Opinion
1:23-MC-01445-DII
08-02-2024
IN RE EX PARTE APPLICATION OF HUNAN SOKAN NEW MATERIALS CO., LTD.'s REQUEST FOR DISCOVERY PURSUANT TO 28 U.S.C. § 1782
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
TO: THE HONORABLE DISTICT COURT
SUSAN HIGHTOWER, UNITED STATES MAGISTRATE JUDGE.
Before the Court is Star Wish Enterprises Ltd.'s Motion to Intervene and for Reconsideration of Hunan Sokan New Materials Co., Ltd.'s Application for Discovery Pursuant to 28 U.S.C. § 1782, filed February 8, 2024 (Dkt. 4); Star Wish Enterprises Ltd.'s Supplement to its Motion to Intervene and for Reconsideration, filed February 19, 2024 (Dkt. 7); Hunan Sokan New Materials Co., Ltd.'s Response, filed February 29, 2024 (Dkt. 8); Star Wish Enterprises Ltd.'s Reply, filed March 5, 2024 (Dkt. 10); and Hunan Sokan New Materials Co., Ltd.'s Sur-Reply, filed March 8, 2023 (Dkt. 12-1).
By Text Orders entered March 4, 2024, the District Court referred the motions to this Magistrate Judge for disposition, pursuant to 28 U.S.C. § 636(b)(1)(A), Federal Rule of Civil Procedure 72, and Rule 1(c) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. Because Star Wish is asking the District Court to reconsider its previous ruling, this Magistrate Judge issues a Report and Recommendation.
I. Background
Star Wish Enterprises Ltd. moves to intervene in this discovery matter and for reconsideration of the District Court's Order granting Hunan Sokan New Materials Co., Ltd.'s Ex Parte Application for Discovery under 28 U.S.C. § 1782. Star Wish is a Hong Kong limited liability consulting company in the Hong Kong Special Administrative Region of China. Zixuan Zhou Decl., Dkt. 1-1 at 4. Sokan is a Chinese manufacturer of coating materials for consumer electronic products in Hunan Province, China. Id.
In 2012, Sokan entered a Technology and Marketing Consulting Services Contract (“Contract”) with Star Wish, in which Star Wish agreed to provide consulting and marketing services to Sokan for a monthly fee. Dkt. 1 at 3-4. Under Article 4.2 of the Contract, Sokan would transfer 2% of its equity to Star Wish and Star Wish would have the right to buy another 2% of Sokan's equity if, within one year from the contract date, Star Wish ensured that Sokan became a qualified supplier of coating products for Dell Technologies, Inc. and Hewlett-Packard Co. “in terms of marketing consulting services,” or was included on their approved vendor list of coating products. Dkt. 5 at 37-39. The Contract also contained a dispute resolution clause requiring the parties to submit any unsettled disputes to “the Chinese International Economic and Trade Arbitration Commission (‘CIETAC'), Shanghai Sub-Commission, to be arbitrated according to its rules and regulations in Shanghai.” Luo Jinrong Decl., Dkt. 5 at 8.
A dispute arose as to whether Star Wish fulfilled its contractual obligation to get Sokan approved as a qualified supplier of coating products to Dell or was included on Dell's approved vendor list, and whether Star Wish was entitled to the equity shares and the option to buy more equity in Sokan. Star Wish filed an arbitration application against Sokan and Yunjian Ling, Sokan's founder and controlling shareholder, in the Shanghai International Economic and Trade Arbitration Commission (“SHIAC”), seeking a ruling that: (1) it had fulfilled its obligations under Article 4.2 of the Contract and was entitled to buy 2% of Sokan; (2) Sokan and Ling were jointly and severally liable; and (3) Sokan and Ling would pay Star Wish for its legal fees and travel expenses. Id. at 24. Sokan argued that Star Wish was not entitled to any relief. Dkt. 1. at 3.
After the parties executed the Contract, CIETAC, Shanghai Sub-Commission, changed its name to the Shanghai International Economic and Trade Arbitration Commission. Dkt. 4 at 4.
