4th Circuit allows evidence for foreign arbitration

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Teeing up a circuit split, a panel of the 4th U.S. Circuit Court of Appeals has held that a party to private arbitration in the United Kingdom can obtain testimony from residents of South Carolina for use in the arbitration.

Servotronics supplied valves to Rolls-Royce for use in an engine later installed on a new Boeing 787 Dreamliner aircraft. During testing, the engine caught fire and resulted in significant damage to the plane. Rolls-Royce settled Boeing’s claim for damages and then sought indemnification of $12.8 million from Servotronics, taking the position that the valve malfunctioned during the test, causing the fire.

Servotronics rejected the claim and Rolls-Royce initiated an arbitration. Under the terms of their contract, the arbitration will be held in the United Kingdom under the rules of the Chartered Institute of Arbitrators. In an effort to collect evidence to support its defense in the arbitration proceedings, Servotronics sought an order under 28 U.S.C. § 1782 from the U.S. District Court in South Carolina authorizing the service of subpoenas on three current or former Boeing employees residing in the state.

Section 1782, “Assistance to foreign and international tribunals and to litigants before such tribunals,” provides that a federal district court has the discretion to order a resident of the district “to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal.” Relying on decisions from the 2nd and 5th Circuits, the district court denied the motion, holding that private arbitral bodies are not “tribunals” as used in § 1782(a).

But in Servotronics Inc. v. The Boeing Co. (VLW 020-2-079), a unanimous opinion written by Judge Paul V. Niemeyer, the 4th Circuit reversed, highlighting changes made to the statute that removed the terms “judicial” and “court” and replaced them with the term “tribunal.”

“The current version of the statute, as amended in 1964, thus manifests Congress’ policy to increase international cooperation by providing U.S. assistance in resolving disputes before not only foreign courts but before all foreign and international tribunals,” Niemeyer wrote. “This policy was intended to contribute to the orderly resolution of disputes both in the United States and abroad, elevating the importance of the rule of law and encouraging a spirit of comity between foreign countries and the United States.”

Circuit split broadens

Servotronics argued that the federal appellate panel decisions relied upon by the district court, both issued in 1999, were placed in doubt by a 2004 U.S. Supreme Court opinion in Intel Corp. v. Advanced Micro Devices, Inc. in which the justices ruled that a district court could entertain an application under § 1782 to assist proceedings before the Commission of the European Communities. Servotronics argued that Intel’s flexible approach doesn’t require that a tribunal be public, state-sponsored or governmental.

Rolls-Royce and Boeing argued that Intel didn’t expressly overrule the 2nd and 5th Circuit decisions, but the 4th Circuit disagreed.

“The statute reflects a long-term—over 150-year—policy of Congress to facilitate cooperation with foreign countries by ‘provid[ing] federal-court assistance in gathering evidence for use in foreign tribunals,’” Niemeyer wrote, a policy reinforced by the changes made in 1964 to delete the terms “court” and “judicial” to use the phrase “tribunal.”

Niemeyer also cited a 6th Circuit decision published after the district court’s ruling that concluded the language of the federal statute unambiguously includes private commercial arbitral panels, creating a split of authority among the circuits. The defendants’ interpretation of § 1782 was “too narrow” an understanding of arbitration, whether conducted in the United States or the United Kingdom, Niemeyer wrote, and the term “foreign tribunal” isn’t limited to an entity that exercises government-conferred authority.

Citing the Federal Arbitration Act (FAA) and subsequent case law, Niemeyer explained that “arbitration in the United States is a congressionally endorsed and regulated process that is judicially supervised. And it was developed as a favored alternative to the judicial process for the resolution of disputes. Thus, contrary to Boeing’s general assertion that arbitration is not a product of ‘government-conferred authority,’ under U.S. law, it clearly is.”

The UK’s Arbitration Act operates similarly and in fact, provides more governmental regulation than the FAA, Niemeyer added.

“Thus, even if we were to apply the more restrictive definition of ‘foreign or international tribunal’ adopted by [2nd and 5th Circuits] and now advanced by [the defendants]—that the term refers only to ‘entities acting with the authority of the State’—we would conclude that the UK arbitral panel charged with resolving the dispute between Servotronics and Rolls-Royce meets that definition,” the panel wrote.

Congressional intent

Niemeyer also rejected the “parade of horribles” advanced by the defendants, who argued that applying § 1782 to arbitration proceedings would lead to bizarre results where participants could obtain broader discovery in the United States as part of a foreign arbitration proceeding than participants in comparable domestic arbitrations. The provision is not designed to authorize full discovery in connection with any proceeding of a foreign tribunal, nor does the application of the statute create a conflict with the FAA by encouraging the use of foreign arbitrations and diminishing the benefits of arbitration under the FAA.

“While § 1782 may expand the geographical scope of a foreign arbitral panel’s authority beyond what that panel or an analogous American panel would otherwise have, that aspect of § 1782 is the result of Congress’ purposeful decision to authorize U.S. district courts to provide assistance to foreign tribunals as a matter of public policy,” Niemeyer wrote. “Moreover, any undue burdens that might result in this regard can and should be managed by the district court with the discretion conferred on it by § 1782(a).”

But the appeals court declined to order the district court to issue the three subpoenas requested by Servotronics, and instead remanded for further proceedings on the application so the district court could apply its discretion on the matter.

Michael B.T. Wilkes of Spartanburg, South Carolina, who represented Servotronics, declined to comment on the decision, as did Henry L. Parr Jr. of Greenville, South Carolina, who represented Rolls-Royce.

Seattle lawyer Scott P. Martin, who represented Boeing, did not respond to a request for comment.