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June 24, 2013 Articles

The Fifth Circuit Accepts Judicial Estoppel as a Basis for Discovery

By Monique Sasson

In its dispute with Chevron Corporation regarding the Lago Agrio litigation, the Republic of Ecuador has frequently been on the losing end of discovery applications filed by Chevron pursuant to 28 U.S.C. section 1782. In Republic of Ecuador, et al. v. John A. Connor, Chevron Corporation, et al., Nos. 12-20122/20123, 2013 WL 539011 (5th Cir. February 13, 2013), Ecuador filed its own section 1782 application in the U.S. District Court for the Southern District of Texas, seeking discovery from an individual and his company for use in the UNCITRAL arbitration pursued by Chevron under the United States-Ecuador Bilateral Investment Treaty (the BIT arbitration), stemming from the actions of the Ecuadorian courts. Chevron intervened and opposed the application. The district court ruled in Chevron's favor. However, the Fifth Circuit reversed the district court's order and remanded for determination of the scope of discovery. The Fifth Circuit held that because Chevron had "benefitted repeatedly against Ecuador and others that the arbitration is a 'foreign or international tribunal'" and that position was inconsistent with its argument in this dispute, "judicial estoppel is appropriate to make discovery" under Section 1782.

Origin of the Appeal
The origin of the BIT arbitration and the 1782 application in Connor is litigation commenced nearly two decades ago concerning the alleged environmental contamination of oil fields in Ecuador. In particular, there was court litigation in Ecuador that concluded with a multibillion dollar judgment against Chevron, and there was the BIT arbitration. In connection with the Ecuadorian court case and the BIT arbitration, Chevron sought discovery pursuant to section 1782 in several U.S. district courts. Ecuador did the same in the Southern District of Texas.

The district court, following Fifth Circuit precedent, concluded that the BIT arbitration did not represent a dispute pending in a "foreign or international tribunal," as section 1782 requires. See Republic of Kazakhstan v. Biedermann Int'l, 168, (Republic of Kazakhstan) F.3d 880 (5th Cir. 1999); El Paso Corp v. La Comision Ejucutiva Hidroelectrica del Rio Lempa, (El Paso) 341 F.App'x 31 (5th Cir. 2009). Accordingly, the district court denied Ecuador's section 1782 application for discovery. Ecuador appealed, and argued that the BIT arbitration is a foreign proceeding covered by section 1782, but in the alternative, Chevron should be judicially estopped from contending that the BIT arbitration does not come under the section 1782 umbrella, given that Chevron had repeatedly argued in other courts that the BIT arbitration does come within section 1782 coverage. The Fifth Circuit agreed with Ecuador that judicial estoppel is appropriate to make section 1782 discovery available to Ecuador.

Application of Judicial Estoppel
The Fifth Circuit defined judicial estoppel "as an equitable doctrine designed to protect the integrity of judicial proceedings by preventing litigants from asserting contradictory positions for tactical gain." The Fifth Circuit referred to the Supreme Court's refusal to establish an "inflexible formula" regarding judicial estoppel (New Hampshire v. Maine, 532 U.S. 742, 121 S. Ct. 1808 (2001), and quoted Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011), where it was noted that "because judicial estoppel is an equitable doctrine, courts may apply it flexibly to achieve substantial justice." In the present case, the Fifth Circuit noted that in numerous other courts, Chevron had asserted that the BIT arbitration is an international proceeding, and its position in the Fifth Circuit was now precisely the contrary; accordingly, "[W]hy shouldn't sauce for Chevron's goose be sauce for the Ecuador gander as well?" Thus, Circuit Judge Edith Jones, who had authored the Fifth Circuit's opinion in Republic of Kazakhstan, in which she took a very restrictive view of section 1782's coverage in relation to an international arbitral tribunal, was now prepared to adopt more flexibility in seeking to do equity.

Judge Jones rejected each of Chevron's attempts to distinguish its goose from the Ecuadorian gander. First, she rejected Chevron's contention that the status of the BIT arbitration under section 1782 raises an issue of jurisdiction to which judicial estoppel may not apply. Judge Jones explained that when a claim facially seeks relief "arising under" the Constitution, the federal court has jurisdiction to determine whether the claim is cognizable. In this case the court had jurisdiction over an application that alleged a non-frivolous claim for section 1782 discovery, and the court had the power to interpret the statutory terms relevant to its power. Judge Jones also rejected Chevron's argument that judicial estoppel may never be applied to issues of law, citing Chevron's inappropriate reliance on Sturm v. Boker,150 U.S. 312, 14 S. CT. 99 (1893), and Royals Ins. Co of Am. V. Quinn-L Capital Corp., 3F. 3d 877, 885 n. 6 (5th Cir. 1993). She commented that Chevron misunderstood both Supreme Court and Fifth Circuit authority on this issue: The application of estoppel in the former was both fact-specific and case-specific and clearly did not reach judicial estoppel; and the latter merely stated that a party's contrary statements of opinion on the law are not by themselves sufficient for judicial estoppel.

