As noted in our prior posts, the U.S. Supreme Court is set to hear the oral arguments in the case of ZF Automotive US, Inc., et al. v. Luxshare, Ltd. on March 23, 2022. There is also another case, AlixPartners LLP v. The Fund for Protection of Investor Rights in Foreign States, being consolidated into the oral arguments that addresses the same discovery issue.
The AlixPartners case originated in the second circuit where the Court of Appeals denied the Petitioner AlixPartners’ request for a rehearing and thus, it petitioned the U.S. Supreme Court for a writ of certiorari, which was granted. The same statute is at issue: Section 1782(a) of Title 28 of the United States Code (“Section 1782”) which provides, in pertinent part:
The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation.
AlixPartners took the position that the phrase “foreign or international tribunal does not apply to private arbitrators that are acknowledged to be “functionally independent” from any government entity or authority. It further argued that the mere fact one party to the arbitration is a sovereign state does not change this affect.
In AlixPartners, the Petitioner is a NY consulting firm, and Respondent is The Fund for Protection of Investors Rights in Foreign States (“Fund”), a Russian investment entity. Respondent alleged it was an assignee of a former shareholder of Snoras Bank (a failed Lithuanian bank). Snoras Bank was placed in bankruptcy in 2012. Roughly eight years later in April 2019, Respondent initiated ad hoc arbitration against Lithuania arising out of its actions involved in Snoras bank and its insolvency.
The Fund asserted that Lithuania consented to the arbitration through the Agreement Between the Government of the Russian Federation and the Government of the Republic of Lithuania on the Promotion and Reciprocal Protection of the Investments (“Treaty”). Lithuania and Russia agreed in this Treaty that investors based in one country have the option to adjudicate disputes against the other foreign sovereign under certain forums, and Respondent chose “ad hoc arbitration in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).”
Respondent alleged that Lithuania expropriated, without due process or compensation, certain investments in Snoras Bank, and in doing so breached Article 6 of the Treaty prohibiting it.
The three-person arbitral panel was not yet constituted when the Respondent filed a Section 1782 request with the Southern District of New York court for non-party discovery (subpoenas for documents and for depositions) for use in the merits phase of the arbitration. AlixPartners opposed the Section 1782 application on the basis that the parties’ arbitration was not a “foreign or international tribunal” under the statute.
The district court, nevertheless, authorized the subpoenas. The order was issued on the same day as the Second Circuit court’s decision In re Guo for an Order to Take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. 1782, 965 F.3d 96 (2d Cir. 2020), as amended (July 9, 2020) (“Guo”), in which it did not allow Section 1782 to apply to private international commercial arbitrations.
AlixPartners thus moved for reconsideration of the authorized subpoenas in light of the decision in Guo, which was denied and the Second Circuit Court of Appeals affirmed, in part on the basis that the Treaty involved was developed by UNICTRAL and the arbitral panel retained affiliations with the foreign States, despites its “functional independence” from the governments. It further emphasized that “the arbitral panel in this case derives its adjudicatory authority from the Treaty…rather than an agreement between purely private parties or any other species of private contract.”
The Petitioner, AlixPartners, relied on original legislative intent, that Section 1782 contemplated assisting the judicial decisionmakers of individual foreign countries when it was enacted in 1948. It contended that the amendment to include the phrase “foreign or international tribunal” was made in 1964 to facilitate discovery to aid governmental bodies. It also focused on the “harmonization” of the language with other federal statutes to show that this phrase means a “governmental entity of one or more sovereign states,” and not private commercial arbitration. AlixPartners noted that if Congress intended to extend Section 1782 to arbitral tribunals, it would have said so (explicitly). In fact, other statutes, including one passed just two years after the 1964 amendment, use the term “arbitral tribunal.”
It further argued that an expansion of Section 1782 would undermine the advantages of arbitration that both Congress and courts have recognized: efficiency and cost effectiveness.
In this current action, AlixPartners argued that neither Russia nor Lithuania (or any of its agencies) was conducting the arbitral proceedings or resolving the dispute between the parties at any stage of the proceedings. The panel itself was not subject to control or oversight by any entity, not even UNCITRAL and the award itself will remain confidential unless both parties agree otherwise; thus, distinguishing this arbitration from Investment Treaty Arbitrations.
In other words, it argued that the arbitral panel was not a governmental authority. Further, AlixPartners argued that Lithuania as a party in the arbitration under the Treaty did not “convent” the ad hoc arbitration into a “foreign or international tribunal.” Its focus is on the arbitral panel, not the parties involved.
The Fund’s Arguments
The Respondent, the Fund, emphasized its argument that the character of the arbitration in this case is different than ZF Automotive US, Inc. It argued that this tribunal was endowed with the authority to act by an instrument of public international law, the Treaty. Therefore, it was a public tribunal and Section 1782 was contemplated to be applied to it as a foreign or international tribunal.
Respondent initiated the Section 1782 petition in S.D.N.Y. for Mr. Simon Freakley’s role in Lithuania’s expropriation of investments including his appointment as Snoras Bank’s temporary administrator, his investigation into expropriation, and his confidential report to Lithuania on such. It also requested similar evidence from AlixPartners, of which Mr. Feakley is the current CEO. It noted that the arbitral tribunal had already ruled on Lithuania’s attempt to enjoin the discovery (rejecting it).
The Fund argued that Section 1782 was indeed enacted with international arbitrations in mind –the amended language of “foreign or international tribunal” was specifically added to include such, per the Rules Commission, which analyzed other federal statutes. It contended the phrase was general and to be interpreted broadly. In other words, Congress intended to use the term “international tribunal” to reference international arbitrations arising from public international law disputes, of which this is one.
The S.D.N.Y found this tribunal “was convened under the authority of the Treaty, a bilateral agreement between Lithuania and Russia,” which made it a public international law dispute. The Guo case held that Section 1782 did not apply to private commercial arbitrations, but the Second Circuit stated that “an arbitral body under a bilateral investment treaty may be a ‘foreign or international tribunal.’” Respondent argued these opinions were not inconsistent with the discovery order in this case.
The Fund further emphasized that the Federal Arbitration Act did not conflict with Section 1782’s application to the tribunal in this case.
Reply from AlixPartners
AlixPartners disagreed with the Fund’s interpretation of the broad interpretation of the statute language to assert that “tribunal” and “international tribunal” are general rather than specific terms. It argued that the Fund’s arguments improperly put the burden of proof on it to prove Congress intended to carve out “ad hoc arbitral bodies”—whereas, it argued, Congress did not intend this panel to be included in the first place. Finally, it emphasized that the Treaty itself did not “create” neither the agreement between the parties to arbitrate the dispute nor the panel that would finally resolve such dispute, such that it was the based in public international law. It argued that the term “foreign or international tribunal” should only reach a governmental entity exercising governmental authority.
The U.S. Supreme Court will have significantly different issues to contend with in the two cases that are consolidated for hearing on Section 1782. Please let us know what you think will happen!