SCOTUS considers U.S. involvement in foreign litigation evidence gathering
2022 MERACDBRF 0001
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By Katie Pasek
Westlaw Mergers and Acquisitions Daily Briefing
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March 31, 2022
(March 31, 2022) - The U.S. Supreme Court heard oral arguments March 23 in a case disputing whether a U.S. court can order discovery for litigation being held in Germany over the acquisition of an automotive parts maker.
ZF Automotive US Inc. v. Luxshare Ltd., No. 21-401; AlixPartners LLP et al. v. Fund for Protection of Investors' Rights in Foreign States, No. 21-518, oral argument held, (U.S. Mar. 23, 2022).
During the nearly two-hour session, the high court examined terminology in 28 U.S.C.A. § 1782, the statute that allows litigants of foreign cases to request U.S. court assistance in gathering evidence for use in a "foreign or international tribunal."
"The justices, at least those who asked questions, appeared to agree that the statutory text of Section 1782 does not give a clear answer in this case," according to Duane Loft of Boies Schiller Flexner LLP, who is not involved with the case.
ZF Automotive US Inc. petitioned the high court to resolve a circuit court split in which the 4th and 6th Circuits have ruled that commercial arbitration panels are considered "foreign tribunals" under Section 1782, while the 2nd, 5th and 7th Circuits have found such panels are not subject to the statute.
According to Rachel B. Goldman of Bracewell LLP, who is also not involved in the case, the high court's decision could have consequences for the U.S. legal system.
"If the Supreme Court agrees with the minority of the circuit courts, it will open the flood gates for comprehensive U.S. style discovery in any international arbitration that has any connection to the U.S., will create significant burdens on litigants and non-parties alike, and will eviscerate the perceived advantage of international arbitration over U.S. litigation," she said.
The Supreme Court consolidated ZF Automotive's case with one filed by AlixPartners LLP, which posed the same question in a dispute involving a Russian national's investments in a now-insolvent Lithuanian bank.
Allegations in ZF Automotive
In April 2018, Hong Kong-based Luxshare Ltd. purchased two business units from ZF Automotive, a Michigan-based indirect subsidiary of German company ZF Friedrichshafen AG, according to court records. The purchase agreement stipulated that any disputes would be resolved by an arbitration panel in Germany.
Luxshare says it later learned that the seller omitted negative information regarding the units' largest customers to inflate the $1 billion purchase price.
The buyer filed a motion in the U.S. District Court for the Eastern District of Michigan, ahead of arbitration proceedings in Germany, seeking discovery from ZF Automotive and two executives involved with the due diligence process.
The District Court, citing 6th Circuit precedent, overruled ZF Automotive's objections that the arbitration panel did not meet Section 1782's definition of a tribunal.
Oral argument
During oral argument, the Supreme Court justices questioned whether the meaning of "foreign tribunal" should be examined as a phrase, which ZF Automotive argued, or as individual words, which Luxshare contended.
"Why should we go with the ordinary meaning of the phrase as a whole when we seem to have cases that sometimes go with the literal meaning of individual words?" Justice Brett M. Kavanaugh asked Roman Martinez of Latham & Watkins LLP, who represented ZF Automotive.
Martinez referenced a March 12 study by law professor James Phillips of Chapman University and linguist Jesse Egbert of Northern Arizona University that used "corpus linguistics" to examine how "foreign tribunal" had been used in legal and nonlegal speech.
According to Reuters columnist Alison Frankel, the study concluded that prior to the enactment of Section 1782, the phrase had never been used to describe private commercial arbitration.
Chief Justice John G. Roberts Jr. expressed skepticism about the study, saying: "Yeah, I don't quite know what to make of that. That's — that's something new."
But the chief justice also did not appear ready to dismiss the phrase. He later questioned Luxshare counsel Andrew R. Davies of Allen & Overy LLP about examining the individual words over the phrase itself.
"Well, your friend on the other side makes the point that you need to look at the phrase as a phrase. It's not what does a tribunal mean, what does foreign mean? It's what is a foreign tribunal?" Chief Justice Roberts asked.