Applying §1782 Discovery to Arbitral Proceedings in China: Implications of the Recent Circuit Split

Keywords: Section 1782, discovery, foreign arbitral proceedings, Chinese arbitration proceedings

Section 1782 of the Federal Judicial Code is at the core of international judicial assistance of U.S. courts. It provides aid rendered by one nation to another in support of judicial or quasi-judicial proceedings in the recipient country’s tribunals. [1] Based on sovereign equality principles, demand for judicial assistance is usually reciprocal and comity-based. However, Section 1782 outlines crucial provisions regarding transnational discovery proceedings by giving ‘a broad discretionary power of U.S. federal courts to order U.S.-based discovery in support of judicial proceedings abroad’. [2] Based on its jurisprudence, any interested person in a judicial proceeding outside of the United States can directly petition the U.S. district court within whose territorial jurisdiction the evidence sought is found.

In 2020, courts in several federal circuits have interpreted Section 1782 in its applicability to foreign arbitration proceedings. Among them, two cases considered by the Second Circuit Court of Appeals (“Second Circuit Court”) and the Court of the Northern District of California in the Ninth Circuit ((Northern District Court”) respectively, i.e., In Re Application of Hanwei Guo, [3] and HRC-Hainan Holding Co., LLC v. Yihan Hu, [4] concern arbitral proceedings taking place under the aegis of China International Economic Trade Arbitration Commission (CIETAC). As Chinese parties become increasingly involved in international trade and commercial disputes, clarities leading to characters of Chinese arbitration proceedings in relation to transnational discovery deserve significant attention. However, these two cases have produced divergent interpretations regarding the use of Section 1782 discovery for Chinese arbitral proceedings – while the Second Circuit Court rejected the discovery application of Hanwei Guo, the Northern District Court permitted ex parte discovery subpoena requests against four non-parties residing in its jurisdiction. Now respondents in HRC-Hainan Holding have appealed, giving the Ninth Circuit an opportunity to decide which side of the current split it will follow.

In February 2019, the U.S. District Court for the Southern District of New York denied petitioner Hanwei Guo’s discovery application after determining that the China International Economic and Trade Arbitration Commission (CIETAC) did not qualify as a “foreign or international tribunal” under 28 U.S.C. § 1782(a). That ruling was primarily based on the Second Circuit Court’s decision in National Broadcasting Co. (“NBC”). [5] On appeal, in In re Application of Hanwei Guo, Guo argued that NBC was no longer good law, having been overruled or otherwise undermined by the U.S. Supreme Court’s Intel decision. [6] While acknowledging that courts following Intel have reached different conclusions on the issue of whether a private foreign arbitration falls within section 1782(a), the Second Circuit Court rejected the notion that Intel undermined NBC. It declared that NBC remains the binding precedent in the Second Circuit Court, and thus denied the discovery request.

In HRC-Hainan Holding Co., LLC v. Yihan Hu, a group of Delaware and Chinese companies (“Applicants”) initiated ex parte Section 1782 proceedings in the Court of the Northern District of California seeking leave to serve document and deposition subpoenas on non-parties to a CIETAC arbitration who reside within the Court’s jurisdiction. The district court granted the applications; the Respondents then moved to quash the subpoenas which had been served. Faced with the question of whether the language used in Section 1782, i.e., “foreign or international tribunal”, covers a private arbitral tribunal, such as the one constituted in the CIETAC proceeding, the Court of the Northern District of California parted ways with other district courts in the Ninth Circuit and expressed its agreement with the Sixth Circuit’s approach in light of Intel. It held that: (a) the ordinary meaning of “tribunal” is unambiguous; (b) the legislative history does not indicate Congressional intent to exclude private arbitral tribunals; and (c) policy concerns raised by the Second Circuit such as “the popularity of arbitration rests in considerable part on its asserted efficiency and cost effectiveness” might be “at odds with the board-ranging discovery made possible by the FRCP” are unpersuasive. Accordingly, the district court largely denied the Respondents’ motions to quash and compelled the Respondents to provide the requisite documents and deposition testimony. Now the appeal filed by Respondents is pending in front of the Ninth Circuit.

