On Wednesday, the Supreme Court returns to the never-ending project – of judges, legislators, lawyers and legal scholars – to make lawsuits less expensive, fairer and, candidly, less subject to manipulation by crafty lawyers. This case, the only one set for hearing tomorrow, projects that endeavor onto the international stage, involving both U.S. federal courts and foreign tribunals.
The “live” audio (no video) can be heard at Quick Links on the Supreme Court’s homepage – supremecourt.gov – and at c-span.org/supremecourt and C-Span Now App.
Wednesday’s hearing: ZF Automotive US v. Luxshare Ltd., consolidated for an 80-minute session with AlixPartners LLP v. Fund for Protection of Investors’ Rights in Foreign States.
Background: Americans tend to be well aware of the Constitution’s Fifth Amendment, which gives everyone the right not to be forced to provide evidence that could get them into serious legal trouble, maybe facing a criminal charge. What is not as well known is that the right does not protect a private individual or a company from having to give up evidence in a civil case that could be quite harmful to their interests (unless, of course, the evidence points to a crime).
In civil lawsuits, each side customarily has the opportunity to seek evidence from the other side to bolster their side of the dispute. That is a process more of compulsion than cooperation. It is called “discovery,” and the process means just that. Questioning to discover evidence is done with the witness under oath, with legal penalties for not being truthful.
Year in and year out, indeed in one decade after another, there are complaints that this process can use up a lot of lawyer time with the inevitable result of rising legal bills. A Supreme Court Justice once cited a survey of lawyers suggesting that 60 percent of the cost of a typical civil lawsuit in federal court is made up of lawyers’ fees.
But there are other complaints, too. This process can delay a case, and, unless each side has the same kind of financial ability to pay lawyers, can force a settlement of the case without a trial. One scholarly study of these problems suggested that there was not really a need for more rules to govern the process, but rather for “behavioral change in the key participants” – lawyers and the judges who oversee the process.
Judges are supposed to monitor discovery closely, but it can get out of hand. Lawyers, of course, have an ethical obligation to work zealously to protect their clients’ interests. At times, though, the zeal can be excessive.
A notorious example was the civil lawsuit by an Arkansas woman, Paula Jones, against President Bill Clinton, claiming he sexually harassed her when he was governor and was her boss.
When the Supreme Court in 1997 allowed that case to go forward, rejecting Clinton’s claim of legal immunity, it expressed confidence that the trial judge would keep discovery under close control. That did not happen, and discovery ultimately turned up evidence about Clinton and other women, leading ultimately to a sweeping criminal investigation and to Clinton’s impeachment for lying when questioned under oath. (He was not convicted by the Senate and Paula Jones settled the lawsuit privately.)
Sensational as that situation was, it well illustrates the difficulty of reining in lawyers turned loose in the pursuit of evidence to help a client.
The hearing before the Court on Wednesday involves nothing approaching the headline-making discovery process that engulfed a President. It deals with commonplace business conduct, but, it, too, hints at how “discovery” may invite legal manipulation.
It involves two separate cases, consolidated for a single hearing. The underlying legal issue is whether the lawyers involved will be allowed to push the discovery process beyond what has been customary. The modern expansion of global commerce has been accompanied, of course, by a rising number of disputes between commercial entities from different countries.
Although Congress has been working for almost 167 years (since 1855) to provide authority for federal courts to assist in gathering evidence for use in foreign tribunals, the version of the law that is at issue in these new cases was enacted in 1964. The Supreme Court has ruled on the scope of that version only once before, and that was almost 18 years ago. (Only two Justices who took part in that decision remain on today’s Court.)
Through the decades, Congress has steadily expanded the kind of foreign tribunal that an American court could assist in evidence discovery. For a long time, that option was available only if a foreign government was directly involved in the dispute. Now, the law reads that it allows assistance “for use in a proceeding in a foreign or international tribunal” without specifying what that category includes. The law allows a federal trial judge to order a person or entity within the U.S. to give testimony or documents for use in such a tribunal.
The two new cases involve different factual scenarios under that law.