On June 15, 2023, the SHIAC Arbitral Tribunal issued its final arbitral award, finding that by the expiry of the evaluation period, Sokan had qualified as a supporting supplier of coating products of Hewlett-Packard and was included on Dell's approved vendor list, so the first condition stipulated in Article 4.2 of the Contract was fulfilled. Dkt. 5 at 53-54. But the Arbitral Tribunal concluded that Star Wish had not fulfilled a second condition under Article 4.2: that Star Wish develop opportunities for Sokan to increase sales of its coating products. Id. at 54. The Arbitral Tribunal added that Ling had transferred Sokan's equity to its subsidiary Maosong Company in 2017 and therefore could not legally transfer the shares to Star Wish. Id. at 59-60. Accordingly, the Arbitral Tribunal found that Star Wish's claim “was not supported by enough evidence,” and ruled that (1) “[a]ll the arbitration claims of the applicant are not supported,” and (2) the arbitration fee “shall be borne by the applicant.” Id. at 62.
Two months later, on August 3, 2023, Star Wish filed a second arbitration proceeding in SHIAC against Sokan and Ling seeking monetary damages arising from their failure to transfer the equity shares, as well as attorneys' fees and arbitration fees. Dkt. 1-1 at 14. This second arbitration proceeding is pending before a SHIAC Arbitral Panel. Id.
On November 28, 2023, Sokan filed an Ex Parte Application for Discovery under 28 U.S.C. § 1782 in this Court seeking discovery from Dell as to whether Sokan was a qualified supplier to Dell or on Dell's approved vendor list between 2012 and 2013. Dkt. 1. Sokan asserted that it had met all the requirements of 28 U.S.C. § 1782. The District Court granted Sokan's Ex Parte Application on January 9, 2024. Dkt. 2.
Star Wish now moves to intervene and asks the District Court to reconsider its previous ruling and vacate its Order granting Sokan's Ex Parte Application under § 1782. Sokan does not oppose Star Wish's motion to intervene, but argues that the District Court's Order should remain in place.
II. Legal Standard
Section 1782(a) seeks to facilitate third-party discovery in American district courts, from subjects that reside or are found in the district, in aid of “interested parties” in “foreign proceedings.” Banca Pueyo SA v. Lone Star Fund IX (US), L.P., 55 F.4th 469, 473 (5th Cir. 2022) (quoting 28 U.S.C. § 1782(a)). Section 1782(a) provides, in relevant part:
The district court of the district in which a person resides or is found may order him 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, including criminal investigations conducted before formal accusation. The order may be made pursuant to a letter rogatory issued, or request made, by a foreign or international tribunal or upon the application of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court.§ 1782(a). To be entitled to discovery under § 1782(a), the applicant must show: (1) the person from whom the discovery is sought “resides or is found” in the district where the application is made; (2) the discovery is “for use in a proceeding in a foreign or international tribunal”; and (3) the application is made by a foreign or international tribunal or “any interested person.” Grupo Mexico SAB de CV v. SAS Asset Recovery, Ltd., 821 F.3d 573, 574 (5th Cir. 2016) (quoting § 1782(a)). If the applicant satisfies these elements, a district court has discretion, but is not required, to grant a § 1782 discovery application. Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 264 (2004).
The Court finds that Star Wish may intervene here, “as it is well-settled that a party against whom the requested information will be used has standing to challenge the issuance of § 1782 subpoenas under the Rules of Civil Procedure and under the statute itself.” In re Rivada Networks, 230 F.Supp.3d 467, 472 (E.D. Va. 2017) (cleaned up); see also In re Thales DIS AIS Deutschland GmbH, No. 3:21-MC-303-S-BN, 2022 WL 717280, at *1 (N.D. Tex. Mar. 10, 2022) (granting motion to intervene under Rule 24 to challenge ex parte grant of application under § 1782).
