In Re Application of Hanwei Guo for an Order to Take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. § 1782 (2d Cir. Case No. 19-781, July 8, 2020).
Section 1782 of Title 28 of the U.S. Code is a statute that provides for U.S. style discovery in aid of foreign proceedings. On July 8, 2020, the Second Circuit Court of Appeals issued a decision that Section 1782 may not be used in aid of private international commercial arbitration.
From 2012 to 2013, Petitioner-Appellant Hanwei Guo invested approximately $26 million in companies referred to in the decision as the Ocean Entities. These businesses operated in the Chinese music streaming market. Through a series of transactions that Guo asserts were misleading, extortionate, and fraudulent, Guo sold his shares in the Ocean Entities for less than they were allegedly worth. Eventually, following a series of mergers, Ocean Music became part of Tencent Music, by some metrics one of the largest music streaming services in the world. In September 2018, shortly before Tencent Music conducted its American IPO, Guo initiated arbitration before the China International Economic and Trade Arbitration Commission (“CIETAC”).
In December 2018, Guo filed a petition for discovery pursuant to 28 U.S.C. § 1782(a) seeking discovery that he intended to use in his pending CIETAC arbitration. The district court denied Guo’s application. That determination was based on the Second Circuit’s 1999 decision in National Broadcasting Co. v. Bear Stearns & Co., 165 F.3d 184 (2d Cir. 1999) (“NBC”), that Section 1782 does not apply to private arbitration. This appeal followed.
Section 1782 imposes several mandatory requirements for an application, including that “(1) the person from whom discovery is sought resides (or is found) in the district of the district court to which the application is made, (2) the discovery is for use in a foreign proceeding before a foreign [or international] tribunal, and (3) the application is made by a foreign or international tribunal or any interested person.” The main issue on appeal was whether a private commercial international arbitration satisfies the statute’s “foreign proceeding” requirement.
The decision in NBC concluded that: (1) the statutory text, namely the phrase “foreign or international tribunal,” was ambiguous as to the inclusion of private arbitrations; (2) the legislative and statutory history of the insertion of the phrase “foreign or international tribunal” into § 1782(a) demonstrated that the statute did not apply to private arbitration; and (3) a contrary reading would impair the efficient and expeditious conduct of arbitrations. Following its threshold finding of ambiguity, the NBC court turned to statutory and legislative history. Based on that analysis, alongside policy considerations weighing strongly in favor of preserving the efficiency and cost-effectiveness of private arbitration, the Court concluded that private arbitrations do not qualify as “foreign or international tribunal[s]” within the meaning of Section 1782.
Shortly after the decision in NBC, the Fifth Circuit followed suit in Republic of Kazakhstan v. Biedermann International, 168 F.3d 880 (5th Cir. 1999) (“Biedermann”). Based on its own analysis of legislative history, the near-uniform limitation of references to “arbitral tribunals” within the U.S. Code to adjuncts of foreign governments or international agencies, and policy considerations, the Fifth Circuit joined the Second Circuit in holding that Section 1782 does not apply to private international arbitrations.
Five years after NBC, the Supreme Court issued its seminal decision in Intel—the only Supreme Court case to address Section 1782. There, the Supreme Court determined that the Directorate General-Competition of the Commission of the European Communities, a public entity, constitutes a “tribunal” under Section 1782. As to any possible relation to the NBC decision Intel also included, in the words of the Second Circuit:
a passing reference in dicta: namely, a parenthetical quotation of a footnote in an article by Professor Hans Smit, setting forth the proposition 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.”
Recently, and partially in reliance on this Smit reference, the Fourth (Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 210 (4th Cir. 2020)) and Sixth (In In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d 710 (6th Cir. 2019)) circuits held that Section 1782 may be used in aid of private international commercial arbitration. [Those cases are discussed in greater detail in this post.] But, as the Second Circuit pointed out, neither opinion rested on the notion that Intel undermined NBC or otherwise required a reading of Section 1782 that encompasses private arbitration.
The Second Circuit decided that NBC remained good law. Critically, the question whether foreign private arbitral bodies qualify as tribunals under § 1782(a) was not before the Intel court, which considered only whether the Directorate General-Competition, a public entity, qualified as such a tribunal. The fleeting reference in dicta to the Smit article was not a sufficient basis to undermine a prior opinion of the Court as to deprive it of precedential force. Moreover, the dicta was not definitively at odds with NBC in that Professor Smit’s reference to “arbitral tribunals” does not necessarily encompass private tribunals. The Second Circuit concluded as follows:
NBC’s thorough analysis, which began with a threshold finding of ambiguity before turning to legislative history and purpose to elucidate the meaning of the statutory language, comports with both Intel’s reiteration of broad principles and its specific analysis of § 1782.
Having concluded that NBC remains good law, the Second Circuit next turned to the question whether the CIETAC arbitration qualifies as a private international commercial arbitration.
NBC made clear that “international arbitral panels created exclusively by private parties” are not “foreign or international tribunals” within the meaning of Section 1782. The Second Circuit clarified that the “foreign or international tribunal” inquiry does not turn on the governmental or non-governmental origins of the administrative entity in question. The inquiry is whether the body in question possesses the functional attributes most commonly associated with private arbitration.
CIETAC was originally founded by the Chinese government but now functions essentially independently of the Chinese government in the administration of its arbitration cases. The court concluded that CIETAC possesses a high degree of independence and autonomy, and, conversely, a low degree of state affiliation. The court also pointed out that the grounds for setting aside an arbitration under Chinese law overlap extensively with the grounds upon which a party could petition a U.S. court to set aside an arbitration award. And, the Second Circuit explained that the CIETAC panel derives its jurisdiction exclusively from the agreement of the parties and has no jurisdiction except by the parties’ consent, plus parties have the ability to choose their own arbitrators.
For all of these reason, the Second Circuit was persuaded that CIETAC panels function in a manner nearly identical to that of private arbitration panels in the United States. As such, the court concluded that CIETAC arbitration is best categorized as a private commercial arbitration for which Section 1782 assistance is unavailable.
In sum, it remains the law in the Second Circuit that Section 1782 may not be used in aid of private international commercial arbitration, and that CIETAC arbitration qualifies as private commercial arbitration. Thus, the district court opinion was affirmed. However, under the original NBC decision, a Section 1782 request made in aid of investor state arbitration should be granted.
There remains a serious split on this issue among the Circuit courts. And, the same issue is currently pending among three other Circuits. It seems inevitable that this matter will ultimately find its way back to the Supreme Court.
