What The U.S. Supreme Court’s Latest Ruling Means for Section 1782 Discovery in Investor-State Arbitration

As it closed the door on the use of discovery statute 28 U.S.C. 1782 (“Section 1782”) in connection with private commercial arbitration, the U.S. Supreme Court’s ruling in ZF Automotive U.S., Inc. v Luxshare, Ltd, raised new questions about whether the statute can be used in connection with investor-state arbitration. In this article, we examine where things stood before the ruling, what has now changed, and the strategies sovereigns can pursue going forward.

Section 1782 Before ZF Automotive

Section 1782 allows federal courts in the U.S. to compel witness testimony or document production from any person or entity if the following three conditions are met:

In Intel Corp. v. Advanced Micro Devices, Inc. – the only Supreme Court ruling on Section 1782 up until this latest decision in ZF Authomotive – the Supreme Court held that a “foreign or international tribunal” included not just conventional court proceedings, but also “administrative and quasi-judicial proceedings abroad.”³ Following Intel, a number of courts grappled with the question whether a “foreign or international tribunal” included an international arbitration tribunal.

While U.S. courts appeared to accept that Congress “intended to cover” investor-state arbitration with Section 1782⁴, there was uncertainty and diverging opinions among various U.S. Courts of Appeals regarding whether private commercial arbitration proceedings seated outside the U.S. qualify as a “foreign or international tribunal” under Section 1782⁵.

In Intel Corp. V. Advanced Micro Devices, Inc., the supreme court held that a "foreign or international tribunal" included not just conventional court proceedings, but also "administrative and quasi-judicial proceedings abroad

Section 1782 Before ZF Automotive

Section 1782 allows federal courts in the U.S. to compel witness testimony or document production from any person or entity if the following three conditions are met:

ZF Automotive and Section 1782 in Arbitration

The Supreme Court’s decision in ZF Automotive arose from two consolidated cases: (1) Luxshare, Ltd. V. ZF Automotive U.S., Inc., regarding the applicability of Section 1782 to a private commercial international arbitration involving a German Institution of Arbitration (“DIS”) panel; and (2) AlixPartners, LLP v. The Fund for Protection of Investors’ Rights in Foreign States, involving an ad hoc investor-state arbitration conducted pursuant to the UNCITRAL Rules⁶.

In ZF Automotive, the Supreme Court ultimately concluded that Section 1782 only applied to governmental or intergovernmental judicial bodies, and not private international bodies. In determining how an entity could qualify as a government or intergovernmental judicial body, the Supreme Court found that the key consideration was whether the foreign tribunal “possess[ed] sovereign authority conferred by” one or more nations.

Turning to the DIS arbitration tribunal at issue, the U.S. Supreme Court held that since the tribunal was constituted pursuant to a private contract, the DIS panel – like most (if not all) tribunals constituted in commercial arbitrations – lacked the governmental element needed to qualify as a “foreign or international tribunal.” With respect to the ad hoc investor-state arbitration tribunal at issue, the Supreme Court noted that this presented a “harder question” given the presence of two sovereigns in the dispute who were arbitrating pursuant to a bilateral investment treaty. The Supreme Court nevertheless found that the ad hoc panel could not qualify as a “foreign or international tribunal” within the meaning of Section 1782, because there was no evidence that it had been formed to exercise governmental authority.

While the Supreme Court’s ruling in ZF Automotive closes the door on the use of Section 1782 in private commercial international arbitrations, the decision introduced uncertainty with respect to whether – and under what circumstances – Section 1782 can apply to arbitration tribunals constituted in investor-state arbitrations.

The ZF Automotive decision left open the possibility that arbitral panels in investor-state cases may have sufficient governmental authority to qualify as a government or intergovernmental judicial body as required by the statute, but the Court declined to adopt a bright-line test providing clarity as to what evidence or indicia could be used to demonstrate when investor-state arbitration panels have been imbued with governmental authority. As a result, there is a possibility that parties in investor-state cases may still pursue Section 1782 discovery, provided there is a cognizable argument that the tribunal in a given case has powers bestowed upon it by one or more states⁷.

ZF Automotive and ISCID Proceedings

With respect to investor-state arbitrations administered by the International Centre for Settlement of Investment Disputes (“ICSID”) in particular, there may be arguments that Section 1782 discovery remains available in such cases, including because:

ICSID tribunals are governed by both a multi-governmental institution (the World Bank) and an international treaty (the ICSID Convention);
the ICSID Secretariat has international legal personality, sets a budget that is funded by World Bank Member States, and its staff enjoys full immunities and privileges;
ICSID tribunals are subject to the ICSID Convention’s rules and procedures and the ICSID Secretariat – funded by member states – can appoint their members; and
ICSID tribunals have several features of governmental authority, including tax exemption for fees and expesnes at rates subsidized by member states, and immunity from legal processes in discharging their duties⁸.

In the aftermath of ZF Automotive, the applicability of Section 1782 to ICSID arbitrations is far from settled, and remains untested in U.S. courts, which are now only beginning to apply the Supreme Court’s new parameters for determining when investor-state arbitration panels may be considered as governmental or intergovernmental judicial bodies.

In one of the first applications of the Supreme Court’s latest decision, a federal magistrate judge sitting in the District Court for the Eastern District of New York recently found that there was “insufficient support” to conclude that an ICSID tribunal constituted under a China-Malta BIT in an investment treaty arbitration against Malta had the requisite “governmental authority” imbued by either Malta or China, and therefore dismissed the petition for Section 1782 discovery⁹.

Whether other courts will follow suit or find in other circumstances that an ICSID arbitration tribunal constitutes a “foreign or international tribunal” within the meaning of Section 1782 remains to be seen.

Therefore, this decision presents new risks and new opportunities that sovereigns with arbitrations pending before an ICSID tribunal should factor into their case strategy.