On August 23, 2011, Judge Richard S. Sullivan of the Southern District of New York issued a decision in Gucci America, Inc. v. Li, No. 10 Civ. 4974 (RJS) granting the plaintiffs' motion to compel the production of counterfeiters' bank records from non-party Bank of China. The Bank had refused to produce these records on the grounds that the documents were located in China and protected by Chinese bank secrecy law. Judge Sullivan also denied Bank of China's cross-motion seeking to modify provisions in the court's preliminary injunction that froze the counterfeiters' accounts at the bank's branches in China. This decision represents a significant victory for intellectual property owners, because IP enforcement efforts are often hampered by the ease with which online counterfeiters can move their illicit proceeds overseas.
On June 25, 2010, plaintiffs Gucci America, Inc., Balenciaga, America, Inc., Balenciaga, S.A., Bottega Veneta International S.a.r.l., Bottega Veneta, Inc., Luxury Goods International (L.G.I.) S.A. and Yves Saint Laurent America, Inc. initiated a trademark infringement action against various individuals selling counterfeit products labeled as Gucci, Balenciaga, Bottega Veneta and Yves Saint Laurent. The counterfeiters operated their business through various websites and processed over $1 million in sales of counterfeit goods, which the defendants advertised as discounted authentic products. The counterfeiters operated at least part of their business out of San Diego, California and used credit card processors based in the United State to facilitate their sales of counterfeit goods. The proceeds from these sales were deposited into the counterfeiters' United States-based bank accounts before being wired into accounts maintained in overseas branches of Bank of China. Plaintiffs obtained an ex parte temporary restraining order ("TRO") freezing the defendants' assets and enjoining them from, among other things, manufacturing, distributing, marketing or selling counterfeit goods. The TRO was subsequently converted into a preliminary injunction on July 12, 2010, including asset freeze provisions that specifically referenced certain Bank of China accounts.
Plaintiffs served the preliminary injunction along with a subpoena for documents on Bank of China at its New York branch. The bank produced responsive documents that were located at its New York branch, but refused to produce any documents located in China, contending that any documents held in the name of a branch in China should be sought through the Hague Convention. Bank of China asserted that these documents were not in "possession, custody or control" of the New York branch and that, because of Chinese bank secrecy laws, any document production or asset freeze of the defendants' accounts would subject the bank to liability in China.
Plaintiffs then filed a motion to compel Bank of China to comply with the preliminary injunction and produce the documents called for by plaintiffs' subpoena. The bank opposed the motion and cross-moved for an order modifying the asset restraint provisions of the preliminary injunction on the grounds that the court lacked authority to issue an extraterritorial pre-judgment asset restraint.
A. The Court Has Authority to Restrain a Counterfeiters' Overseas Assets
Judge Sullivan cited Section 35(a) of the Lanham Act (15 U.S.C. § 1117(a)), which authorizes a trademark owner to recover defendants' profits in finding that "[a] district court, therefore, 'has authority to freeze [a defendant's] assets insofar as they could be used to satisfy an award of . . . profits pursuant to Plaintiffs' Lanham Act Claims.'" Opinion at 4 (alteration in opinion) (quoting Balenciaga Am., Inc. v. Dollinger, No. 10 Civ. 2912 (LTS), 2010 WL 3952850, at *7 (S.D.N.Y. Oct. 8, 2010)). Judge Sullivan rejected Bank of China's assertion that the court lacked authority to issue a pre-judgment asset restraint directed at assets held overseas by a third party and distinguished the case relied upon by the bank, Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999), which held that a district court did not have authority to issue a preliminary injunction freezing a defendant's assets pending adjudication of a contract claim for money damages. Judge Sullivan observed that "the Court was very careful to distinguish an action for monetary damages where a restraint is sought on a party's general assets--as was the case in Grupo Mexicano--from a case in which the party is seeking an asset freeze pursuant to a court's equitable powers." Opinion at 4. The court noted that where, as in the present case, "'plaintiffs seek both equitable and legal relief in relation to specific funds, a court retains its equitable power to freeze assets.'" Id. (quoting Quantum Corp. Funding, Ltd. v. Assist You Home Health Servs. Of Va., 144 F. Supp. 2d 241, 250 n.9 (S.D.N.Y. 2001)). The court concluded that the relief sought by the Gucci plaintiffs, which included an accounting of profits was "equitable relief that authorizes a district court to freeze a party's assets." Id.
Further, the overseas location of the assets "does not, contrary to the Bank's arguments, deprive the Court of authority to issue the asset restraint." Id. at 5. The court observed, consistent with decisions issued by the Supreme Court and the New York Court of Appeals, that "'[o]nce personal jurisdiction of a party is obtained, the District Court has authority to order it to freeze property under [the party's] control, whether the property be within or without the United States.'" Id. (quoting U.S. v. First Nat. City Bank, 379 U.S. 378, 384 (1965)). Judge Sullivan concluded that because "there is no dispute that Defendants . . . are subject to this Court's jurisdiction," the court "therefore, possesses the power to restrain Defendants' assets whether they are located domestically or abroad." Id. Judge Sullivan also rejected Bank of China's reliance on New York's "separate entity rule," which the court observed "applies only for attachment purposes" and, therefore, "is inapposite here, where Plaintiffs merely seek a preliminary injunction pursuant to the Lanham Act and the Court's equitable powers." Id. at 5 n.6. Accordingly, the court denied the bank's motion to modify the preliminary injunction.
