About the authors: Juan Perla is a partner in the New York office of Curtis, Mallet-Prevost, Colt & Mosle LLP, focusing on appeals and international disputes. Lise Johnson is international arbitration counsel in the firm’s London office. The authors thank associates Grace Condro and Jean Lambert for their contributions to this article.
Photo by Juan Perla.
On March 23, 2022, the US Supreme Court heard arguments in two cases that raise the question of whether US-based discovery is available for use in international arbitral proceedings. The first case, ZF Automotive US v. Luxshare, involves a commercial arbitration between private parties. The second, AlixPartners v. The Fund for Protection of Investors’ Rights in Foreign States, deals with a dispute between Russian investors and the Government of Lithuania under a bilateral investment treaty, which provides for investor-state arbitration (also known as investor-state dispute settlement or “ISDS”).
These cases ask whether foreign or international arbitral tribunals fall within the meaning of 28 U.S.C. § 1782, the statute authorizing a district court to order discovery “for use in a proceeding in a foreign or international tribunal.” If so, any “interested person” may seek discovery from persons in the US for use in those arbitrations pursuant to the Federal Rules of Civil Procedure, which provide broader discovery than is otherwise available in arbitral proceedings and may result in sanctions for noncompliance.
In answering this question, the Supreme Court will consider whether and how to take account of the differences between commercial arbitrations and ISDS for purposes of section 1782.
Differences between commercial arbitrations and investor-state arbitrations
Lower courts are split on whether section 1782 is available for use in commercial arbitrations (compare here and here with here and here), with some courts emphasizing the bargained-for benefits of arbitration—speed and efficiency—as reasons for not extending this provision to private arbitral tribunals.
By contrast, there is a general consensus among lower courts that section 1782 applies to ISDS (see, e.g., here, here and here). In AlixPartners, for instance, the Second Circuit held that ISDS tribunals are covered by section 1782 because of their distinctive “functional attributes”—most critically that ISDS tribunals derive their jurisdiction from investment treaties between states, rather than from contracts between private parties.
The US Government offered a different view. As outlined in an amicus brief in these two cases, and in a prior case raising the same issue, the US disfavors section 1782 for use in both types of arbitral proceedings, notably departing from lower courts on its understanding of ISDS. The US argued that ISDS “resembles private commercial arbitration in the most salient respects,” highlighting both the nongovernmental status of the arbitrators and the importance of efficiency in both types of proceedings.
The US’ emphasis on the similarities between commercial arbitration and ISDS is notable for two reasons. First, it assumes that ISDS tribunals are all composed of privately appointed arbitrators. However, some investment treaties between the European Union and other states (at present, Canada, Vietnam, Singapore, and Mexico), refer ISDS disputes to adjudicators who are appointed in advance by joint committees of the relevant state parties and compensated by those states. Additionally, ongoing negotiations at the United Nations Commission on International Trade Law envision the creation of a standing multilateral investment court within roughly four years, which would also rely upon adjudicators appointed and paid by states. If the Supreme Court were to rule that section 1782 is not available for ISDS proceedings with private, party-appointed arbitrators, the result could be different for ISDS cases brought before a standing investment “court,” creating a dual track for investment claims against states—one in which US discovery is available and another in which it is not.
Second, in other contexts, the US has taken the position that ISDS may warrant different, less efficient rules than commercial arbitrations due to the public interests inherent in ISDS. While confidentiality may be the default rule in commercial arbitration, the US has called for ISDS to be transparent and to allow for input from nonparties even though such openness may hamper the efficiency of proceedings.
Regardless of what the Supreme Court decides with respect to commercial arbitration, it may be receptive to arguments about the distinctive characteristics of ISDS. During oral argument, several Justices seemed interested in understanding whether ISDS was more like dispute settlement before the World Trade Organization and state-to-state arbitrations than commercial arbitrations. Chief Justice Roberts observed that ISDS is “not a purely private undertaking,” noting its “sovereign character.” As the Chief Justice previously explained, the “uniqueness” of ISDS “should not be overlooked,” especially because those tribunals are endowed with the “power [a state] typically reserves to its own courts, if it grants it at all: the power to sit in judgment on its sovereign acts.” Indeed, ISDS tribunals hear disputes implicating important questions of governmental power such as national security measures, sovereignty over natural resources or the power to regulate public health and the environment. The decision to include or exclude ISDS tribunals under section 1782 could thus have profound consequences on how those cases are decided.
Potential implications of permitting section 1782 discovery in investor-state arbitrations
To date, use of section 1782 for ISDS has been relatively limited. But if the Supreme Court clarifies that this procedural device is available, there may be greater recourse to it. Since many investors bringing ISDS claims reside in the US or are connected to persons residing in the US, section 1782 could become an important tool for parties to obtain otherwise inaccessible evidence.
Already, ISDS tribunals have demonstrated a willingness to receive evidence obtained through section 1782 discovery (see, e.g., here and here). As noted above, US courts have granted section 1782 discovery for use in ISDS proceedings, not only at the request of private investors, but also at the request of foreign states. For instance, in Republic of Kazakhstan v. Lawler, Kazakhstan attempted in the arbitration to obtain evidence from the investor to establish a jurisdictional defense. Unsuccessful in its evidence-gathering efforts before the tribunal, Kazakhstan then invoked section 1782 and sought the evidence directly from the investor’s sole officer and director in the US. The court granted the application. Shortly thereafter, the investor produced the requested evidence in the arbitration.
There may be a variety of reasons why states may seek discovery to defend against investment treaty claims (e.g., gathering evidence on capital flows, due diligence, business plans and expectations, and possible corruption or other illicit activities), or to pursue counterclaims. In addition, investment treaties and arbitral decisions have been evolving so as to make a broader range of information relevant to ISDS claims, defenses, and counterclaims. For example, an ISDS tribunal has recognized that investors’ knowing misconduct can be more prejudicial to their claims than negligence. This, in turn, could support requests for discovery about investors’ knowledge and state of mind.
Relatedly, new treaties and models are breaking ground by imposing obligations directly on investors and on their investments, and by providing that investors may face financial sanctions for violating standards found in soft law instruments such as the OECD Guidelines on Multinational Enterprises. Discovery may be useful in proving that companies, their investors, or their shareholders have breached relevant standards.
Another potential user of section 1782 discovery may be any nonlitigant who can demonstrate that they are an “interested person” under the statute. This could include public interest groups whose participation as amici is expressly permitted under a growing number of investment treaties and arbitral rules governing ISDS cases. Potential amici may want to provide input to advance or protect their own discrete rights or interests (as might be the case if the investor is claiming property rights subject to competing claims), or to protect and promote general public interests (e.g., by elaborating upon and applying norms of corporate responsibility under international law). These groups may want to use section 1782 to strengthen their input.
In sum, it is not a foregone conclusion that the Supreme Court will agree with lower courts that ISDS tribunals are covered by section 1782, especially in light of the US’ opposition. But if the Court does agree, then US-based discovery could become a more important tool in litigating ISDS claims in the future.