III. Analysis
Star Wish argues that Sokan's Ex Parte Application under § 1782(a) should not have been granted because Sokan did not show that the discovery sought was “for use in a proceeding before a foreign or international tribunal.” For the reasons explained below, the Court agrees.
A. Private Arbitrations Do Not Fall Under Section 1782
As stated, to be entitled to discovery under § 1782, an applicant must show that the discovery is “for use in a proceeding in a foreign or international tribunal.” For many years, courts debated whether private international arbitrations qualified as “a proceeding in a foreign or international tribunal” under the statute. In Republic of Kazakhstan v. Biedermann Int'l, 168 F.3d 880 (5th Cir. 1999), the Fifth Circuit concluded that § 1782 did not apply to private international arbitrations. The court reversed a grant of a § 1782 application seeking discovery to be used in an arbitration proceeding before the Arbitration Institute of the Stockholm Chamber of Commerce, a private arbitration organization. After examining the language and history of § 1782, the court held that “the term ‘foreign and international tribunals' in § 1782 was not intended to authorize resort to United States federal courts to assist discovery in private international arbitrations. The provision was enlarged to further comity among nations, not to complicate and undermine the salutary device of private international arbitration.” Id. at 883.
In so holding, the Fifth Circuit followed the Second Circuit's decision in National Broad. Co. v. Bear Stearns & Co., 165 F.3d 184, 191 (2d Cir. 1999), concluding that § 1782 does not apply “to an arbitral body established by private parties.” The Seventh Circuit later joined the Fifth and Second Circuits. See Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689 (7th Cir. 2020). But the Fourth and Sixth Circuits held the opposite, finding that § 1782 applied to private arbitration proceedings. Servotronics, Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020); In re Application to Obtain Discovery for Use in Foreign Proc., 939 F.3d 710 (6th Cir. 2019).
In ZF Automobile US, 596 U.S. 619, 633 (2022), the United States Supreme Court resolved the circuit split, holding that § 1782 requires a “foreign or international tribunal to be governmental or intergovernmental” and excludes “[p]rivate adjudicative bodies,” so private adjudicatory bodies do not qualify as “foreign or international tribunals” under the statute. The Court then found that the arbitration panels before it-the German Institution of Arbitration (“DIS”), a private disputeresolution organization based in Berlin, and an ad hoc arbitration panel authorized by a bilateral treaty between Russia and Lithuania-did not qualify as foreign or international tribunals under § 1782.
First, DIS arbitration did not qualify as a governmental or intergovernmental body because (1) the parties had agreed in a private contract that DIS, a private arbitration organization, would arbitrate any disputes between them; (2) the DIS arbitral panel operated under DIS rules “just like panels of any other private arbitration organization operate under private arbitral rules”; and (3) the government was not involved “in creating the DIS panel or prescribing its procedures.” Id. at 62425. The Court also rejected the applicant's argument that the DIS arbitral panel qualified as a governmental body because German law governed some aspects of the arbitration and courts in Germany help enforce arbitration agreements: “[P]rivate entities do not become governmental because laws govern them and courts enforce their contracts-that would erase any distinction between private and governmental adjudicative bodies. Luxshare's implausibly broad definition of a governmental adjudicative body is nothing but an attempted end run around § 1782's limit.” Id. at 633-34.
The ad hoc arbitration panel also did not qualify as a governmental entity even though a sovereign nation was on one side of the dispute, and the option to arbitrate was in an international treaty rather than a private contract. Id. at 634. The Court reasoned that: “What matters is the substance of their agreement: Did these two nations intend to confer governmental authority on an ad hoc panel formed pursuant to the treaty?” Id. at 634. The Court found that the ad hoc panel did not exercise governmental authority because (1) it was not a preexisting body, but formed to adjudicate investor-state disputes; (2) the treaty did not create the panel, but simply referenced the set of rules that governed its formation and procedures if an investor chose that forum; (3) the panel consisted of individuals chosen by the parties and lacked any official affiliation with Lithuania, Russia, or any other governmental or intergovernmental entity; and (4) the panel received no government funding, the proceedings were confidential, and any award would be made public only with the consent of both parties. Id. at 635-36. Thus, the ad hoc arbitration panel was not “imbue[d] . . . with governmental authority.” Id. at 637.
