Received wisdom in selecting an arbitration seat, if the goal is arbitration unencumbered by “American-style discovery,” is to avoid America. Today we take a close look at one factor in that supposedly common calculus — obtaining evidence from non-parties.
In an arbitration seated in London (or elsewhere beyond US borders), pre-hearing discovery in the United States may quite possibly be had by a subpoena for documents or deposition testimony issued by US counsel in the name of a US court after the grant of an order permitting such discovery issued by the US District Court in the district where the witness resides or is found. The order is (quite possibly) issued upon the authority of the famous US foreign judicial assistance statute, 28 USC §1782. Such an order may be granted ex parte — a useful tool when there are concerns that the witness will take steps to evade service of process. There is no legal requirement that the Court issuing the discovery order take into account the rules and procedural law applicable to the arbitration, or consider or invite the position of the Arbitral Tribunal concerning the proposed discovery. Notwithstanding the view, more widely held, that the statutory powers to furnish judicial assistance to gathering evidence for use in foreign courts and tribunals do not apply to commercial arbitrations conducted under private auspices rather than through governmental or intergovernmental bodies, there is enough support for the opposite position that US judges inclined to permit the discovery can hold that private arbitration is covered by §1782, and find non-appellate US precedents, and one famous US Supreme Court dictum to support the position. For a very recent instance, see In re Ex Parte Application of Kleimar N.V., 2016 WL 6906712 (S.D.N.Y. Nov. 16, 2016), the decision that motivates this post.
Kleimar is a curious case mainly because the US Second Circuit Court of Appeals, whose decisions are binding precedents, stare decisis for New York’s federal district judges, held in 1999 that a private arbitral tribunal is not covered by the famous statute 28 USC §1782. And while a few courts in other parts of the US have found solace in a phrase in the US Supreme Court’s 2004 decision in the Intel case (Intel Corp. v. Advanced Micro Devices, 542 U.S. 241, 258), that so-called dictum until now has not motivated the Second Circuit or its district judges to walk away from the 1999 position (NBC v. Bear Stearns, 165 F.3d 184). But in this Kleimar case two respected judges on the Manhattan federal bench have now walked that walk (one judge who issued the discovery order, another who denied a motion to vacate that order and to quash the subpoena issued in furtherance of the order) — and they have not done so with any probing analysis, but rather with just a glancing comment, that the Intel so-called dictum of 2004 casts doubt on NBC holding of 1999. [I have twice now used the “so called” label, because as will be seen below, what is referred to as a dictum is not that, unless dictum embraces everything appearing in a Supreme Court opinion other than its holding. Dear skeptics, see the excellent deconstruction of the Intel “Dictum” Overreading in In re Application of the Government of the Lao People’s Democratic Republic, 2016 WL 1389764 (D.N.M.I. April 7, 2016). A federal district court in the Northern Mariana Islands — who knew?).
In this possibly short-lived new Golden Age for the Intel “Dictum” Overreaders, consider how much less enthusiasm US arbitration law shows for third-party discovery in international arbitrations conducted with (and maybe at) an agreed US seat. For a start, the subpoena power resides with the arbitrators not with the courts. And the majority view by a wide margin is that discovery as we understand it in litigation is not permitted because the statute (FAA Section 7) refers to the appearance of a non-party witness before one or more of the arbitrators to give testimony and to bring along to the testimonial hearing any relevant and material documents. (Supporting this position recently, see CVS Health Corp. v. Vividius LLC, 2016 WL 3227160 (D. Ariz. June 13, 2016), appeal filed at No. 16-16187 (9th Cir. July 6, 2016)).
In a rationally-ordered US arbitration law universe, the deference shown to arbitrators as the primary regulators of the evidence-gathering process would not be less for foreign-seated private arbitrations than for those seated within US borders. (If you will, call this Goldstein’s Buffalo-Toronto Equivalency Principle). It seems obvious that considerations of comity weigh against imposing US discovery on a proceeding that the parties have agreed to subject to the arbitral procedural law of a foreign State. Indeed, whereas the FAA mandates enforcement of the parties’ agreement to arbitrate at a foreign seat (and therefore under that arbitral procedural law of that seat, or another State’s procedural law designated in the arbitration agreement), the protracted conundrum over § 1782’s application to foreign private arbitration might be solved if US courts decided that the FAA in all events bars use of § 1782 to obtain discovery for use in foreign private arbitrations unless the applicable lex arbitri permits a court other than a court of the Seat State to direct the collection of evidence.
