petitions in state court, but a resolution of this circuit split will be necessary if we are to know whether federal courts can hear § 10 petitions.


*Thank you to Professors Phillip Armstrong and John Allgood for sending us this interesting split.