In December 2020, a New York electronics supplier Servotronics filed a petition for a writ of certiorari over the Seventh Circuit decision rendered in September 2020, which denied the company’s effort to obtain documents for use in a UK-seated arbitration. [7] Servotronics has asked the Supreme Court to resolve the current circuit split among U.S. Federal Courts of Appeals over the scope of discovery applications under Section 1782. It is uncertain if the Ninth Circuit will join either group in deciding on the HRC-Hainan appeal. However, sooner or later, the Supreme Court of the United States will finally have to provide a more uniform standard on what discretion lower courts should use regarding evidence – gathering for private arbitral tribunals seated abroad under Section 1782.

China has embraced international commercial arbitration as the dominant mode of cross-border dispute resolution. In general, the commercial arbitration system seems to be in a good shape in China after 30 years’ development, and CIETAC remains one of the world’s busiest arbitration institutions. A number of reforms were conducted in recent years as part of China’s national legal reform strategy to further liberalize property-related rules to safeguard investors’ rights. These reforms have led to the prioritization of developing modernized dispute resolution procedures to enhance the credibility of China’s adjudication venues. Some of the recent reforms in arbitration and ADR areas include the limited allowance of ad hoc arbitration in the recently established Shanghai Free Trade Zone, the implementation of a court review system to ensure enforceability of arbitral awards, the singing of an Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region, and the establishment of China International Commercial Court which is a specialized commercial court of contractual choice blending practices of mediation, arbitration, and litigation. These steps have greatly improved the efficiency and professionalism of arbitration proceedings conducted in China.

As more business parties turn to arbitration in China to resolve their cross-border disputes, the need of receiving assistance under Section 1782 became stronger. Arbitration proceedings in China are still dominated by the civil law style of inquisitive factual and legal findings. Depositions and interrogatories are rare, while witness statements are the norm. Under relevant procedures and practices, the standard for what is discoverable in Chinese arbitral proceedings is much narrower even compared to some of its civil law counterparts. Moreover, as a general rule, international arbitral tribunals have no authority to request documents or oral testimony for third parties, and therefore a party’s ability to procure evidence from third parties remains very limited. Therefore, it should not come as a surprise that it has become more common for Chinese arbitral parties to try to access evidence in the U.S. with help of the U.S. courts. Due to the inactive nature of participation of arbitral tribunals, most of these requests come directly from the parties themselves. In addition, many of these requests come in an overly broad scope and it is not clear if this disclosed evidence will be admitted by arbitral tribunals back in China.

In general, the option of resorting to American-style discovery will also increase evidentiary forum shopping. Liberal discovery pursuant to Section 1782 affords litigants an attractive alternative to the limited discovery procedures available in arbitration in China. Despite these legitimate concerns, transposing U.S. – style discovery to China will probably further improve the popularity and reputation of arbitration. As a litigation alternative, arbitration in China already has the language and foreign commercial expertise advantage of arbitrators. Arbitral awards are more easily enforced internationally. The potential availability of liberal U.S. – style discovery may potentially further help elevate the status of international arbitration in China for sophisticated business parties.

ENDNOTES

[1] Harry L. Jones, ‘International Judicial Assistance: Procedural Chaos and a Program for Reform’ (1953) 62 Yale L.J.

[2] Cameron S. E. Ford and Christopher Bloch, ‘The Availability of Section 1782 Discovery in International Commercial Arbitration: A View from Northern California and the Epicenter of IP’ (Global Business IP and Technology Blog, 28 April 2020) https://www.lexology.com/library/detail.aspx?g=ac7dfe1d-62db-410c-a6f3-429d4a60e88b accessed 24 December 2020.

[3] Guo v. Deutsche Bank Sec. Inc. (In re Hanwei Guo), 965 F.3d 96 (2d Cir. 2020).

[4] HRC-Hainan Holding Co. v. Hu, Case No. 19-mc-80277-TSH (N.D. Cal. Apr. 2, 2020).

[5] National Broadcasting Co. v. Bear Stearns & Co., 165 F.3d 184 (2d Cir. 1999).

[6] Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004).

[7] Servotronics, Inc. v. Rolls-Royce PLC, et al, No. 19-1847, 2020 WL 5640466 (7th Cir. Sept. 22, 2020).

Carrie Shu Shang is an Assistant Professor of Business Law at the California State Polytechnic University, Pomona. Can Eken, LLM (LSE, London) is a Ph.D. Candidate at the Faculty of Law of The Chinese University of Hong Kong.

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.