Overview
First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. This month we cover two Supreme Court cases. Arbitration is not often considered by the Supreme Court but this past month, the Court held that federal courts cannot search an arbitration dispute for a federal question in order to establish jurisdiction to confirm or deny that arbitration award and heard oral argument on the scope of Section 1782 requests. This is a lengthy update but covers the material points for both topics. We’ve written about this issue and these cases before. See "The Federal Arbitration Act & Look Through - Can the Federal Courts Confirm an Award Based on Underlying Federal Question Jurisdiction?," "Take 2—Supreme Court Will Determine Whether US Discovery Is Available in International Arbitration Under Section 1782," and "SCOTUS to Determine Applicability of Section 1782 Discovery in International Arbitration."
Federal Courts Can't Look Through for Jurisdiction in Domestic Arbitrations
On March 31, 2022, the Supreme Court held that federal courts cannot search an arbitration dispute for a federal question in order to establish jurisdiction to confirm or deny a domestic arbitration award. Denise Badgerow v. Greg Walters et al., 20-1142. The court reasoned that the text of the FAA (Federal Arbitration Act) does not authorize courts to "look through" the arbitral dispute for federal questions that would establish jurisdiction.
In an 8-1 ruling, the Court held that the FAA does not empower federal courts to search the underlying arbitral dispute for a federal question in order to confer subject matter jurisdiction. Justice Kagan distinguished the Court’s ruling from a previous decision, Vaden v. Discover Bank, where the high court held that the "look-through" approach was appropriate for petitions to compel arbitration under Section 4 of the FAA. Justice Kagan noted that Sections 9 and 10, which concern the confirmation and denial of arbitral awards, "contain none of the statutory language on which Vaden relied[.]" That language – which is found in Section 4 of the FAA – specifically states that the party seeking to compel arbitration "may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or the admiralty of the subject matter of a suit arising out of the controversy between the parties . . ." 9 U.S.C. § 4. Because that language is nowhere to be found in Sections 9 and 10, "under ordinary principles of statutory construction, the look-through method should not apply."
Justice Breyer dissented. He thought the Court should have focused on the law’s purpose. He feared that the majority's interpretation, which is consistent with the text of the FAA, would create unnecessary complexity and confusion.
The Scope of Section 1782
On March 23, 2022, the Supreme Court heard oral arguments to determine the scope of 28 U.S.C. § 1782 in two consolidated cases, ZF Automotive US, Inc., et al., v. Luxshare, Ltd. and AlixPartners, LLP, et al. v. The Fund for Protection of Investors' Rights in Foreign States.
Section 1782 allows a party to a legal proceeding outside the United States to petition a US federal district court to order the disclosure of evidence for use in non-US proceedings. Particularly at issue was the 1964 Amendment to the statute, which added the phrase, "foreign or international tribunal" to the text. The Courts of Appeals for several circuits have been divided on whether this phrase applies exclusively to investor-state arbitration or whether it can also encompass private commercial arbitrations. Courts against the expansive reading of the phrase worry that such an interpretation would burden federal courts with discovery requests from extraneous foreign proceedings.
The first case, ZF Automotive US Inc. et al. v. Luxshare Ltd., concerns a Chinese electronics manufacturer's request for documents from ZF Automotive, a U.S. company. Luxshare Ltd. has petitioned the United States District Court for the Eastern District of Michigan to compel discovery testimony in anticipation of its upcoming arbitration in Germany with ZF Automotive. The arbitration concerns Luxshare’s acquisition of ZF Automotive’s business units for approximately $1 billion. ZF Automotive argues that Section 1782 does not apply to private commercial arbitrations, only those governmental arbitrations operating under the supervision of a sovereign. Luxshare argues that Congress intentionally broadened the language in Section 1782 in its 1964 amendment to encompass private commercial arbitration proceedings.