B. SHIAC is Not a “Foreign or International Tribunal” under Section 1782
Star Wish argues that SHIAC is excluded from § 1782 because it is “a private and independent” organization offering dispute resolution services in China that “exercises no governmental authority.” Dkt. 4 at 4-5. Star Wish relies on sworn testimony from Dou Shaowu, a SHIAC arbiter and former judge in China, that SHIAC is “a private institution offering dispute resolution services” and “independent from the government.” Dkt. 5 at 3. Shaowu states that: (1) SHIAC has jurisdiction over a case “only when the parties agreed so,” and such jurisdiction is not delegated by the Chinese government; (2) SHIAC offers parties a list of more than 1,400 independent arbitrators from different nations who do not act on behalf of the Chinese government; (3) the arbitration panel is not a preexisting body but is formed by the parties, rather than the Chinese government; (4) arbitrators are chosen by the parties themselves, or by SHIAC if the parties cannot agree; (5) the parties can determine the specific rules to apply and can make special agreements regarding the rules; (6) SHIAC makes its arbitration rules and the Chinese government does not participate in the rule-making process; (7) the arbitral panel functions independently from the government; and (8) SHIAC arbitration rules require that the arbitrations are confidential. Id. at 34. Star Wish also points out that Article 14 of The Arbitration Law of the People's Republic of China stipulates that “arbitration commissions shall be independent from administrative organs” and that SHIAC is a “social organization.” Id. at. Star Wish adds that none of the arbiters on the SHIAC Arbitral Panels here had any affiliation with the Chinese government. Dkt. 4 at 6-7.
Sokan disagrees that SHIAC is an independent private organization, arguing that it is “imbued with governmental authority by the Chinese government.” Dkt. 8 at 4. Sokan contends that SHIAC (1) “was judicially registered and established in 1988 with the official approval of the Shanghai Municipal People's Government in accordance with the law of China”; (2) “was established upon the approval of the Shanghai Municipal Government and Shanghai Commission for Public Sector Reform”; and (3) “is included in the People's Republic of China Supreme People's Court's ‘One-Stop' Diversified Mechanisms for Resolving International Commercial Disputes.” Dkt. 1-2 at 10. Sokan contends that the Shanghai Municipal government “was thus involved in the creation and development of the SHIAC and involved in establishing its procedures.” Dkt. 8 at 5.
While the Supreme Court and the Fifth Circuit have not addressed whether SHIAC or its predecessor entity, CIETAC, Shanghai Sub-Commission, qualify as foreign or international tribunals under § 1782, the Second Circuit held in In Re Guo, 965 F.3d 96, 107 (2d Cir. 2020), that CIETAC is a private arbitration organization that falls outside the statute. The court acknowledged that CIETAC “was originally created through state action,” but found that CIETAC evolved to function “essentially independently of the Chinese government in the administration of its arbitration cases.” Id. (citation omitted). The Second Circuit clarified that the “‘foreign or international tribunal' inquiry does not turn on the governmental or nongovernmental origins of the administrative entity in question,” but courts consider a range of factors,
including the degree of state affiliation and functional independence possessed by the entity, as well as the degree to which the parties' contract controls the panel's jurisdiction. In short, the inquiry is whether the body in question possesses the functional attributes most commonly associated with private arbitration. Here, considering these factors, it is clear that CIETAC arbitrations are private international commercial arbitrations falling outside the ambit of § 1782.Id. The court explained that the focus of state affiliation “is on the extent to which the arbitral body is internally directed and governed by a foreign state or intergovernmental body.” Id. The court stated that “CIETAC possesses a high degree of independence and autonomy, and, conversely, a low degree of state affiliation,” because: (1) the CIETAC panel derives its jurisdiction exclusively from the agreement of the parties and has no jurisdiction except by the parties' consent; (2) the parties select their own arbitrators from a pool of arbitrators who do not purport to act on behalf of the Chinese government; (3) the arbitrators come from many different backgrounds and nations; and (4) CIETAC maintains confidentiality from all non-participants during and after arbitration, limiting opportunities for ex parte intervention by state officials. Id. at 107-08.
