On Wednesday, Judge Richard Sullivan of the Southern District of New York relieved the Bank of China from an order issuing $50,000 of daily fines for failing to comply with two subpoenas for information on account holders accused of selling goods counterfeit “Gucci” goods. The matter provides an interesting case study of at least one dilemma facing foreign companies doing business in the United States – whether to comply with a US-issued subpoena knowing that compliance would break foreign law.
In 2010, Gucci brought suit in the Southern District of New York (SDNY) against the owners and operators of a Chinese website allegedly selling “Gucci” counterfeit merchandise. Although not a party to the suit, the Bank of China (BOC) received a set of subpoenas requiring it to produce certain banking information for the named defendants. In overruling objections from BOC to the subpoenas, the SDNY issued orders compelling certain of the subpoenaed information. These orders ultimately provided for fines of up to $50,000 per day for failure to comply.
Contrary to the requirements of the SDNY’s issued subpoenas, China’s Commercial Bank Law requires its commercial banks to protect depositors’ information. So here is the dilemma. If BOC produced its customers’ information in accordance with the SDNY-issued subpoenas and related court orders, the BOC would face penalties from Chinese banking regulatory agencies and lawsuits from its banking customers. On the other hand, if BOC failed to comply with the SDNY’s orders, BOC was required pay $50,000 per day in penalties.
In some circumstances, New York has long-arm jurisdiction over foreign entities. As an international financial center, New York City is the home to many international banks’ U.S. branches. BOC is no exception; it has a branch in New York. And the SDNY orders set forth a precedent to subject foreign banks to jurisdictions in New York courts—to produce its customers’ overseas account information. The SDNY’s orders are pending appeal before the Second Circuit Court of Appeals.
This conundrum represents a major legal dilemma for BOC and other foreign banking institutions. In particular is the enforceability of the US judgments against the foreign entities in their home countries. In the Gucci matter, many of the defendants simply did not respond to the issued and served complaint and had default judgments rendered against them. Their reasons for not responding are unclear but perhaps they wanted to avoid any legal liability as they were not US citizens or owners of any palpable assets in the US. It is unclear whether Chinese courts or governmental institutions would have allowed enforcement of the U.S. default judgments against the Chinese defendants.
As to Gucci, regardless of whether BOC would have won the appeal, any judgment entered by the SDNY would present Gucci with multiple obstacles, the least of which would be enforcement of the judgments in China. Currently there are no bilateral treaties between China and the U.S. to ensure enforcement of court judgments.
BOC’s dilemmas get even more complicated. When BOC froze the defendants’ Chinese bank accounts, in accordance an injunction order from the SDNY, the defendants filed a lawsuit in China against BOC alleging that BOC violated the Chinese Contract Law and the Chinese Commercial Bank Law. The defendants requested that the Chinese Court lift the freeze ordered by the SDNY – and the defendants won the Chinese lawsuit. In short, the Chinese court refused to recognize the SDNY’s orders, and BOC was ordered by the Chinese Court to lift the freeze on the accounts. It is unclear if BOC produces the defendants’ Chinese bank account information for Gucci in compliance with the SDNY’s orders, whether the defendants will file another lawsuit against BOC in China.
There are alternatives available to litigants in US court proceedings involving foreign entities. Going forward, Gucci and BOC could resolve their respective dilemmas and obstacles in several ways.
First, the Gucci plaintiffs should initiate an infringement/counterfeiting lawsuit in China against the defendants. Compared with the procedures of the SDNY, a Chinese lawsuit would likely be less costly and much quicker to a decision on the merits. In recent years, Chinese governmental agencies have used new rules and laws to significantly strengthen the nation’s own protection of intellectual property. And if the lawsuit were commenced in China for infringement of Gucci’s intellectual property rights, Gucci could request that the Chinese Court freeze defendants’ bank accounts—along with the defendants’ illegal manufacturing, distributing and exporting of the infringed merchandise.
Second, even though Gucci obtained an injunction in the US proceeding, and the defendants are ordered to refrain from dealing in any counterfeit Gucci merchandising in the U.S., in order to enjoin the defendants’ activities in China, Gucci also needs to obtain an enforceable monetary (and injunctive) remedy in China to have complete relief from the accused counterfeiting activities.
Third, the dilemma for a nonparty, such as BOC, is the conflict between compliance with Chinese law and the SDNY order. This conflict could be resolved by the two countries’ judiciary cooperation and/or through diplomatic channels. In sum, this conflict is related to the principle of comity and national sovereignty. And if the conflict remains unresolved, the victims like BOC must pay penalties either in China or the U.S. Therefore, the two countries’ judiciary bodies should find a mutually acceptable solution to protect intellectual property right owners and penalize the infringers—without penalizing an innocent party.