The ZF Automotive case was consolidated with the AlixPartners, LLP case. That case concerns a Second Circuit decision granting the Fund for Protection of Investors’ Rights in Foreign States' discovery request for documents for use in arbitration. The Fund is representing Vladimir Antonov, a controlling shareholder to AB Bankas Snoras. AB Bankas Snoras filed for bankruptcy in 2011 at the hands of the Lithuanian government. Antonov is seeking compensation from Lithuania for the expropriations of its shares in the bank. Simon Freakley, the Lithuanian administrator of AB Bankas Snoras, argues that Section 1782 cannot be used to compel discovery since the tribunal in the case is an ad hoc investor-state arbitral panel. Freakley thinks that because the panel is a private panel, it is not covered by "foreign tribunal" under Section 1782.
Counsel for Petitioner ZF Automotive US Inc. argued that Section 1782's text, structure, and history, all entail that the statute does not authorize district courts to grant discovery for use in private commercial arbitrations. Focusing on the "foreign tribunal" language, Counsel for Petitioner ZF Automotive US Inc. argued that the phrase only applies to government tribunals, and not to private foreign commercial arbitration proceedings. Counsel for Petitioner ZF Automotive US Inc. stated that the rules commission drafted Section 1782 under a direct command from Congress to promote international comity and to assist both judicial and quasi-judicial arms of foreign governments. When pressed later in the argument by Justice Kavanaugh to define "governmental," Counsel for Petitioner ZF Automotive US Inc. said that, for purposes of a "foreign tribunal" to be governmental, the tribunal "needs to be created by the government and exercise authority conferred by the government."
Counsel for Petitioner ZF Automotive US Inc. attempted to cite the "Corpus Linguistic study", a study encompassing five different databases that analyzed the word "foreign," to argue for his interpretation of "foreign tribunal." Chief Justice Roberts and Justice Barrett both expressed skepticism at the study, stating that the high court has never used the database before when writing its opinions.
The high court also challenged the notion that the phrase "foreign tribunal" should be read so narrowly. Chief Justice Roberts first asked Counsel for Petitioner ZF Automotive US Inc. why a foreign tribunal should not be thought of as a government tribunal established under the laws of a foreign country. Counsel for Petitioner ZF Automotive US Inc. focused on the word, "foreign", arguing that when that adjective is combined with a noun like "leader", "flag", or "law" the phrase has strong governmental connotations. Chief Justice Roberts appeared unconvinced that the phrase "foreign tribunal" would exclude a private arbitral body located in a foreign country. Justice Kagan added that "foreign university" does not necessarily refer to a government-run school.
Counsel for Petitioner ZF Automotive US Inc. emphasized that the rules commission drafted the statute to implement the statutory directive in the 1958 Act: to draft legislation that would assist foreign courts and quasi-judicial agencies with the purpose of enhancing interstate cooperation. Justice Breyer, however, noted that the language can be read more broadly because commercial arbitration is now increasingly resolving business matters previously brought before courts. He asked Counsel for Petitioner ZF Automotive US Inc.: "[S]o what’s the problem? Why not treat them the same way as these quasi-judicial, et cetera, used to be treated . . . Purpose is similar. Language, similar. Nothing that says you can't. Why Not?"
Counsel for Petitioner ZF Automotive US Inc. pivoted to the policy objectives of the statute, noting that broadening the scope of "foreign tribunal" would first overburden US district courts and force US courts to play a role in foreign proceedings where there is not a strong U.S. interest. He next stated that a broad interpretation of Section 1782 would undermine the streamlined nature of arbitration proceedings, that the type of discovery allowed under such an interpretation would be uniquely burdensome, and that allowing such discovery would disrupt interstate treatment of international arbitration.