The Second Circuit further found that “the limited review provided to parties to CIETAC arbitrations in Chinese courts and the role of the Chinese government in enforcing awards” is “not enough to render CIETAC a ‘foreign or international tribunal.'” Id. at 107. “Because the provisions of Chinese law relied on by Guo merely control the enforceability of arbitrations in China in almost the same manner and to the same extent as the FAA in the United States, they do not convert CIETAC arbitrations into state-sponsored endeavors.” Id. at 108. Furthermore:
The fact that CIETAC panels may ultimately rely on the authority of China to enforce their decisions does not mean that CIETAC arbitration panels are public entities, any more than a corporation becomes a public entity because of its reliance on a given state's commitment to enforce its contracts or uphold its charter.Id. Considering these factors, the Second Circuit concluded that “CIETAC panels function in a manner nearly identical to that of private arbitration panels in the United States. As such, we conclude that CIETAC arbitration is best categorized as a private commercial arbitration for which § 1782 assistance is unavailable.” Id.
This Court is not bound by the Second Circuit's holding in Guo, but finds its reasoning persuasive and applicable. In light of ZF Automotive, Biedermann, and Guo, the following evidence supports a finding that SHIAC is not a governmental or intergovernmental body, but a private arbitration organization: (1) the SHIAC Arbitration Panel was not a preexisting body, but one formed to adjudicate the dispute; (2) the Chinese government did not appoint the arbiters or prescribe the rules applied; (3) the parties chose to arbitrate under their private contract; (4) the arbiters were not government officials; and (5) the proceedings were confidential. See ZF Automotive, 596 U.S. at 635-36; Guo, 965 F.3d at 107-08. That the local government was involved in SHIAC's origin, the parties can initiate litigation in Chinese courts to challenge the arbitration awards, and SHIAC is included in the “One Stop” program does not show that it is exercising governmental authority. See Guo, 965 F.3d at 107.
Sokan argues that the Court should not rely on Guo because it has been “superseded by the Supreme Court's holding in ZF Automotive.” Dkt. 8 at 11. Sokan is mistaken. First, ZF Automotive did not address Guo or whether CIETAC/SHIAC are governmental bodies under § 1782. Second, ZF Automotive did not abrogate Guo. As stated, the Supreme Court implicitly adopted the Second Circuit's holding in finding that private adjudicative bodies do not qualify as foreign or international tribunals under § 1782.
C. Conclusion
The Court finds that Sokan has not sustained its burden to show that SHIAC is a governmental or intergovernmental body that qualifies as a “foreign or international tribunal” under § 1782. Because Sokan does not meet the requirement that the discovery sought is “for use in a proceeding before a foreign or international tribunal,” it is not entitled to discovery under § 1782.
IV. Recommendation
This Magistrate Judge RECOMMENDS that the District Court: (1) GRANT Star Wish Enterprises Ltd.'s Motion to Intervene and for Reconsideration (Dkt. 4); (2) VACATE its previous Order Granting Hunan Sokan New Material Co., Ltd.'s Application for Discovery Pursuant to 28 U.S.C. § 1782 (Dkt. 2); (3) DENY Sokan New Material Co., Ltd.'s Application for Discovery Pursuant to 28 U.S.C. § 1782 (Dkt. 4); and (4) CLOSE this case.
IT IS FURTHER ORDERED that the Clerk remove this case from this Magistrate Judge's docket and return it to the docket of the District Court.
V. Warnings
The parties may file objections to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battle v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987). A party's failure to file written objections to the proposed findings and recommendations contained in this Report within fourteen (14) days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except on grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).