Stephen M. Kramarsky

New technologies, generally speaking, do not respect old boundaries. That can create great opportunities, but it can also raise unexpected challenges. The internet has global reach and provides on-demand access to a world of content that, a few decades ago, would have been unimaginable. At least that's true of the internet in America, but the internet in more restrictive countries—including China—is quite different, and the content available there is far more tightly controlled. One consequence of the ready availability of this global resource in the pocket of every American is that we may tend to forget, as legal matter, that international borders still exist and that they still have very serious consequences in our technological lives. Just ask the 40 million Americans who use (and adore) TikTok, the social media app now facing a potential ban in the U.S. because of its Chinese ownership.

When providing legal advice to companies in this space, these issues can be particularly difficult to pin down. Firms entering transactions or collecting data in one jurisdiction through an app or internet presence may need to consider the laws and regulations in dozens (or hundreds) of other jurisdictions not only around the country, but around the world. The users of apps or websites should (ideally) be at least generally aware of the laws and regulations governing how their data and information can be stored and used, which varies widely across the U.S., Asia, and the European Union. As a practical matter, it is hard enough for companies to keep track of all this, and all but impossible for users to do so.

Facing such challenges, many firms attempt to codify their obligations by agreement with their business partners and their users, often selecting arbitration as a means of settling any disputes that might arise. While arbitration clauses have grown popular in most commercial contexts, they are a near necessity in agreements involving international commerce, as they avoid jurisdictional fights and allow the parties to ensure that disputes will be handled by a known entity.

But private arbitration is not a panacea. Efficiency comes with tradeoffs—particularly in discovery, which may not be as easily available (for example, from non-parties) as it would be in a judicial proceeding. That is especially so in international arbitration where non-parties may reside in a different jurisdiction than the arbitral forum. In such instances, even if parties can convince the arbitral tribunal to order discovery, it can be nearly impossible, as a practical matter, to force non-parties to comply. Although U.S. law provides some help in a limited subset of international proceedings, that law is not always applicable. A recent Second Circuit case, In re Hanwei Guo, No. 19-781 (2d Cir. 2020), provides insight into those challenges.

Non-Party Discovery in Arbitration

Obtaining discovery from non-parties in arbitration can be challenging in the United States, whether the dispute is foreign or domestic. Unlike judicial bodies, private arbitration tribunals do not typically have subpoena powers. And, as a general matter, courts in the Second Circuit have held that the Federal Arbitration Act does not confer an arbitral tribunal the authority to compel non-parties to produce documents outside of a hearing. See Life Receivables Trust v. Syndicate, 549 F.3d 210 (2d Cir. 2008). In some cases, state law may provide for discovery in aid of arbitration, but that relief generally will not be available internationally.

U.S. law does, however, provide for some limited non-party discovery in aid of foreign actions, and parties engaged in foreign arbitration have sometimes turned to that law. The statute is 28 U.S.C. §1782, which provides that United States District Courts may in certain circumstances order non-parties to produce documents for use in a proceeding before a "foreign or international tribunal." Unfortunately, long-standing Second Circuit authority holds that the statute does not apply to private international arbitration proceedings. See Nat'l Broad. Co. v. Bear Stearns & Co., 165 F.3d 184 (2d Cir. 1999) ("NBC"). Under NBC and its progeny, participants in private international arbitrations cannot take advantage of federal law to get discovery from non-parties, but several other circuits have reached the opposite conclusion, and an intervening Supreme Court decision left a small potential opening. Recently, the Second Circuit reaffirmed its position in NBC.

'In re Hanwei Guo'

Hanwei Guo is a Chinese investor who made investments totaling over $26 million in Ocean Technology and its affiliates, businesses operating in the Chinese music streaming market. After acquiring his shares, Guo participated in a series of transactions, resulting in the sale of all of his shares in the Ocean entities. After Guo sold his shares, the Ocean entities were acquired by Tencent Music, "one of the largest music streaming services in the world." See In re Hanwei Guo.

In September 2018, after the Ocean entities were acquired by Tencent Music, but before Tencent Music launched its US IPO, Guo brought an arbitration in China against Tencent Music and the founder of the Ocean entities asserting that the transactions through which he disposed of his shares were fraudulent and misleading. That arbitration was brought before a private Chinese arbitral forum, as called for by the parties' contract.

In December 2018, Guo filed a petition in the Southern District of New York seeking discovery from four investment banks that operate in the United States for use in his Chinese arbitration under 28 USC §1782. The district court denied that petition, relying on the NBC holding that 28 USC §1782 does not extend to private international arbitrations.

The Second Circuit Opinion

Guo appealed, arguing that the district court erred because an intervening Supreme Court case superseded NBC and that the Chinese arbitral forum qualified "as an arbitration under a state-sponsored judicatory body." See In re Hanwei Guo. The Second Circuit rejected both arguments.

First, the court considered Guo's argument that the Supreme Court's decision in Intel Corp. v. Advanced  Micro  Devices, 542 U.S. 241  (2004)  ("Intel"), implicitly overruled NBC. In Intel, the court found that a public tribunal that was a "quasi-judicial agenc[y]" qualified as a "tribunal" for purposes of 28 USC §1782 to the extent it "acts as a first-instance decisionmaker." See In re Hanwei Guo. Guo asserted that Intel's holding extended 28 USC §1782's reach to private arbitral bodies. The Second Circuit disagreed, finding that question was not before the court because Intel only considered whether certain public arbitral forums fell within the ambit of the statute. Relying on NBC, as well as the weight of the authority from other circuits, the Second Circuit found that the private arbitration fora were not covered by 28 USC §1782.

Second, the Second Circuit rejected Guo's argument that the Chinese arbitration forum was a public adjudicatory body, covered by 28 USC §1782, rather than a private arbitral forum. The Second Circuit acknowledged that the Chinese arbitration forum was "created through state action" but noted that it had since "evolved" such that it no longer was covered by the statute. In re Hanwei Guo. The Second Circuit opined that the origin of the arbitral forum was not dispositive. Instead, the court applied a "functional approach" under which it considered a "range of factors" including the "independence" of the forum and the "degree to which the parties' contract controls the panel's jurisdiction." Id. Because the Chinese arbitration was run by an independent arbitral organization, the Chinese government could not intervene in the arbitration, and the panel, chosen by the parties, had its discretion explicitly limited by the parties' contractual arrangement, the court found that under NBC, it was a private arbitration outside the reach of 28 USC §1782.

An International Challenge

As the Second Circuit noted, circuits are split as to whether private arbitrations are within the scope of 28 USC §1782. It thus remains an open question whether parties may avail themselves of United States District Courts to obtain discovery from non-parties to assist in the prosecution of foreign arbitrations, but at least in New York that avenue is not available. This does not mean that arbitration is the wrong choice—particularly when the alternative is an uncertain foreign tribunal that may have its own limitations on discovery and even due process—but it is a choice, at least at the contracting stage, that comes with some tradeoffs. And, in advising clients on that choice, it is worth understanding how it may actually play out.

Stephen M. Kramarsky, a member of Dewey Pegno & Kramarsky, focuses on complex commercial and intellectual property litigation. Jack Millson, an associate at the firm, provided substantial assistance with the preparation of this article.