But rational ordering of the arbitration world might not be the route most judges would adopt to construe § 1782. So it is critical for judges, and those who seek to persuade them, to understand why Intel “Dictum” Overreaders are overreading. To repeat what many others have written many times: The Intel case had nothing to do with commercial arbitration; it concerned antitrust proceedings before the European Commission. In the passage from Intel cited by Overreaders as a hint that private arbitration is within §1782, the Court’s plurality opinion (Justice Ginsburg as author) took note of the fact that §1782 emerged from a task force set up by Congress in 1958 called the Commission on International Rules of Judicial Procedure. The plurality opinion noted that this Commission’s draft revision of Section 1782 replaced “judicial proceeding” in the extant version of § 1782 with “proceeding in a foreign or international tribunal.” Justice Ginsburg’s opinion cited the Senate Report on this 1964 amendment as evidence that the amendment was motivated by a desire to extend judicial assistance not merely to foreign courts but also to “administrative and quasi-judicial proceedings abroad.” The Court then quoted from footnote in a 1965 Columbia Law Review article by Professor Hans Smit entitled “International Litigation Under the United States Code” (65 Colum. L. Rev. 1015 at 1026-27 n. 71,73) where Professor Smit — a redoubtable expert on international commercial arbitration but also the author of the amended text of §1782 adopted by Congress — stated that “[t]he term ‘tribunal’ … includes investigating magistrates, administrative and arbitral tribunals, and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts.” (emphasis supplied). The Overreaders lift the phrase “arbitral tribunals” out of its proper Intel context — within the quoted excerpt from the Smit article — to read a tea leaf of an opening to private commercial arbitration. (One can only imagine, and cringe at, how many briefs to how many courts have stated, shamelessly, that “the Intel Court in dictum indicated that 1782 applies to ‘arbitral tribunals’.”). This tea leaf reading seems rather wishful. The litany of adjudicative bodies in which Professor Smit included arbitral tribunals was evidently invoked by Justice Ginsburg (and her subscribers) to illustrate that non-“conventional” governmental or intergovernmental adjudicators were included. Whether or not that was what Professor Smit believed in 1965, that was the Supreme Court’s purpose in using this quotation from his 1965 article, as the question before the Court was whether the European Commission had functioned as an adjudicative body.
Finally the Intel Overreaders might reconsider their position if they consider how the Supreme Court as currently composed might regard the Intel “dictum”. Justice Breyer wrote a dissent in Intel cautioning against interjecting US discovery into foreign proceedings and admonished that in interpreting and applying §1782, US courts should “pay particular attention to the views of the very foreign nations that Congress sought to help….” If at least two other Justices (Kagan?, Sotomayor?) share the view that §1782 was meant to help foreign nations, the position of the Intel Overreader view is only two votes away from defeat. Justice Scalia of blessed memory, who concurred in the judgment in Intel, criticized the plurality for relying on legislative history (and, by implication, on the later-expressed Law Review views of Professor Smit, which would seem to qualify as post-legislative history). Justice Scalia thought the words of §1782 were sufficient to decide the case, and it seems likely that at least three members of the current Court (Justices Alito?, Roberts?, Thomas?) would take that view and would find that, in statutory context, “foreign or international” was meant in at least a geopolitical sense, that is to say, a tribunal created by, not merely situated in, a foreign State or States. (It is controversial whether parties appearing before a geopolitically international tribunal like an ICSID tribunal, when the tribunal is seated in the United States, may seek discovery under §1782, as the US-seated ICSID tribunal will generally have subpoena powers under FAA Section 7. In a rational world, §1782 would only apply when an arbitral tribunal is “foreign or international” both geopolitically and territorially).
How long will the new Golden Age last for §1782 in the world of private commercial arbitration? Perhaps only long enough for the Second Circuit to reverse the Kleimar case in a Summary Order reaffirming that the NBC v. Bear Stearns case from 1999 is still good law. But perhaps there will be no appeal and Kleimar could snowball for a period of time. Perhaps arbitrators will take control of the matter, and enter procedural orders prohibiting parties before them from resorting to §1782 without first applying to the Tribunal for an order permitting this to be done. That is not a complete solution, because some §1782 applications are made before the Tribunal is constituted precisely to avoid having the Tribunal pre-empt the initiative. But Tribunals mindful of the issue can make substantial inroads by preventative action.