S.D.N.Y. Rules That Transactions on US Exchanges May Provide Jurisdictional Basis for Section 1782 Discovery

Although federal law has long provided that American courts may order discovery of materials and testimony for use in a foreign proceeding pursuant to 28 U.S.C. § 1782, the exact scope of courts’ jurisdiction to do so has remained a point of significant dispute. Most recently, the Southern District of New York (S.D.N.Y.) in Pfaff v. Deutsche Bank ¹ addressed the reach of federal courts’ power to order discovery from non-US companies under the statute.

Pfaff held that, because the foreign proceeding in question concerned transactions that occurred on a New York-based securities exchange, the district court had jurisdiction to order discovery from foreign banks that had executed those transactions—even though executed by the foreign banks from outside of the United States. This decision carries implications for international businesses—especially banks and other financial institutions that regularly transact on exchanges located in the United States.

Discovery under Section 1782

Since the 1850s, US law has provided a mechanism by which domestic courts may provide their foreign counterparts with assistance in gathering information to be used in proceedings overseas. The modern statute codifying this long-observed norm of international comity, 28 U.S.C. § 1782(a), permits federal district courts to order discovery where several conditions are satisfied: (1) the person from whom discovery is sought resides or is found within the court’s jurisdiction; (2) the materials sought are “for use” in a proceeding before a foreign tribunal; and (3) the application for discovery is made either by the foreign tribunal or by “any interested person” (a term that includes persons who are not parties to the foreign dispute).²

If those threshold requirements are met, the court then conducts a second inquiry to determine whether to exercise its discretion to grant discovery. That inquiry depends on four factors identified by the Supreme Court in Intel v. Advanced Micro Devices: (1) whether the subject of the order is also a participant in the foreign proceeding; (2) whether the foreign tribunal is receptive to the court’s assistance, as well as the “nature” and “character” of the foreign proceedings; (3) whether the order is sought in an effort to circumvent foreign restrictions on discovery or otherwise contravene the policies of the foreign jurisdiction or the United States; and (4) whether the request is “unduly intrusive or burdensome.”³

Pfaff’s § 1782 petition

The underlying dispute in Pfaff arose from Mr. Pfaff’s investment in silver certificate options listed on the Commodities Exchange (COMEX) in New York offered by two German banks. Pfaff alleges that the foreign banks conspired with one another (and various other financial institutions) to manipulate the price of the options and to execute fraudulent transactions that ultimately resulted in the loss of his entire €3 million investment.

In December 2017, Pfaff filed suit against one of the banks in the Regional Court of Saarbrücken, Germany, seeking damages for fraud. In August 2018, he petitioned the Southern District of New York for discovery pursuant to 28 U.S.C. § 1782, hoping to gather evidence to support his claims in German court. Specifically, he sought documents from the banks and COMEX relating to silver derivatives transactions between the two banks between 2011 and 2013.

The court granted Pfaff’s request, and, once served with subpoenas, both banks claimed they could not identify any responsive documents. After the German court issued an order clarifying the scope of the evidence it required in order to make a determination, Pfaff asked the court to authorize the issuance of additional subpoenas, interrogatories and requests for admission pursuant to the German court order. Although COMEX entered into an agreement with Pfaff to provide him with a portion of the discovery he requested, the banks again objected, arguing that the court lacked jurisdiction under Section 1782 to grant the discovery orders against them.

The court in Pfaff was thus presented with the question of what basis—if any—there was for its exercise of jurisdiction over banks based and incorporated in Germany but transacting on US-based exchanges

Transactions on a US-based exchange found sufficient for a court to exercise specific personal jurisdiction for Section 1782 discovery

Pfaff had argued the German banks were subject to the general personal jurisdiction of the court—that the S.D.N.Y. had jurisdiction “to hear any and all claims against” the banks, including the instant discovery request.⁴ The court rejected this argument outright, relying on established precedent that, absent exceptional circumstances, a corporation is only “at home”—and thus subject to general jurisdiction—in the state where it is incorporated and where its principal place of business is located.⁵ Both banks in question are incorporated and headquartered abroad; thus, general jurisdiction was lacking. This conclusion was not affected by the fact that the banks had consented to general jurisdiction because their New York branches were subject to the licensing requirements of the New York Department of Financial Services (NYDFS), as Pfaff had argued.⁶

However, the court went on to hold that it nonetheless had specific personal jurisdiction over the banks, which “is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction”⁷—here, the discovery being sought in connection with the foreign proceeding.