Counsel for the CEO of consulting from AlixPartners LLP, Simon Freakley, in the consolidated case argued that the scope of tribunals covered under Section 1782 depends upon the types of decisionmakers that constitute the tribunal at issue. Section 1782, according to Counsel for CEO Simon Freakley, encompasses those tribunals made up of decisionmakers that owe both their existence and powers to an international agreement between or among sovereign nations. Because the treaty between Lithuania and Russia (in the consolidated case) neither created nor empowered the ad hoc arbitration pale to resolve investor disputes, it did not come within the bounds of Section 1782. Instead, Counsel for CEO Simon Freakley argued, the ad hoc panel was empowered by the parties’ consent to arbitrate, not by the treaty.
Justice Sotomayor pressed on this point, asking whether there was any meaningful difference between the treaty itself designating the adjudicators versus the treaty vesting this power to the investors to the treaty. Counsel for CEO Simon Freakley responded, stating that the treaty specifically gave, "four alternatives that the claimant gets to pick to escape any governmental review in the decisionmaking." Turning to Justice Breyer's point that the statute need not be read so restrictively, Counsel for CEO Simon Freakley asks, "Is the United States, which does not favor broad discovery in arbitrations under the [Federal Arbitration Act], going to recognize that, if there is the German equivalent of Judge Judy, that – that they will be entitled[?]"
Justice Breyer expressed frustration, because the Restatement of the U.S. Law of International Commercial and Investor-State Arbitration, along with notable experts, say that the statute should apply to private commercial arbitrations. Further, noted Justice Breyer, if the high court took the government’s position, that Section 1782 only applies to governmental entities, the high court would need to be prepared to decide opinions based upon this test. The Justices appeared wary of this test, expressing skepticism over whether they could differentiate between a non-governmental versus governmental entity that would come within the scope of the statute.
Justice Kagan attempted to re-raise Justice Sotomayor's initial question to Counsel for CEO Simon Freakley, asking why there was a meaningful difference between state to state selected arbitral panels versus states investing individual investors with that decision: "I guess one question then would be why is state to state so different from investor state when states used to represent investors directly and now they don't? This is a better system. Why should that difference matter?” Counsel for CEO Simon Freakley reiterated that the nature of the decisionmaker in state to state scenarios in such that "the decisionmaker ultimately is being selected by sovereigns and only sovereigns." A running thread throughout the Justices’ questions to both Counsel for Petitioner ZF Automotive US Inc.: and Counsel for CEO Simon Freakley, was how one should define an international tribunal.
Moving away from the language and legislative history of the statute, Deputy United States Solicitor General, arguing on behalf of the US as amicus curiae, turned to the purpose of the statute to argue that it should not be interpreted to encompass private commercial arbitrations. The 1964 law, he states, was "specifically designed to promote comity with over governments by improving existing practices of judicial assistance in litigation. Arbitration is an alternative to litigation. It is not a form of litigation." Deputy United States Solicitor General also made a structural argument and pointed out that arbitration is handled separately under the United States Code in Title IX.
Explaining that the government views investor-state arbitration in the same manner as private commercial arbitration, Deputy United States Solicitor General argued that the two are the same because in both scenarios, there is a "standing offer to arbitration from the government . . . if the private investor accepts that offer, there is an agreement to arbitrate formed. At that point, the foreign government is stepping out of its governmental role, just like when a sovereign waives sovereign immunity, it is becoming a private person or just like a private person."
Re-directing the argument back to the issue of comity, Justice Kagan asked Deputy United States Solicitor General why including private commercial arbitration under the statute undermines international comity. Deputy United States Solicitor General replied that when Congress has previously addressed the issue of evidence in arbitrations in Section 7 of the FAA, Congress has limited that evidence in so far as only the arbitrator can request information—there is no pretrial discovery. If Section 1782 is read to include private commercial arbitrations, said Deputy United States Solicitor General, "[i]t could be discovery about any dispute anywhere in the world between a government– and an investor that the United States government has no responsibility for."
Justice Breyer objected, highlighting that many of the international briefs say that Section 1782 cannot be used in any situations unless the arbitrator wants to do so. Deputy United States Solicitor General suggested that the scope of Section 1782 is a political, rather than judicial, question for Congress to decide. Before the FAA is extended elsewhere, stated Deputy United States Solicitor General, the US government would want to analyze whether the acquisition of evidence in domestic proceedings should be limited to situations where the arbitrator is already appointed and whether or not there should be any pretrial discovery.
