Section 1782 Proceedings in the US: Privacy Warning

Many institutional clients value anonymity about their participation in non-US group (opt-in) recovery efforts, particularly sovereign wealth funds and other government-related entities. Outside the United Kingdom (UK), in most countries, anonymity results from restrictions on public access to court pleadings, and from the claimant being one among many group members.

However, funds should be cautious about Section 1782 proceedings in the US, which could expose their involvement in these non-US recovery efforts and potentially subject them to press scrutiny.

The Challenge

Under Section 1782 of United States Code Title 28, a party to foreign legal proceedings can apply to a US federal court for discovery from persons or entities in the US for use in those non-US proceedings. In the US, federal court proceedings are public, and all case docket information and copies of pleadings can be accessed and downloaded 24/7 through the Public Access to Court Electronic Records (PACER) system. PACER includes a tool for searching party names.

Revelation of claimant involvement in non-US group (opt-in) recovery efforts can occur two ways:

• Offensive use of Section 1782 against defendants: Plaintiff counsel typically file Section 1782 applications in the name of a representative or ‘test’ plaintiff. Discovery is sought in the US because in most countries, parties do not have the power to obtain documents and information from the opposing side absent court permission, making claim prosecution difficult. With these applications, counsel can obtain corporate records they could not get directly in the non-US court proceedings, and this can be especially helpful when there is a pending class action in the US against the same issuer. Defense counsel will know about the application and may inform the press in the country where the fund is based.
• Defensive use of Section 1782 against claimants: If a claimant is US-based, or has any US presence, the company being sued in the foreign proceeding can bring Section 1782 proceedings in US federal courts seeking information relevant to their defenses or counterclaims. Without sounding too cynical, the time and resource burden on US-based claimants has the additional benefit to the defendants of potentially discouraging their continued participation in the non-US proceedings. Most funding agreements that claimants sign with case organizers do not cover these collateral proceedings, and claimants on the receiving end of discovery demands may have to negotiate coverage from funders for defense costs or end up paying for it themselves. Like Section 1782 applications made in a claimant’s name, once filed by defendants, the PACER system makes their involvement in the foreign proceeding fully visible to the public.

The Solution

Funds concerned about the public visibility of their involvement in these non-US recovery efforts should try to limit their involvement in Section 1782 proceedings in the US by communicating to funders and counsel that (a) they do not want to be the representative or ‘test’ plaintiffs [1], and (b) they do want any collateral proceedings filed in their names (i.e., offensive use against defendants) absent express consent. Negative or implied consent should never be sufficient. Unfortunately, there is limited ability to pre-empt defensive use of Section 1782 proceedings against claimants. Fortunately, defensive use does not occur too frequently because it only applies to funds domiciled or having operations in the US; and the defendants must convince US federal courts that the discovery sought is relevant under foreign law to their defenses or counterclaims.

In sum, defensive use is less common and the real threat to claimant privacy comes from offensive use of Section 1782 proceedings by plaintiff’s counsel against defendants.

[1] The process for selecting the representative or ‘test’ plaintiffs varies by country.  In most cases, they are selected by plaintiff counsel prior to filing, or after when the two sides propose and negotiate the roster of claimants that will fill that role during proceedings.  However, if the parties disagree, courts may designate representative or ‘test’ claimants, sometimes involuntarily drafting them.  In short, simply expressing a preference not to be a test plaintiff may not be sufficient to avoid being selected later.  If it’s critical for claimants not to be put in those positions, they will need to negotiate withdrawal rights in advance with the funders and lawyers.