For more than a half a century, the United States has provided a powerful tool to obtain U.S. style discovery in aid of foreign proceedings. For years the statute was seldom utilized. But, in recent years, there has been a considerable uptick in its use.
Under 28 U.S.C. § 1782, a federal district court may grant an applicant the authority to issue subpoenas under Rule 45 of the Federal Rules of Civil Procedure to obtain documents or testimony. An applicant needs to show three things:
(1) the applicant is an “interested person” in a foreign proceeding;
(2) the proceeding is before a foreign “tribunal,” which could include actual or contemplated judicial or other governmental proceedings; and
(3) the person from whom evidence is sought “resides or is found” in the district of the court before which the application has been filed.
If the threshold statutory factors are shown, the district court typically considers certain factors provided by the U.S. Supreme Court in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004), to decide whether to exercise its discretion to grant the application.
In In re Application of Ruiz, the Second Circuit considered an application from investors in Banco Popular Espanol, S.A. (“BPE Investors”), which was once Spain’s sixth-largest bank and later was forced by the European Union and the government of Spain into resolution and sold to Banco Santander, S.A. (“Santander”) for the nominal price of €1. The BPE Investors filed an application in the Southern District of New York seeking discovery from Santander and certain of its affiliates in support of foreign proceedings regarding the sale.
On appeal, the Second Circuit answered two important questions. First, what does it mean to reside or be found in a federal district? Second, what is the extraterritorial reach of Section 1782?
What Does It Mean to Reside or Be Found in a District?
As to the first question, Santander, which is neither incorporated nor has its principal place of business in the United States, much less New York, argued that to reside or be found in a district requires that a target of Section 1782 discovery be subject to general jurisdiction under the standard set by the Supreme Court in Daimler AG v. Bauman, 571 U.S. 117 (2014). In other words, Santander argued that discovery could not proceed in any judicial district against an entity like it that has its principal place of business and place of incorporation outside the United States. Alternatively, Santander argued that if the “resides or is found” language in Section 1782 also extends to specific personal jurisdiction, the request for discovery does not arise out of or relate to Santander’s activities in the district. Rather, Santander argued that the BPE Investors tried to bootstrap a finding of specific personal jurisdiction based on the weight of general personal jurisdiction contacts with the district.
The BPE Investors argued that to reside or be found in the district merely means that the entity must be subject to personal jurisdiction in the district. In other words, even if the discovery target is not subject to general personal jurisdiction, it may be subject to specific personal jurisdiction based on its contacts with the forum and the relationship of the discovery to its contacts. The BPE Investors pointed to the fact that Santander has physical branch offices in New York, manages substantial assets in New York, and availed itself of New York’s financial markets in connection with the BPE takeover.
While no federal court of appeals had yet decided this issue, a number of district courts have held that Daimler bars Section 1782 discovery where the target is neither incorporated in nor has its principal place of business in the district. Other district courts have used a more relaxed standard and held that mere presence of an office in the district is sufficient.
The Second Circuit held that a person or entity “resides or is found” within a district when the district court has personal jurisdiction over the person or entity consistent with due process. In other words, as long as there is some basis for personal jurisdiction over the person or entity—general or specific personal jurisdiction—the statutory requirement that the person or entity “resides or is found” in the district is met. With respect to Santander, the Second Circuit found that there was an insufficient basis to assert either general or specific personal jurisdiction. Thus, while they could proceed with obtaining discovery from a separate Santander affiliate headquartered in New York, the BPE Investors could not obtain discovery from Santander itself.
What Is the Extraterritorial Reach of Section 1782?
As to the second question, Santander argued that Section 1782 cannot be used to reach documents that are located outside the United States. Santander pointed to the general presumption against the extraterritorial effect of U.S. laws and the legislative history of Section 1782.
The BPE Investors argued that Section 1782 provides that “[t]o the extent that the order does not prescribe otherwise, the testimony or statement shall be taken, and the document or other things produced, in accordance with the Federal Rules of Civil Procedure.” In that the Federal Rules of Civil Procedure permit discovery of documents within a party’s possession, custody, or control without regard to where they are located, the BPE Investors argued that there are no territorial limits. The BPE Investors further argued that any presumption against extraterritorial application should not apply because Section 1782 does not seek to regulate foreign conduct.
Only one federal court of appeals had previously decided this issue. The Eleventh Circuit held that Section 1782 has no categorical extraterritorial limits. Other courts of appeals have declined to decide the question.
Agreeing with the Eleventh Circuit, the Second Circuit held that there is no per se bar to the extraterritorial application of Section 1782, and district courts may exercise their discretion as to whether to allow such discovery.
The Second Circuit’s clarification that the “resides or is found” language in Section 1782 is the same standard used for personal jurisdiction is a win for companies that may have a branch office in a judicial district, but where like with Santander, the contacts with the district have an insufficient nexus with the application to establish specific personal jurisdiction. For instance, many foreign banks may have a branch office in New York, but the Second Circuit has clarified that this does not mean that the foreign bank is automatically exposed to U.S. style discovery in aid of foreign proceedings.
Many district courts around the country have found that a Section 1782 application can go forward based on a bare showing that the company has an office in the district. If these courts follow the Second Circuit’s holding, they will more closely scrutinize whether there is a jurisdictional basis for the application to go forward.
Additionally, in light of the Second Circuit’s decision, parties seeking discovery from companies that are not headquartered or incorporated in the district, will likely need to make a clearer showing that the specific requests are tied to activity in the forum. This will likely discourage broad discovery requests that have no forum nexus.
In contrast, the Second Circuit’s holding with respect to the extraterritorial reach of Section 1782 is unhappy news for companies that keep most or all of their documents overseas. While they can still argue that the district court should limit extraterritorial discovery as unduly burdensome under the discretionary Intel factors, these companies will be unable to argue that such discovery is per se impermissible under Section 1782.
While the Second Circuit’s decision resolves some important questions under Section 1782, other important questions remain. For instance, there are divergent views within and outside the Second Circuit as to whether Section 1782 can be used to aid foreign private arbitration. As the use of Section 1782 expands, courts will continue to be called upon to address its scope.