Returning to his initial point on international comity, Deputy United States Solicitor General explained that "“when it comes to international comity, often what the United States wants to do is to do something reciprocal, to adopt something and hope other countries will do it . . . But opening up U.S. courts unilaterally to this sort of discovery that has never been permitted, even in domestic arbitration, is a unilateral act[.]" That unilateral act, he stated, would have no benefit or comity interchange for the US.
Justice Barrett asked whether two foreign countries to an international agreement could designate a private body as one that exercises the sort of governmental authority that would come within the ambit of Section 1782 as the government sees it. Deputy United States Solicitor General appeared perplexed by the hypothetical and ultimately answered that the character of the tribunal is what matters for the Section 1782 analysis.
Counsel on behalf of Respondent Luxshare Ltd. stated that a broad interpretation of Section 1782, which would include private commercial arbitrations, would promote cross-border commercial arbitration and international comity. He stated it would provide access to evidence that would otherwise be out of reach and promotes the US’s pro-arbitration policy. Further, Counsel for Respondent Luxshare Ltd. explained, the statute has a number of procedural safeguards: parties can opt out by agreeing not to seek discovery and the arbitral institutions can prohibit or limit discovery through their own rules.
Justice Gorsuch raised Deputy United States Solicitor General’s point that when discussing comity, the Court should be hesitant to address questions better reserved for the political branches. Counsel for Respondent Luxshare Ltd. responded that these concerns can be addressed within the structure of the statute and in respect of a potential amendment to the statute. Justices Gorsuch and Breyer asked why the judiciary should be tasked with creating factors to limit the reach of Section 1782 instead of Congress.
Counsel for Respondent Luxshare Ltd. responded that there was no need for factors, and that instead the high court should instead apply the "most natural meaning of the two words [foreign tribunal]." Counsel for Respondent Luxshare Ltd. also pointed to Section 5 of the 1964 statute, arguing that when Congress wanted to mean "foreign governmental" it did so in that section. He also noted that the absence of commentary one way or another on whether the statute applies to foreign commercial tribunals does not mean that there was an understanding that it did not apply to those tribunals.
Counsel for Respondent, The Fund for Protection of Investors' Rights in Foreign States, first emphasized that the Senate and House Reports to Section 1782 both referenced the German Mixed Claims Commission, which itself was a foreign arbitral tribunal.'
The Justices focused mainly on the foreign policy impacts of both Respondents' positions. Counsel for Respondent, The Fund for Protection of Investors' Rights in Foreign States, pointed out that a number of sovereigns have invoked Section 1782 in the context of Bilateral Investment Treaty disputes, so comity should be of no issue.
Justices Sotomayor and Gorsuch pressed Counsel for Respondent, The Fund for Protection of Investors' Rights in Foreign States, on the other side's position that there is a distinction between treaties that create arbitration mechanisms and those that leave it to investors. Counsel for Respondent, The Fund for Protection of Investors’ Rights in Foreign States, stated that the distinction is without merit because even under Bilateral Investment Treaties, the arbitral tribunal is ultimately asking whether the parties breached their obligations to another sovereign, not the private individual to the investor treaty. The promises, noted Counsel for Respondent, The Fund for Protection of Investors' Rights in Foreign States, in either type of treaty are ultimately made to sovereigns, not private individuals.
The cases are ZF Automotive US Inc. et al. v. Luxshare Ltd., case number 21-401, and AlixPartners LLP et al. v. The Fund for Protection of Investors' Rights in Foreign States, case number 21-518, in the USSupreme Court. A copy of the transcript of the oral argument is available here: https://www.supremecourt.gov/oral_arguments/argument_transcripts/2021/21-401_9ol1.pdf.
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