Chevron further argued that it was entitled to follow the law of the circuit, even if the law may be different from that of another circuit. Judge Jones found no case law to support this proposition. Moreover, Chevron admitted that the legal standard under section 1782 must ultimately be uniform. The Fifth Circuit observed that following the law of the circuit "is not an antidote" to judicial estoppel in these circumstances.

Finally, Chevron contended that in prior cases its section 1782 applications were often premised on twin grounds: the existence of Ecuadorian court litigation––clearly a "foreign tribunal"––and the BIT arbitration––an "international tribunal." However, Judge Jones found that in the prior cases, the status of the BIT arbitration "was not irrelevant to Chevron's success." Thus, with all of Chevron's objections dispatched, the Fifth Circuit noted that what remained was the reality that Chevron had deliberately taken inconsistent positions on Section 1782, thereby seeking to gain an unfair advantage over Ecuador. Judicial estoppel was therefore deemed appropriate, without the Fifth Circuit having to opine on whether the BIT arbitration is an "international tribunal."

Eleventh Circuit First to Apply Section 1782 to Private Arbitration
The Eleventh Circuit, in Consorcio Ecuatoriano De Telecomunicaciones S.A. v. Jas Forwarding (USA), Inc., (Consorcio) 685 F. 3d 987 (11th Cir. 2012) became the first circuit court to determine that a private commercial arbitration comes under the section 1782 umbrella, drawing a direct contrast to the Fifth Circuit's pre-Connor decisions. The Eleventh Circuit emphasized that it considered an arbitral tribunal seated outside the United States to be a "foreign tribunal" because the arbitral panel: acts as a first instance decision maker; permits the gathering and submission of evidence; resolves the dispute; issues a binding order; and is subject to judicial review. The Eleventh Circuit also held that a district court enjoys "considerable discretion" in granting section 1782 discovery, and in this particular case the district court did not abuse its discretion.

In the first part of its decision, the Eleventh Circuit reviewed the district court's analysis of section 1782 and whether the requirements set in section 1782 had been met. The key initial point to consider was "whether the subpoenaed documents will be used in a proceeding in a foreign or international tribunal." 685 F.3d at 992. Here the district court cited and relied on Intel Corp. v Advanced Micro Devices, Inc., (Intel), 542 U.S. 241, 259 (2004) where the Supreme Court explained that the foreign proceeding must "be within reasonable contemplation," but need not be pending or imminent. The district court concluded that CONECEL, the section 1782 applicant, had established that the criminal and civil proceedings were in reasonable contemplation. But of central importance for the international arbitration community, the district court also concluded that, even though it did not have to reach the question of whether the pending arbitration was a proceeding in a foreign tribunal under the statute, the "arbitral tribunal, in this action, is likely within the purview of Section 1782." (685 F.3d at 992).

Scope of Section 1782 post-Intel
The Eleventh Circuit provided an extensive discussion concerning the scope of section 1782, which will undoubtedly be a focal point of section 1782 analysis by other circuit courts having to confront the question of whether a private commercial arbitral tribunal comes under the statute. The Eleventh Circuit relied heavily on Intel,and the Supreme Court's broad interpretation of the term "tribunal": Congress introduced this term in lieu of judicial proceeding so that the court assistance would extend to "administrative and quasi-judicial proceedings." (Consorcio, at 994). In Intel, although the assistance was granted in the course of proceedings in the Directorate-General for Competition of the European Commission, the Supreme Court cited with approval an article authored by the late Professor Hans Smit, a principal drafter of the 1964 revision of section 1782, in which Professor Smit made it clear that the statute's definition of the term "tribunal" included arbitral tribunals (Consorcio, at 994). The Eleventh Circuit also deemed it noteworthy that the Intel court placed significance on the European Commission's role in acting as a "proof taking" body and a "first-instance decision maker." According to the Eleventh Circuit, the Supreme Court adopted a "functional approach" toward the term "tribunal," and the same approach should be used to consider whether the term includes arbitral tribunal.