In one, a U.S.-based subsidiary of a German auto parts company is trying to avoid providing evidence demanded by a Hong Kong-based company for use in a commercial arbitration proceeding in Germany. The American subsidiary is a Michigan firm, ZF Automotive US Inc. It has been drawn into arbitration by the Hong Kong firm, Luxshare, Ltd., which claims that the U.S. firm concealed vital information when Luxshare bought out part of the business of ZF US’s parent German company.
In the other case, a New York company is trying to fend off a demand for evidence from its chief executive officer by a Russian investors’ group for evidence to be used in an arbitration in Lithuania that grows out of failure of a Lithuanian bank. Simon Freakley is the CEO of the New York consulting firm, AlixPartners LLP, and he previously had a role as a financial adviser to the failing bank. Evidence from Freakley is being sought by the Fund for Protection of Investor Rights in Foreign States, a Russian entity that is pursuing shareholder claims against the bank.
The dispute over the auto parts companies’ transaction raises the question of whether the law on discovery applies when the dispute is unfolding between two private parties in a foreign arbitration proceeding.
The dispute over the failed bank in Lithuania tests whether that law applies when the dispute is unfolding between what is asserted to be a private Russian investment entity and the government of Lithuania, under an arbitration treaty between the two countries. While the government of Lithuania is a party in the dispute, the dispute itself is purely private over shareholder rights, and the tribunal has no ties to either government, Russia’s or Lithuania’s. .
The federal courts of appeals have become enmeshed in deeply conflicting interpretations of the 1964 evidence-gathering law, leading the Supreme Court to step in.
The Biden Administration’s Justice Department has entered both of these cases, and it is taking the firm position that the 1964 law allows discovery for evidence in America only if the tribunal overseas is governmental in nature. It argues that the two arbitration panels at issue in these cases do not qualify. Both, the Department asserts, are “ad hoc” (this dispute only) panels, not ongoing government tribunals.
The questions before the Court: Do U.S. federal courts have authority to order a U.S. person or entity to provide evidence for use in a foreign arbitration between two private commercial entities? Do those courts have authority to do so when the evidence will be used in a foreign commercial arbitration in which one party is a foreign government but the dispute is private?
Significance: Settlement of disputes by arbitration is often the accepted (if not always mutually valued) mode of resolving commercial disagreements, as shown by a discussion in this space of another case heard on Monday by the Supreme Court. Wednesday’s case moves the discussion on into the trans-national sphere where arbitration appears to be increasingly used as a mode of settling business disagreements.
But these cases also figure into the larger project of curbing the use of legal processes in a manipulated way – here, the arbitration process. Over the decades that Congress has been tinkering with the evidence-gathering issue in the international context, it has been careful to keep that within fairly tight boundaries. The federal government, too, appears to have consistently monitored how that law is deployed in international commerce.
Both of the cases appear, at least in part, to have involved manipulation of the opportunity to pursue arbitration.
In the auto parts case, the Hong Kong company waited more than two years after the completion of its purchase of part of the German company before it invoked the arbitration clause in that agreement, and turned to a federal court in Detroit for orders to require the American subsidiary and some of its executives to produce evidence for the arbitration.
The Lithuanian bank case suggests a developing problem of wider scope in foreign arbitration: using compulsion to get evidence in a way that is generally not possible for arbitration proceedings that occur only within the U.S. The law of arbitration in this country significantly narrows the opportunity of either side to build their case by demanding help from the other side. Indeed, the kind of arbitration invoked by the Russian entity did not even exist in 1964, when Congress passed the version of the evidence law which it now seeks to exploit.
(NOTE: It is one of the ironies involving the failed Lithuanian bank case that it is a Russian entity, no doubt in some way linked to or at least controlled by that nation’s totalitarian government, that is insisting on the fulfillment of the solemn obligation of a treaty. That case comes up in the Supreme Court when the world is witnessing Russia’s brutal invasion of Ukraine, in blatant disregard of its obligations under the United Nations Charter. That is not likely to play any part in the Supreme Court review of that case, because the terms of the Russia-Lithuania treaty are not directly at issue in the case. It may be, however, that the fraying rupture of Russia’s economic relations with much of Europe over the invasion could affect the future of arbitration in which it has an interest.)
Next week, the Court will hear four more cases.