A Chinese manufacturer should not be allowed to use the U.S. legal system to compel production of evidence in a private arbitration taking place overseas, the Supreme Court heard March 23 in a case fast-tracked from a federal appeals court.
The Supreme Court’s decision in the case may help to determine the reach of the complex civil discovery process available in U.S. courts.
The case, ZF Automotive US Inc. v. Luxshare Ltd., court file 21-401, was heard together with a similar case, AlixPartners v. Fund for Protection of Investor’s Rights, court file 21-518.
Livonia, Michigan-based ZF Automotive manufactures automotive parts and industrial technology.
Luxshare, a Hong Kong limited liability company, manufactures consumer electronics, communications, and automotive products. Luxshare is sometimes called “little Foxconn,” after Taiwan-based Foxconn, a contract manufacturer of electronics in the Apple supply chain that has a large number of Chinese supplier locations.
Luxshare is disputing the value of assets of a business unit in ZF’s German parent company, ZF Friedrichshafen AG, that Luxshare purchased in 2017 for about $1 billion. Luxshare claims it was misled about the profitability of two of ZF’s businesses. The deal stipulated that disputes would be resolved according to the rules of the German Arbitration Institute, which goes by the German acronym DIS.
A U.S. District Court in Detroit approved a request to subpoena ZF Automotive, ordering it to hand over the relevant documents to Luxshare.
The Supreme Court granted the petition in ZF Automotive US Inc. v. Luxshare Ltd. on Dec. 10, 2021, sidestepping the U.S. Court of Appeals for the 6th Circuit before it had ruled in the case. Before that, on Oct. 27, 2021, the Supreme Court also blocked the lower court’s order compelling ZF Automotive to produce the documents demanded by Luxshare.
In the ZF Automotive case, the specific legal issue is whether Section 1782 of Title 28 of the U.S. Code, which allows parties to lawsuits to call upon U.S. courts to aid in the gathering of evidence to be used in “a foreign or international tribunal,” covers private commercial arbitration tribunals. The appellate courts for the 4th and 6th circuits have held that it does; the 2nd, 5th, and 7th circuits have held that it does not.
ZF Automotive contends the phrase “foreign or international tribunal” refers only to government-backed dispute resolution bodies. Luxshare takes the position that Congress intended the phrase to be interpreted broadly, saying it covers just about any dispute resolution body governed by a foreign jurisdiction. The Biden administration sides with ZF in the case.
The Supreme Court had been poised to consider the issues involved in the case last fall, but the parties in Servotronics Inc. v. Rolls-Royce PLC settled. That case had been scheduled for oral argument but was dismissed on consent of the parties.
ZF Automotive attorney Roman Martinez told the Supreme Court during oral arguments March 23 that “Section 1782’s text, structure, and history make clear that district courts are not authorized to grant discovery for use in purely private foreign arbitrations.”
“The key statutory language is the complete phrase ‘foreign tribunal.’ That phrase most naturally refers to government tribunals, just like the phrase ‘foreign leader’ most naturally refers to government leaders. Ordinary and legal usage confirm that interpretation.”
“Luxshare misreads the text and ignores the context. It can’t identify a single person, not a lawmaker, judge, lawyer, scholar, anyone who ever claimed 1782 covers private arbitrations” over the past 58 years, Martinez said.
“Luxshare’s approach would flood district courts with discovery applications, undermine the goals of arbitration, and inflict asymmetric harm on American companies and American businesses,” the lawyer said.
“Congress didn’t intend these results,” Martinez said.
“Congress did not force American judges to referee private discovery fights in purely private, non-governmental arbitrations abroad.”
Justice Elena Kagan pushed back against Martinez, saying that years ago “arbitration was not as settled a practice as it is now, but now we just commonly refer to arbitral tribunals … and we don’t think anything of it.”
She suggested she was perplexed by the notion that when the word “foreign” is placed “in front of something, all of a sudden it connotes government,” adding “foreign language doesn’t connote government.”
“If I say it’s a foreign university, I may or may not be speaking of a government-run school,” Kagan said. “If I say it’s a foreign city, all I mean is a city that happens to be in another country. I mean, it all depends, right?”
“I’m all for … being serious about language when there’s something to be serious about, but I don’t know … what this language tells us.”
Justice Stephen Breyer said it is probably true when the statutory language was written the drafters were thinking of government, “but the language can be read more broadly, and, unlike then, now commercial arbitration is resolving lots and lots of matters that businesses used to bring before courts.”
Luxshare’s attorney, Andrew Rhys Davies, said Congress “has authorized assistance to foreign tribunals.”
“The best, most natural interpretation of that broad phrase includes a foreign-seated commercial arbitral tribunal. A commercial arbitral tribunal is a tribunal because it’s authorized to render an adjudication of the parties’ legal rights that is final, unless it’s set aside by a reviewing court.”
This is consistent with Supreme Court precedent “and with contemporaneous usage of ‘tribunal’ to mean commercial arbitral tribunals,” Davies said.
A foreign-seated “commercial arbitral tribunal is foreign because its legal domicile or its juridical home is in another jurisdiction,” the lawyer said. “There is no basis to draw an arbitrary line at the tribunals of foreign countries.”
For the third consecutive day, Justice Clarence Thomas, who is reportedly in hospital, was absent from the courtroom. Chief Justice John Roberts said that he would, nonetheless, participate in the case.
