Rolls-Royce Seeks to Resolve Circuit Split on Whether District Courts Can Order Discovery For Use in Private Arbitration
As discussed in our previous blog, many foreign companies favor private international arbitration for dispute resolution purposes in order to avoid being haled into a U.S. court and to avoid U.S.-style discovery. That calculus may change if the Supreme Court decides to consider whether a district court has authority to order discovery under 28 U.S.C. § 1782 for use in private commercial arbitration, which would resolve the current split amongst Circuit Courts.
On March 30, 2020, the Fourth Circuit Court of Appeals in Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 210 (4th Cir. 2020), joined the Sixth Circuit in allowing the use of § 1782 in the context of private arbitration. The British Company Rolls-Royce subsequently indicated that it will file a petition for certiorari with the Supreme Court, asking the High Court to reverse the Fourth Circuit. Rolls-Royce has until June 28, 2020 to file a writ petition.
The underlying dispute arose when the engine of a new Boeing 787 Dreamliner aircraft caught fire during testing in January 2016, causing significant damage to the aircraft. Servotronics, 954 F.3d at 210. Servotronics supplied a valve to Rolls-Royce that Rolls-Royce then installed in the engine that it manufactured for Boeing. Id. Rolls-Royce settled Boeing’s claim for damages, and then sought indemnification from Servotronics. Id. Servotronics rejected Boeing’s indemnification claim, and Rolls Royce commenced arbitration in the UK. Id.
Servotronics brought an ex parte application pursuant to 28 U.S.C. § 1782 in the United States District Court for the District of South Carolina to obtain testimony of South Carolina residents, three Boeing employees, for use in the UK arbitration, which the District Court denied. The Fourth Circuit reversed and remanded, holding that a UK arbitration panel proceeding under the rules of the Chartered Institute of Arbitrators, qualified as a foreign tribunal for purposes of § 1782. Id. at 216. The Fourth Circuit refused to follow National Broadcasting Co., Inc. v. Bear Stearns & Co., Inc., 165 F.3d 184 (2d Cir. 1999), and Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880 (5th Cir. 1999), finding that Congress’s 1964 change from “in any judicial proceeding pending in any court in a foreign country” to the current phrase, “in a proceeding in a foreign or international tribunal,” reflected the legislature’s intent to authorize U.S. assistance not only in court proceedings but also in quasi-judicial proceedings, including arbitration. See id. at 213. The Fourth Circuit also found that even if the more restrictive reasoning of National Broadcasting and Beidermann were applied, the UK tribunal would meet the definition of “an entity that exercise[s] government-conferred authority” because of the significant government regulation over arbitration in both the US and the UK. See id. at 213-14.
The deep Circuit Court split is soon to be joined by the Ninth Circuit, although it remains to be seen which side the Ninth Circuit will take. Less than a week after the Fourth Circuit’s decision in Servotronics, appellants in HRC-Hainan Holding Co., et al. v. Yihan Hu, et al., No. 20-15371 (9th Cir.) urged the Ninth Circuit to reverse the Northern District of California’s decision to allow discovery pursuant to § 1782 for use in a China International Economic and Trade Arbitration Commission (“CIETAC”) arbitration. Appellants argued in a May 4, 2020 brief that the legislative history of § 1782 makes no reference to private arbitration, and this silence demonstrates that Congress did not intend to allow the use of § 1782 to enable discovery for use in private arbitrations. Whether the Ninth Circuit will decide HRC-Hainan before the Supreme Court rules in Servotronics remains to be seen.
If the Supreme Court grants certiorari in Servotronics and ultimately decides that a district court may order discovery under 28 U.S.C. § 1782 for use in private arbitrations, such a ruling could give rise to concerns that U.S.-style discovery will be available to parties in private international arbitrations, potentially disrupting the expectations of parties who chose arbitration precisely to avoid the burdens of extensive discovery. But private litigants should still remember that § 1782 does not override contractual provisions or arbitral rules and procedures. Rather, although the statute authorizes a district court to order discovery, it has no bearing on whether an arbitration tribunal will allow the use of such discovery as evidence in an arbitration. Additionally, parties who seek discovery under § 1782 still will have to address the multiple factors enumerated by the Supreme Court in Intel Cop. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004), to determine whether discovery under § 1782 can be invoked, and district courts will retain discretion to deny discovery if they perceive an attempt to circumvent otherwise applicable restrictions on evidence-gathering. See, e.g., ICDR International Arbitration Rules, Art. 21(10) (“Depositions, interrogatories, and requests to admit as developed for use in U.S. court procedures generally are not appropriate procedures for obtaining information in an arbitration under these Rules.”). However, if the Supreme Court decides that “tribunal” does encompass private arbitral bodies, there will likely be an increase in the use of § 1782 by private litigants. This may lead companies to consider explicitly specifying the type and scope of discovery that will and will not be available in an arbitration proceeding in their arbitration clauses.