Authored by Naresh Kilaru and Mark Sommers
While the authority of US courts to order a prejudgment restraint of a counterfeiter's assets and the production of bank records is well-settled, what if those assets and records are located outside the United States? A decision by the US District Court for the Southern District of New York and the May 18, 2012, denial of a motion for reconsideration suggests that overseas assets and bank records may be within the reach of US courts.
On June 25, 2010, plaintiffs Gucci, Balenciaga, Bottega Veneta, and Yves Saint Laurent initiated a trademark infringement action against the operators of various Web sites selling counterfeit products. The counterfeiters, who processed over $1 million in sales of counterfeit goods, had deposited the proceeds in US-based bank accounts before wiring them to overseas branches of the Bank of China. The plaintiffs obtained an ex parte temporary restraining order (which was later converted into a preliminary injunction) freezing the defendants' assets in China. The plaintiffs then served on the Bank of China's New York branch a subpoena for documents relating to the defendants' accounts in China. Although the bank produced documents located at its New York branch, it refused to produce any documents located in China on the ground that such a request should be made through the proper channels of the Hague Conventions. The plaintiffs filed a motion to compel the bank to comply with the subpoena and the asset-freeze provision of the preliminary injunction. The bank opposed the motion and cross-moved for an order modifying the preliminary injunction so as to terminate any obligation to freeze assets located in China.
The Court's Analysis
In an August 23, 2011, opinion, the court granted the plaintiffs' motion and denied the defendants' crossmotion. With respect to the issue of restraining overseas assets, the court held that, so long as personal jurisdiction over a defendant is established, the court has the authority to freeze property under the defendants' control—regardless of whether the property is located within or outside the United States. Although the court noted that under New York banking law, such authority may not extend to the attachment of overseas assets once a final judgment has been issued; the authority to restrain such assets pending a final determination of the action was squarely within the extraterritorial reach of the Lanham Act. The court accordingly denied the bank's cross-motion for a modification of the preliminary injunction.
With respect to the plaintiffs' motion to compel the production of documents located in China, the bank opposed the motion on the ground that producing documents relating to the defendants' accounts would violate Chinese bank secrecy laws and subject the bank to civil and criminal liability in China. In determining whether to order the bank to produce the documents, the court weighed the following seven factors: (1) whether the information originated and remained in a location outside of the United States, (2) the good faith of the party resisting discovery, (3) the importance of the documents to the litigation, (4) the specificity of the document requests, (5) alternative methods of securing the information, (6) the balance of national interests, and (7) the hardship of compliance.
In considering these factors, the court found that the first two factors weighed in favor of the bank and that the remaining factors weighed in favor of the plaintiffs. With respect to the factors favoring the plaintiffs, the court found that the documents that the plaintiffs were seeking were clearly important to the litigation because the defendants' bank account information was likely to provide the most effective measure of the revenues generated by the defendants' counterfeiting activities.The court also found that the plaintiffs' document requests were sufficiently specific because the subpoena sought production of information limited solely to the defendants' accounts at the Bank of China and the plaintiffs had already identified two such accounts that were connected to the defendants' counterfeiting activities.
With respect to alternative methods of securing the information, the court, relying upon a Ninth Circuit decision, held that so long as the documents could not "easily be obtained" through alternative means, this factor should weigh in favor of the party seeking discovery. The bank argued that the Hague Conventions provide a perfectly adequate means for the plaintiffs to obtain the requested documents. The court disagreed, holding that although there might be "some likelihood" of success with a Hague Conventions request, it was not "an easily obtainable alternative." Citing previous decisions in the Second Circuit, the court noted that, as a general matter, Hague Conventions requests can result in delays of considerable and unknown duration. The court was also persuaded by the evidence that the plaintiffs put forward on this issue, which included a declaration from an expert in international law opining that a Hague Conventions request was "not a realistic or meaningful option" for the plaintiffs to obtain the requested information in this case.
The court next considered the balance of national interests. Although the court recognized that China has bank secrecy laws that generally prohibit the disclosure of personal account information, those laws were entitled to less deference because the protection against disclosure could be waived not only by the account holder, but also, by any number of governmental agencies that have the power to inquire about, freeze, and deduct the deposits of individuals. As such, the court concluded that China's bank secrecy laws merely confer an individual privilege and do not reflect a national policy entitled to substantial deference. Additionally, the court found that the fact that the Chinese government had not voiced any objections to the disclosure of documents in this case militated against a finding that China had strong national interests at stake.
Finally, the court considered the hardship in complying with the subpoena. On this point, the bank submitted an expert's affidavit stating that if the bank were forced to comply with the subpoena, it could be subject to heavy fines and its employees could spend several years in jail for violating China's bank secrecy laws. The court found, however, that there was no evidence to substantiate these contentions. Indeed, the bank could not cite any specific instances in which a Chinese financial institution had been held civilly or criminally liable for complying with a foreign court order directing the production of documents. The court therefore concluded that any liability on the part of the bank for complying with the subpoena was speculative at best.
After considering all of the factors, the court found that they weighed "strongly" in favor of ordering the bank to comply with the subpoena. The court accordingly granted the plaintiffs' motion to compel.
Motion for Reconsideration
On November 30, 2011, the bank filed a motion for reconsideration of the court's August 23, 2011 order under US Federal Rule of Civil Procedure 60(b), based on what it contended was new evidence. The new evidence was a November 3, 2011, letter to the court from Chinese banking regulators informing the court that, among other things (1) Chinese law prohibits banks in China from disclosing account information or freezing assets in such accounts pursuant to a US court order; (2) the bank's compliance with the court's August 23, 2011 order would subject the bank to sanctions; and (3) the regulators were committed to working with the Chinese Ministry of Justice to ensure that any request for documents made through the Hague Conventions would be satisfied within a reasonable period of time. In its motion for reconsideration, the bank also pointed to a contrary decision in the same district holding that requests for documents located in China should first be made through the Hague Conventions based on international comity.1
On May 18, 2012, the court denied the bank's motion for reconsideration. In addition to noting that the motion was procedurally improper because there had been no final judgment, the court found that the letter from the Chinese banking regulators was not "newly discovered evidence" because (1) the bank could have asked the regulators to submit the letter prior to the court's August 23, 2011, order; and (2) the statements in the letter were largely duplicative of those expressed in declarations previously submitted by the bank. On June 4, 2012, the bank filed a notice of appeal to the US Court of Appeals for the Second Circuit.
Ultimately, if China can show a track record of prompt compliance with Hague Conventions requests, the question of whether requests for documents located in China can be made through a US court's subpoena powers may become a moot point. Accordingly, the real question is whether US courts have the authority to freeze assets located in overseas bank accounts. Although the answer appears to be that US courts have such authority so long as personal jurisdiction exists over the account holder, the effectiveness of prejudgment asset restraints against counterfeiters whose operations are international in scope remains questionable.
1 See Tiffany v. Andrew, 276 F.R.D. 143 (S.D.N.Y. 2011).
Reprinted with permission from the IP Litigator, published by Aspen Law and Business. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.