B. Bank of China Must Produce Counterfeiters' Account Records That Are Maintained in China
In granting plaintiffs' motion to compel, Judge Sullivan applied the traditional factors evaluated by courts in the Second Circuit when determining whether to order the production of overseas documents pursuant to the Federal Rules of Civil Procedure rather than the Hague Convention: (1) the importance of the documents to the litigation; (2) the specificity of the request; (3) whether the information originated outside of the United States; (4) the availability of alternative means of retrieving the information; (5) competing interests between foreign nations; (6) hardship of compliance; and (7) the good faith of the party resisting discovery. Opinion at 6.
Judge Sullivan found that although the documents originated in China and the bank's opposition to the subpoena was not in bad faith, the remaining factors all weighed in favor of requiring Bank of China to produce the documents. Specifically, the court noted that the documents sought by the subpoena were "likely to provide the most fruitful avenue for discovering the identify of additional infringers" and that "information related to Defendants' bank accounts is likely to provide the most effective measure of the revenues generated by Defendants in contravention of United States trademark laws." Id. The court also found the subpoena, which sought "production of information limited solely to Defendants' accounts at Bank of China" was "sufficiently specific and discrete to weigh in favor of Plaintiffs." Id. at 7.
The court also concluded that the Hague Convention "does not present an easily obtainable alternative for Plaintiffs in this case." Id. at 9. Judge Sullivan found the evidence put forward by plaintiffs, which included expert testimony and literature from practitioners regarding the difficult of obtaining evidence in China, "sufficient to demonstrate that a Hague Convention request in this case would be 'unduly time consuming and expensive, as well as less certain to produce needed evidence than direct use of the Federal Rules.'" Id. (quoting Société Nationale Industrielle Aérospatiale v. U.S. Dist. Court for the S. Dist. of Iowa, 482 U.S. 522, 542 (1987)). The court rejected Bank of China's contention that a Hague Convention request must be "futile" in order for this factor to weigh in plaintiffs' favor. Judge Sullivan observed that this position, which would require all parties to resort to the Hague Convention "in the first instance as long as there was some likelihood of compliance" had been specifically rejected by the Supreme Court in Aérospatiale. Id. at 8.
In weighing the national interests involved--China's interest in enforcing its bank secrecy laws and the United States' interest in enforcing the Lanham Act--the court observed that the United States "has a powerful interest in enforcing the acts of Congress, especially those, such as a the Lanham Act, that are designed to protect intellectual property rights and prevent consumer confusion." Id. at 11. In contrast, Judge Sullivan found that China had a "limited national interest in this case." Id. The court found that the fact that the customer could waive the protections afforded under Chinese bank secrecy law "strongly suggests that China's bank secrecy laws merely confer an individual privilege on customers rather than . . . a national policy entitled to substantial deference." Id. Further, "the Chinese government has not voiced any objection to disclosure in this case, which militates against a finding that strong national interests of the foreign country are at stake." Id. (citation and quotation marks omitted). Judge Sullivan also found that, having decided to do business in New York and "avail itself of the myriad benefits that come with establishing a presence in the United States' premier financial center," Bank of China "can hardly hide behind Chinese bank secrecy laws as a shield against the requirements faced by other United States-based financial institutions. This is particularly true where the bank secrecy laws at issue have been used to facilitate serious violations of United States law." Id.
Although Bank of China claimed to face possible criminal and civil penalties in China if it complied with the subpoena, the court found "the Bank's representation of the liability that it faces to be unduly speculative." Id. at 12. In support of its conclusion that Bank of China had failed to demonstrate hardship, the court observed that the cases cited by the bank and its Chinese law expert were "plainly inapposite to the facts of the case at bar. Indeed, the Bank has cited no specific instance in which a Chinese financial institution was punished for complying with a foreign court order directing the production of documents." Id. The court noted that, in contrast, the plaintiffs had cited to "at least one case in which Bank of China produced, pursuant to court order, documents similar to those that Plaintiffs seek here." Id.
Having considered the relevant factors, Judge Sullivan granted plaintiffs' motion to compel, stating that "[t]his result is particularly warranted in light of (i) the Bank's failure to demonstrate an actual likelihood that compliance with the Subpoena would result in criminal or civil liability in China, (ii) the Bank's failure to forward credible, non-speculative evidence that requests made through the Hague Convention represent a viable alternative method of obtaining discovery, (iii) the clear and obvious harm caused by counterfeiters to mark holders such as Plaintiffs, and (iv) the fact that such counterfeiters have deliberately utilized institutions such as the Bank to thwart Congress and the reach of the Lanham Act." Id. at 13.
The decision by Judge Sullivan makes clear that counterfeiters will no longer be able to render themselves "judgment proof" by moving assets offshore. Further, counterfeiters will not be able to use bank secrecy laws as a shield to hide their business records. This ruling is significant for trademark owners, as the defendants' bank records can be used to identify additional parties involved in the counterfeiting operation, thereby providing the plaintiff with more complete relief. Further, Judge Sullivan's order confirms the court's ability to freeze a counterfeiters' overseas assets, which will allow trademark owners to recoup the profits generated by the defendants' infringing activities.