To determine that specific jurisdiction exists in the nonparty discovery context, the court must “(i) first assess the connection between the nonparty’s contacts with the forum and the order at issue and (ii) then decide whether exercising jurisdiction for the purposes of the order would comport with fair play and substantial justice.”⁸ Put differently, the court was required to determine whether the banks’ contacts with New York were “the primary or proximate reason that the evidence sought is available at all.”⁹

The court held that it could exercise specific jurisdiction over the banks. Although the trades at issue were executed by bank employees in Frankfurt, London and Singapore, rather than New York offices, the court emphasized the fact that the trades “occurred largely through COMEX, which operates in New York[.]” Relying on S.D.N.Y. decisions that held that a party’s use of a New York-based exchange (and COMEX, in particular) was a sufficient basis for jurisdiction,¹⁰ the court concluded that “the discovery material sought—which largely relates to [the banks’] silver trading through COMEX—proximately resulted from” the banks’ activities in New York.¹¹

One of the banks had argued, unsuccessfully, that the court could not rely on the fact that the trades were executed through COMEX because the exchange’s parent company is headquartered in Chicago, and the servers that process COMEX trades are located in Aurora, Illinois.¹² The court found these arguments unavailing, as COMEX itself is a New York corporation headquartered in Manhattan, and past S.D.N.Y. decisions have held that an exchange’s computer hardware need not be located in-state for trades on that exchange to provide a basis for personal jurisdiction.¹³

Applying the discretionary Intel factors

After establishing that it had jurisdiction to order discovery, the court turned to the factors outlined in Intel to determine whether to exercise its discretion to grant the orders. In applying the Intel factors, the court noted that only one of the two banks was a party to the German proceeding and that Pfaff had not exhausted all of his available remedies in the German court to pursue discovery from the banks. Even so, the court explained, under Second Circuit law, there is no requirement that a party exhaust all available foreign proceedings to obtain discovery before Section 1782 becomes available.¹⁴

The court determined “that the German Court would be receptive to further evidence [Pfaff] obtains through this § 1782 proceeding” in light of its order clarifying the information it sought, that he “is not seeking to circumvent a German court ruling,” and that at least some of the discovery he sought was not overly intrusive or burdensome.¹⁵

The court did agree with the banks, however, that some of Pfaff’s requests were overbroad—for example, his requests for trading data for all silver trades that one bank carried out in the relevant two-year period, as well as the identities of all traders and supervisors involved in any of those silver trades.¹⁶ The court similarly refused to grant other requests it deemed too vague or that related to the banks’ silver trades on exchanges other than COMEX.¹⁷

The court ultimately granted Pfaff’s request in part and ordered his lawyers to prepare narrowed requests to which the banks would have another opportunity to object.

Implications

The Pfaff decision helps clarify the scope of Section 1782 as applied to foreign banks that have registered branches in the United States and execute trades that occur on US-based exchanges.

The decision suggests that when a foreign proceeding involves transactions on a US-based exchange within a district court’s jurisdiction, an action seeking discovery under Section 1782 may reach discoverable materials located within the jurisdiction, even when the transactions were executed abroad by foreign entities. However, the court’s rejection of NYDFS registration as a basis for jurisdiction further reaffirms that a foreign bank will not be subject to a Section 1782 discovery absent a more specific connection to the discovery being sought for use in the foreign proceeding.

Finally, the court reiterated that a party seeking Section 1782 discovery need not have exhausted all available mechanisms in the foreign tribunal for gathering the requested information in order to satisfy the discretionary Intel factors. While the court acknowledged that failure to exhaust other discovery methods may weigh against applying Section 1782, it emphasized that such a failure is not dispositive and that discovery may be allowed even where there is no allegation that the requested material is beyond the reach of the foreign tribunal. Thus, foreign litigants may be able to take advantage of discovery in US courts even when courts in their home countries are fully capable of ordering production of the materials sought.

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