It is a trite comment that cross-border commerce and international markets have globalized most every business, from fledging startups to multinational companies. With this new globalized reality, parties are commonly finding themselves either directly involved in disputes around the world or connected to them in some way. Northern California, with its high tech sector and concentration of intellectual property, embodies this reality like few others, and the U.S. District Court for the Northern District of California—whose jurisdiction covers San Francisco, Silicon Valley, and the like—has become one of the favored destinations for major litigation involving the high tech sector, especially with East Asian counterparties.
With the internationality of business and Northern California’s oversized importance in the tech world, decisions coming out of the jurisdiction can potentially have wide-ranging impact on international litigation and arbitration. The recent case in the U.S. District Court for the Northern District of California—HRC-Hainan Holding Company, LLC v. Yihan Hu, et al, Case No. 19-mc-80277-TSH (“HRC-Hainan”)—arising out of a Chinese-seated arbitration is one important example, and one of which international disputes practitioners from across the globe should be aware.
Support of International Arbitration: The Applicability of 28 U.S.C. § 1782
Whether engaged in litigation in a foreign jurisdiction or arbitration proceedings around the world, knowing what tools are available can make all the difference in advancing the best possible case. One such tool available for non-US disputants that is often overlooked in the international arbitration context is the “Section 1782 Application”, a broad discretionary power of U.S. federal courts to order U.S.-based discovery in support of proceedings abroad.
Set forth in U.S. federal statutory code, 28 U.S.C. § 1782, the eponymous application empowers a U.S. federal district court—typically a magistrate judge—to order a person residing in (or found in) that jurisdiction to either (i) give testimony (including depositions); and/or (ii) produce documents or physical evidence to aid “in a proceeding in a foreign or international tribunal” if certain criteria are met. A Section 1782 Application can be made either by a party to the foreign proceeding or by the international tribunal itself, providing a powerful tool to obtain evidence, even where the tribunal itself has no jurisdiction over a third party in the U.S.
While Section 1782 has been used in foreign litigation for quite some time, its applicability in private international arbitration—as “a proceeding in a foreign or international tribunal”—has been a topic of debate. It largely settled that a Section 1782 Application will be available in state-to-state arbitration, but its availability for parties in investor-state or commercial arbitration has given rise to conflicting decisions in federal courts, with the question reaching the U.S. Supreme Court almost a decade ago in the case of Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004) (“Intel”). Despite the U.S. Supreme Court holding that Section 1782 authorizes a federal district court to grant discovery in support of an international arbitral tribunal, it still allows for the district court to exercise discretion to determine in which cases it will exercise that power. Unfortunately, 16 years on from Intel, there is still no consensus on exactly what arbitral proceedings will receive support, with different district courts developing different rubrics.
In the United States, federal courts are divided between 13 circuits which hear appeals from their respective district courts. Each district court is bound by the precedent of their own district, with decisions of other districts offering persuasive authority. Where conflicts exist between districts, the circuit courts will solve any conflicts on appeal, thereby providing binding authority for their own districts. However, circuits once again only look to each other for persuasive authority, with the U.S. Supreme Court rectifying any circuit splits once and for all. Unfortunately, in the case of Section 1782 Applications, the Intel decision by the U.S. Supreme Court left open the question of what type of arbitrations the measure could be used to support, leaving room for circuit splits to arise, which they have.
Landmark Decision in Northern California: Tech Companies Take Note
Despite questions as to the availability of Section 1782 Applications in some jurisdictions (e.g., the Second and Fifth Circuits), the Sixth Circuit had taken an expansive approach to its application. For California, the Ninth Circuit (overseeing all of California’s district courts) has not yet weighed in on the question and, until the decision in HRC-Hainan, the U.S. District Court for the Northern District of California had not considered the question either.
In HRC-Hainan, the claimant in a Chinese-seated arbitration administered by the Chinese International Economic and Trade Arbitration Commission (CIETAC), who was also the plaintiff in a parallel lawsuit before the No. 1 Intermediate People’s Court of Hainan Province of China, submitted a Section 1782 Application in support of their case. The underlying dispute involved investment into the development of an in vitro fertilization center at the respondent’s hospital in Hainan Province and the claimant secured a USD 20 million freezing order from the local Hainanese court against the respondent. After receiving the freezing order, the claimant suspected that the respondent had improperly shifted assets outside of the jurisdiction to avoid the court’s freezing order. Believing that the transfers were made to persons and entities in Northern California, the claimant sought discovery by way of a Section 1782 Application of 3 individuals and 4 entities, including Wells Fargo, in the U.S. District Court for the Northern District of California.
Although the question has been considered by other California districts, the issue has not been decided by the Ninth Circuit and HRC-Hainan represents the first time the Northern District of California has considered the question. In reviewing the various approaches taken by the appellate circuits on how to interpret the second requirement of Section 1782—i.e., whether a private arbitral tribunal is encompassed within the statute—the district court decided to follow the Sixth Circuit’s approach in Abdul Latif Jameel Transp. Co. v FedEx Corp. (In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d 710 (6th Cir. 2019) and found that the power extends to supporting all arbitral tribunals, not just governmental and intergovernmental tribunals (as held by the Second and Fifth Circuits in National Broadcasting Co., Inc. v Bear Stearns & Co., Inc., 165 F.3d 184 (2d Cir. 1999) and Republic of Kazakhstan v. Biederman Int’l, 168 F.3d 880 (5th Cir. 1999), respectively).
Particularly, the Northern District found that the ordinary meaning of “tribunal” within Section 1782(a) encompasses private arbitral tribunals that have the power to bind the contracting parties and rejected the Second Circuit’s policy concerns that opening the door to private arbitrations would lead to an influx of applications due to the popularity of international arbitration, which might be at odds with the broad discovery allowed in U.S. courts. While the popularity of international arbitration is well-documented, the Northern District noted that Section 1782 provides the district court with discretion, and while the statute authorizes discovery under certain circumstances, “it does not require the foreign or international tribunal to accept evidence produced by that discovery”. In this regard, the court in HRC-Hainan specifically examined whether the CIETAC tribunal would be “receptive” to U.S. judicial assistance. Finding that the CIETAC tribunal could not order the same discovery but would be receptive to that evidence—even extending procedural deadlines for the submission of evidence in the underlying arbitration to accommodate the claimant’s Section 1782 Application—the district court granted the claimant’s application after finally determining that the requests were not “unduly burdensome”.
While the Northern District of California’s decision in HRC-Hainan involved an examination of the particular facts of the case—namely whether (i) the tribunal in the underlying arbitration would be receptive to the discovery produced by way of the application; and (ii) the requests were unduly burdensome to the third party from whom the evidence is sought—it is clear that evidence within the district is now subject to the court’s discretionary power under Section 1782. The court’s reasoning is quite pragmatic, largely based on the purpose of Section 1782, and it takes a pro-arbitration stance, especially in countering the Second Circuit’s hesitations and their factoring in the likelihood of assisting the tribunal in the underlying dispute.
Either way, it is a forceful tool confirmed to be available in arbitrations involving the tech industry due to the jurisdiction’s coverage of important locations like San Francisco and Silicon Valley. With the current circuit split, this is likely an issue that will eventually end up back before the U.S. Supreme Court, but that could take several years. In the meantime, the District Court for Northern California will be open, on a case-by-case basis, to exercising its discretion and granting such measures. Time will tell how much of an effect the HRC-Hainan decision will have for foreign arbitrations in the intellectual property and tech industries, with the newly confirmed option to seek discovery of some of the world’s largest tech giants and startups alike. It will be interesting to see how many non-US disputants will take advantage of the court’s powers.