Adopting this functional approach, the Eleventh Circuit analyzed the characteristics of an arbitral tribunal and observed that such tribunals act as first instance adjudicative decision makers. Arbitral tribunals may also permit the gathering and submission of evidence and have the authority to determine liability and impose penalties. Further, an arbitral tribunal's decision is subject to judicial review. Accordingly, the Eleventh Circuit concluded that on the basis of the functional approach, the pending arbitration, an Ecuadorian seated arbitration between JASE and CONECEL, was within the scope of section 1782. The Eleventh Circuit rejected the alleged relevance of the fact that the award would be reviewable only with regard to procedural defects and not on the substantive matters in dispute; the narrow extent of a judicial review did not mean that there was no judicial review.

Scope of Section 1782 pre-Intel
In a footnote (at 998), the Eleventh Circuit discussed the circuit decisions pre-Intel that had reached different conclusions on the scope of section 1782 in relation to private commercial arbitrations––the court did not discuss the Fifth Circuit decision post-Intel, El Paso,which also reached the conclusion that a private arbitration did not come under the statute. section 1782, the other circuits reasoned, was meant to cover governmental or intergovernmental arbitral tribunals and other state sponsored adjudicatory bodies; therefore, private arbitral tribunals fall outside the scope of section 1782 (see, Republic of Kazakhstan). The Eleventh Circuit pointed out that these contrary decisions were reached without the benefit of the analysis provided by Intel,which set out a "broader and wholly functional definition of the term 'tribunal.'" In particular, the Eleventh Circuit rejected the distinction between governmental and private arbitral tribunal because neither the statute nor Intel referred to such a distinction. Although Intel only referred to arbitral tribunals in dicta, it did so without drawing or even suggesting any distinction between private and governmental tribunals. Above all, Professor Smit had been very clear in stating that the term "tribunal" used in section 1782 includes arbitral tribunals.

Split among the Circuits
The Eleventh Circuit then dealt with some of the concerns raised by the Second and Fifth Circuits about a broader scope of section 1782 being at odds with the limited discovery provisions in private commercial arbitration. The Eleventh Circuit stated that the "district court is in the best position to weigh the section 1782 applicant's asserted need for the evidence against the nature of the foreign proceeding and concerns of undue burden or intrusiveness." However, the Eleventh Circuit did not address the argument that the parties, by electing arbitration, excluded the interference of the courts per se—unless the recourse to the courts was required by express legislative provisions tailored to certain limited circumstances. Further, the assistance granted by the broad interpretation of section 1782 is in relation to arbitrations where the only connecting factor with the United States is that the discovery is sought from an entity or an individual resident in the district. This type of national court assistance was likely never contemplated by the parties in entering into an arbitration agreement.

Abuse of Discretion by the Eleventh Circuit?
On the question of whether the district court abused its discretion in granting the application, the Eleventh Circuit, having stressed that section 1782 was the product of more than 150 years of congressional effort to provide assistance in gathering evidence, applied the four factors identified by Intel that should be considered by the district court in exercising its discretion:

• whether the person from whom discovery is sought is a participant in the foreign proceeding
• the nature of the foreign tribunal, the character of the foreign proceedings
• whether the application under section 1782 concealed an attempt to circumvent foreign proof-gathering restrictions or other policies and
• whether the request is unduly intrusive or burdensome.

In assessing these factors, the Eleventh Circuit determined that the district court had not abused its discretion in granting the application. However, in making this determination, the Eleventh Circuit disregarded the fact that requests for document production in arbitration are regulated by the applicable rules of the arbitration including, if adopted by the parties or the tribunal, the IBA Rules on the Taking of Evidence in International Arbitration. In doing so, the Eleventh Circuit again opens the door to a potential intrusion on the arbitral process, whereby the evidence-gathering should be regulated by agreement of the parties, and remits part of the evidence-gathering process to the discretion of a U.S. federal judge irrespective of any other agreement on evidence reached by the parties. A district judge may simply grant discovery under the Federal Rules of Civil Procedure, which then becomes part of an ongoing arbitration seated outside the United States. The Eleventh Circuit observed that there must be a positive determination by the district court that the applicant is seeking to circumvent the rules of the arbitration for the district court to exercise its discretion and deny assistance. Many arbitration practitioners and in-house counsel may consider that this hardly constitutes adequate protection against the expansion of discovery in commercial arbitration.

In view of the clear circuit split on the question of whether section 1782 is available to aid international arbitrations––Eleventh versus Fifth and Second Circuits––whether "private" or investment treaty, the possibility of judicial estoppel situations such as the one in the present case may well multiply. As the Fifth Circuit itself says, the legal standard under section 1782 must ultimately be uniform. It is clearly time for the U.S Supreme Court to establish that uniformity.

Keywords: ADR, litigation, judicial estoppel, discovery under 28 USC Section 1782