Foreign-Seated Arbitrations in United States

The Seventh Circuit Court of Appeals holds that parties may not seek discovery in the United States in aid of foreign-seated arbitrations. A Circuit split has emerged over the use of section 1782 to obtain discovery in aid of private commercial arbitrations seated outside the United States

At a Glance…

In Servotronics, Inc. v. Rolls-Royce PLC, the U.S. Court of Appeals for the Seventh Circuit recently held that 28 U.S.C. section 1782 does not authorize a district court to compel discovery for use in private arbitrations seated outside the United States. Rolls-Royce is significant because: (1) it deepens the circuit split that has emerged over the use of section 1782 to obtain discovery in aid of private commercial arbitrations seated outside the United States; and (2) it virtually assures that the U.S. Supreme Court will take the issue up on certiorari when the opportunity arises.

The Seventh Circuit Court of Appeals deepens the circuit split

The Rolls-Royce decision arose from the same factual event that led to a conflicting section 1782 decision from the Fourth Circuit in March of this year in Servotronics, Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020), which is discussed in detail in our prior alert. There, an aircraft engine manufactured by Rolls-Royce caught fire during maintenance because of a faulty valve, and the resulting fire severely damaged a Boeing 787 aircraft in which that engine was housed.

Boeing brought a claim against Rolls Royce for the fire damage to the aircraft, and the parties settled their dispute. Rolls-Royce then commenced an arbitration against Servotronics, the manufacturer of the valve. The arbitration was seated in England and was conducted under the rules of the Chartered Institute of Arbitrators.

After Rolls-Royce commenced the arbitration, Servotronics filed section 1782 applications to obtain evidence to be used in the arbitration, including an ex parte application in the Northern District of Illinois against Boeing. Servotronics' ex parte application sought the right to serve a subpoena on Boeing to compel it to produce documents that Servotronics intended to use in its arbitration with Rolls Royce.

The trial court initially granted Servotronics' ex parte application, but subsequently reversed its decision after Boeing contested the matter. Specifically, after hearing from Boeing, the trial court quashed the subpoena on grounds that in its view, a private arbitral tribunal does not qualify as a foreign tribunal within the meaning of section 1782.

Servotronics appealed that decision to the Seventh Circuit, which affirmed the trial court's ruling that a private arbitral tribunal does not qualify as a foreign tribunal within the meaning of section 1782. The Seventh Circuit therefore reached the exact opposite conclusion from the Fourth Circuit when it considered a similar section 1782 application from Servotronics for evidence to be used in the exact same arbitration.

Section 1782 and support for private arbitral tribunals

Section 1782 is a statute that permits federal courts in the United States to order persons or entities in their jurisdiction to provide documentary and testimonial evidence for use before a "foreign or international tribunal" if the applicant satisfies certain statutory requirements and discretionary criteria. If the court grants the section 1782 application, the applicant then has the right to serve a subpoena on the target.

The use of section 1782 as a discovery tool has increased dramatically since 2004 when the U.S. Supreme Court issued its seminal decision in Intel Corporation v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004), which significantly clarified the conditions under which a section 1782 application may be granted. Although Intel gave much sharper guidance as to when a section 1782 application may be granted, it nevertheless left open significant questions with which lower courts have grappled. One such question is whether a private arbitral tribunal seated outside the United States qualifies as a tribunal for which section 1782 discovery may be ordered.

The circuit split on whether section 1782 may be used in support of private arbitrations

In deciding that section 1782 cannot be used in support of a private arbitral tribunals seated outside the United States, the Seventh Circuit has joined the Second and Fifth Circuits, which both initially reached that conclusion in 1999 before Intel was decided. The Second Circuit, in its highly anticipated decision in In re Guo, recently reaffirmed its view that section 1782 cannot be used to support private arbitrations.

The Rolls Royce decision now puts the Second, Fifth, and Seventh Circuits in direct conflict with the Fourth and Sixth Circuits, which have expressly held that section 1782 does permit discovery for use in private arbitrations. The Sixth Circuit in September 2019 became the first court to expressly hold that section 1782 can be employed in support of private commercial arbitrations. The Fourth Circuit joined the Sixth Circuit and similarly held that a private commercial arbitral tribunal seated outside the United States is a foreign or international tribunal within the meaning of section 1782.

Now, all eyes will turn to the Ninth Circuit to see whether it will side with the Second, Fifth, and Seventh Circuits or with the Fourth and Sixth Circuits. Earlier this year, in HRC-Hainan Holding Co., LLC v. Yihan Hu, a federal trial court in the Northern District of California adopted the Sixth Circuit's reasoning in FedEx and granted a section 1782 petition in support of an arbitration before the China International Economic and Trade Commission. The parties argued an appeal of the lower court's decision before the Ninth Circuit, and a decision is now pending.

The outcome of that appeal could even the circuit score or tip the balance in favor of those circuits that do not permit the use of section 1782 in support of private arbitrations.

The issue will likely be resolved by the U.S. Supreme Court

Regardless of how the Ninth Circuit rules in HRC-Hainan Holding Co., the Seventh Circuit's Rolls-Royce decision substantially increases the likelihood that the Supreme Court will be forced to resolve the question of whether section 1782 discovery may be ordered in support of private arbitral tribunals seated outside the United States. While it had been rumored that a certiorari petition might be filed in Servotronics that would present that issue, no such petition has been filed to date, and the deadline for doing so appears to have passed. Consequently, practitioners will simply have to wait for another party to seek a conclusive resolution of the question.

Conclusion

Section 1782 continues to be a valuable tool in appropriate circumstances. For the time being, whether that tool can be used in support of private arbitral tribunals seated outside the United States will depend upon where the evidence is located and where the application is brought.