A recent opinion from the U.S. Court of Appeals for the Second Circuit, in the case of In re: Application of Antonio Del Valle Ruiz, 939 F.3d 520 (2^nd Cir. 2019),  permitted use of 28 U.S.C. §1782 by a foreign party to obtain discovery of evidence from a company located in the United States, where the documents being sought were located outside the United States, but within the company’s control.

Section 1782 allows “interested persons” or parties in an international proceeding to apply to a U.S. district court to obtain discovery from a person or corporation located in the district.  The statute requires the discovery target to be located in the district, not the discovery itself.  The Eleventh Circuit had previously allowed extraterritorial discovery under §1782 in Sergeeva v. Tripleton Int. Ltd., 834 F.3d 1194 (11^th Cir. 2016).

The Second Circuit’s opinion in Del Valle Ruiz demonstrates that U.S. federal courts will permit discovery against international businesses with a corporate presence in the U.S. even where the discovery is in the possession, custody and control of a corporate affiliate located outside the U.S.

Under §1782, the “interested person” or party initiates a petition in the U.S. district court to obtain permission to serve a subpoena pursuant to the statute.  The district court is not required to permit the discovery.  Rather, the court is entitled to exercise its discretion in determining whether the discovery request is appropriate in the circumstances.  Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004).  The U.S. Supreme Court set out four criteria for the district courts to utilize:

1. 1. Whether the discovery target is a participant in a foreign proceeding;
   2. The type of tribunal and proceeding and whether the foreign tribunal is receptive to the assistance;
   3. Whether the discovery request is an attempt to circumvent the foreign tribunal’s order or procedures; and
   4. Whether the request is unduly burdensome. at 264-65.

In Del Valle Ruiz, the discovery target was within the district but the discovery itself was located outside the country in the possession of a corporate affiliate.  The Second Circuit acknowledged the maxim of statutory construction that U.S. law should not be construed to have extraterritorial effect.  However, it determined that the “presumption against extraterritoriality” did not apply to a §1782 application because it is a discovery mechanism and does not subject a party to liability or otherwise regulate conduct.  Del Valle Ruiz, 939 F.3d at 532.

The Second Circuit followed the approach of the Eleventh Circuit in Sergeeva when it reasoned that §1782 authorizes discovery pursuant to the Federal Rules of Civil Procedure, which permit extraterritorial discovery so long as the documents are within the subpoenaed party’s possession, custody or control.  Del Valle Ruiz, supra at 533.  In doing so, however, the Second Circuit stated that a court “may properly, and in fact should, consider the location of documents and other evidence when deciding whether to exercise its discretion to authorize such discovery.”  Id.at 533 (citation omitted).

The phrasing of the Second Circuit’s admonition that the location of the discovery should weigh in the court’s decision implies that extraterritoriality could weigh against the application.  However, the underlying facts of  Del Valle Ruiz suggest otherwise.

In May 2017, Banco Popular (“BP”) invited interested buyers to acquire it in a private sale.  Santander S.A. (“Santander”) retained New York-based UBS and Citibank to assist it in preparing a bid to purchase BP.  Santander was purportedly prepared to bid €3 billion and follow up with a subsequent capital injection of €4 billion.  Thereafter, reports emerged that BP was a bankruptcy risk which caused an all-out run on deposits.

On June 6, 2017, the European Central Bank determined that BP was  “failing or was likely to fail.”  This caused Spain’s national banking supervisory authority to invite bids for acquisition of BP.  Santander submitted the only bid for €1.  It took over BP pursuant to the government forced sale.

Petitioners intervened in various foreign proceedings challenging the sale and filed the §1782 application in the Southern District New York seeking discovery from Santander and its New York based affiliate, Santander Investment Securities, Inc. (“S.I.S.”) regarding the preparation of the bid to purchase BP prior to reports of its impending insolvency.

It was undisputed that Santander wasn’t located in the district for purposes of  §1782 discovery, but S.I.S was located within the district.  Interestingly, S.I.S. was not involved in the bid preparation.  That was handled locally by UBS and Citibank on behalf of Santander.  The court allowed the subpoena to proceed against S.I.S., notwithstanding its apparent lack of involvement in the bid preparation.  As such, it appears the presence of a corporate affiliate within the district is a sufficient basis to obtain discovery that is located outside the district and the country.

This decision from the Second Circuit is an important one for companies conducting international business, because it demonstrates that United States courts, following legislation passed by Congress, will utilize their control of U.S. corporate entities to permit parties in foreign disputes to obtain discovery, even when corporate entities may be relying upon their U.S. corporate status, or foreign location of the documents, to avoid discovery in an international dispute.

Stay tuned to see whether other circuits will follow this approach or refuse extraterritorial discovery thereby inviting a U.S. Supreme Court ruling.