ZF Automotive: A Practitioner’s Perspective

As a practitioner in commercial litigation with an emphasis on China-related cross-border disputes, I have been eagerly anticipating the Supreme Court’s decision in ZF Automotive US Inc. v. Luxshare, Ltd., resolving a circuit split on the applicability of Section 1782 discovery to private international arbitration.   In this post, I share the practitioner’s perspective on what the decision does, what it doesn’t do, and the potential ramifications of this decision in Section 1782 litigation.

What the Decision Does

The ZF Automotive decision creates a refreshingly bright line: Section 1782 does not apply to private international arbitration.  The decision is straightforward and unanimous.

The clear decision makes it much easier to advise clients on the viability of Section 1782 petitions.  This pragmatic benefit can be easily overlooked when parsing the meaning of a fresh Supreme Court decision.  Before this decision, the issue of whether Section 1782 applied to private arbitration was still unsettled in multiple circuits.  (The Second, Fifth, and Seventh Circuits had all ruled that Section 1782 did not apply to private arbitration, while the Sixth and the Fourth Circuits reached the opposite conclusion.  The issue was teed up in other circuits as well when the Supreme Court granted cert in ZF Automotive.)  When bringing a Section 1782 petition in an unsettled circuit, a party would roll the dice on which judge would pick up the case and how that judge would rule.  The pre-ZF Automotive landscape had a lot of uncertainty, which the decision has eliminated to the benefit of practitioners and parties.

The bright-line decision also eliminates the prospect of forum shopping for Section 1782 based on an arbitration action.  Prior to the ZF Automotive decision, a party to an arbitration action knew that certain jurisdictions were viable for Section 1782, some were a no-go, and some were uncertain.  If a discovery target could arguably be “found” in more than one jurisdiction – as Section 1782 requires that a target must “reside” or be “found” in the district – then a savvy litigant could forum-shop for a court that would allow Section 1782 discovery in aid of private arbitration.  No more.

The ZF Automotive decision also makes it easier to advise clients regarding arbitration clauses in commercial contracts.  In the absence of a bright-line rule from the Supreme Court, it may have been advisable to counsel clients to specifically disclaim Section 1782 in their dispute resolution clauses, as a way to pre-empt collateral litigation.  With a bright-line rule from the Supreme Court that excludes private arbitration from Section 1782 discovery, those concerns are obviated.

What the Decision Doesn’t Do

Although the bright-line rule is quite helpful in many ways, the ZF Automotive decision is sparse.  There is plenty that it does not do.

The Court did not take the opportunity to revisit the discretionary factors enunciated in Intel Corp. v. Advanced Micro Devices (2004).  One difficulty with Section 1782 litigation is that much is left up to the individual district court judge’s or magistrate judge’s discretion in ruling on a Section 1782 petition.   The court’s analysis of a Section 1782 petition is essentially two steps: first, whether the petitioner satisfies the statutory requirements, and, if so, whether the petitioner sufficiently satisfies the discretionary elements.  Thus, even if a petition satisfies the statutory elements, the petition may still be narrowed or denied by the trial court under its exercise of discretion.  The ZF Automotive court did not provide any further guidance to lower court judges on how to exercise that discretion under Section 1782.

The ZF Automotive decision also does not include much policy discussion of the purpose of Section 1782.  In my view, the phrase “foreign or international tribunal” is ambiguous, and the Court could have relied on policy considerations to determine the scope of Section 1782, or at least to bolster its conclusions.  This was the essentially the analysis of the Second Circuit in NBC v. Bear Stearns & Co. (1999), which found the phrase ambiguous and then looked at legislative history and “policy considerations of some magnitude” to reach its conclusion that Section 1782 did not apply to private arbitration.  The primary policy consideration noted in ZF Automotive is the Court’s statement that “the animating purpose of § 1782 is comity[.]”

As a result, the Supreme Court also skipped an opportunity to address the widely lauded, if not fully accurate, benefits of arbitration, namely its efficiency, flexibility, and confidentiality.  The Supreme Court has repeatedly emphasized arbitration’s “essential virtue of resolving disputes straightaway,” as well as “the informality of arbitral proceedings … , reducing the cost and increasing the speed of dispute resolution.”  The Court has often issued pro-arbitration decisions, and those cases would have offered additional support to the ZF Automotive ruling.  The Court opted not to place this decision in that context.

However, the relative simplicity of the ZF Automotive ruling is not necessarily a bad thing for practitioners.  The Supreme Court’s dicta in Intel regarding Professor Hans Smit’s references to “arbitral tribunals” created tremendous confusion, and the ZF Automotive decision largely avoids dropping such tea leaves.

Potential Ramifications

From the practitioner’s perspective, I see several potential ramifications of the ZF Automotive decision.  First, litigious parties may commence auxiliary court proceedings in other countries in support of arbitration actions, in order to leverage those court proceedings for Section 1782 discovery in the United States.  While Section 1782 discovery can be substantively fruitful, it is also useful as a tactic to burden an opponent.  In some foreign jurisdictions, a party can commence an asset freezing action to preserve assets during the pendency of an arbitration action.  That auxiliary action can then be leveraged for Section 1782 because it is a judicial proceeding and therefore still qualifies under the clarified rule.

Second, parties may resort further to the “reasonably contemplated” path under Section 1782.  As established by the Court in Intel, a proceeding “must be in reasonable contemplation but need not be ‘pending’ or ‘imminent.’”  Even a party that has agreed to an arbitration clause could nonetheless “reasonably contemplate” commencing a court-based litigation action – or at least claim to reasonably contemplate such an action for purposes of pursuing Section 1782 discovery.  Further, a party to an arbitration action could “reasonably contemplate” bringing an auxiliary action in court, and thus leverage a contemplated second action to seek discovery under Section 1782.  The standard for “reasonable contemplation” is open to interpretation by the courts.  In the Second Circuit, reasonable contemplation generally means that “the applicant must have more than a subjective intent to undertake some legal action, and instead must provide some objective indicium that the action is being contemplated…. At a minimum, a § 1782 applicant must present to the district court some concrete basis from which it can determine that the contemplated proceeding is more than just a twinkle in counsel’s eye.”  This standard is still open to broad interpretation by the court and courts may differ widely in their application of this standard.  Moreover, most Section 1782 applications are brought ex parte, which in practice means that courts are relatively deferential to applicants and will impose tighter scrutiny on an application if and when a motion to quash is filed by a respondent.

Ultimately, the federal courts will need to be on the lookout for attempted end-runs around the ZF Automotive decision, particularly through any expanded use of the “reasonable contemplation” standard.

Full Disclosure

I have used Section 1782 as a tool for discovery in numerous cases, and I have defended against Section 1782 petitions as well.  Further, I argued that Section 1782 should not apply to private arbitration in the Ninth Circuit matter of HRC-Hainan Holding Co. v. Hu, but the decision was stayed after oral argument due to a petition for cert being granted first in Servotronics v. Rolls-Royce PLC and then ZF Automotive.  In addition, I submitted an amicus brief in ZF Automotive on behalf of five Chinese arbitrators – in support of the petitioner – to provide the Court with a pragmatic understanding of how Section 1782 would, or would not, benefit private international arbitration.  As I have repeatedly supported the position that Section 1782 should not apply to private commercial arbitration, I am pleased that the Supreme Court unanimously reached the same conclusion.

Conclusion

Ultimately, the ZF Automotive decision provides much-needed clarity for litigants and practitioners.  While the Supreme Court may have missed an opportunity to provide additional guidance regarding Section 1782 overall, the straightforward decision cleanly answered the core question that was brought before the Justices.