The Situation: Plaintiffs in an underlying trademark action sought contempt-sanctions for violations of asset restraining orders against six nonparty Chinese banks that held assets of judgment debtors (hundreds of alleged counterfeiters) at Chinese branches.

The Result: In Next Investments LLC v. Bank Of China, the Second Circuit denied sanctions against the Chinese banks, finding that there was "fair ground of doubt" as to whether the mere provision of routine account services at foreign branches to non-compliant judgment-debtors constituted "active concert or participation" with the debtors for purposes of restraining orders under Federal Rule of Civil Procedure 65(d)(2). The court also suggested that New York's "separate entity rule" and considerations of international comity based on conflicting foreign laws may preclude asset restraining orders purporting to bind a bank's foreign branches.

Looking Ahead: The Second Circuit's decision provides welcome relief for foreign banks present in New York whose foreign branches may hold the accounts of non-compliant debtors of judgments entered by U.S. courts. However, foreign banks must ensure that they assert and preserve their objections against the potential extraterritorial application of U.S. court asset restraints on their foreign branches, particularly when those branches may face conflicting local laws.

The Underlying Dispute

The dispute giving rise to the Second Circuit's decision began with a trademark infringement suit filed by Nike in 2013 against several hundred Chinese retailers for selling counterfeit Nike products on the internet. To protect its interests, Nike served pre-judgment asset restraining orders on the New York branches of six Chinese banks that held the assets of the counterfeit sellers that purported to apply regardless of whether the judgment debtors' "assets are held in the U.S. or abroad." The banks objected to this potential extraterritorial application on several grounds, but the District Court for the Southern District of New York overruled the banks' objections as not "ripe" because Nike represented that it "seeks no enforcement against the banks." Accordingly, in 2015, the District Court issued a $1.8 billion default judgment against the defendant counterfeiters (who never appeared in the case) that preserved the relevant asset restraints.

In 2017, Nike assigned its rights to the default judgment to litigation finance vehicle Next Investments. Next then sought and was granted a contempt order against the non-compliant judgment debtors. The banks reasserted their objections to the potential extraterritorial application of the asset restraints and, in response, Next represented that it "seeks no enforcement against the banks," nor did it seek "an order compelling the [b]anks to turn over their proceeds." The banks accordingly withdrew their objections without prejudice to renewing them if Next were to seek to enforce the restraints.

Despite these repeated representations by first Nike and then Next, in 2019 Next moved for sanctions against the banks for being in contempt of the asset-restraint orders by failing to freeze the relevant accounts. Next argued that it had identified thousands of withdrawals and deposits from the accounts since the entry of the asset restraining orders that constituted the banks' "active concert or participation" with the judgment debtors in violation of Federal Rule of Civil Procedure 65(d)(2). Next sought $150 million in "compensatory contempt damages," which included statutory damages against the banks for being "participants in the counterfeiting networks" and thus jointly and severally liable with the judgment debtors, in addition to the dollar amount of unlawful withdrawals from the relevant accounts, and a turnover of the amounts remaining in the accounts. The District Court denied Next's motion leading to the appeal.

The Second Circuit's Decision

On appeal, the Second Circuit agreed with the District Court's refusal to reward Next's "gotcha tactics" and "gamesmanship" in repeatedly disclaiming and not pursuing enforcement of the asset restraints against the banks. Importantly, it also held that the District Court did not abuse its discretion in denying sanctions because there were "fair ground[s] of doubt" as to whether: (i) the asset restraints bound the banks extraterritorially in light of New York's "separate entity rule" (which treats a banks' branches outside New York as separate entities for purposes of, among other things, pre- and post-judgment asset restraints and turnover orders under New York law) and principles of international comity given potentially conflicting Chinese law; and (ii) providing "routine financial services" constituted "active concert or participation" that "aided and abetted" the judgment debtors in violation of Rule 65(d).

Although the Second Circuit declined to address whether banks' provision of "routine" banking services could ever constitute aiding and abetting violations of asset-restraint orders in general, the court's refusal to find that such services by the banks in this case constituted "active concert or participation" with the judgment-debtors in contempt of asset restraints provides welcome relief for international banks with a U.S. presence. Also welcome is the Second Circuit's rejection of Next's argument that New York's "separate entity rule" should not apply because it was inconsistent with Federal Rule 65(d) (which binds nonparties with actual notice to restraining orders). The court held that Rule 69, which specifically provides that the "procedure on execution [of federal judgments] must accord with the procedure of the state where the court is located" governed in this context over the more general language in Rule 65(d). Moreover, having found no New York authority basing the applicability of separate entity rule on the "nature of the jurisdictional hook," the Second Circuit also rejected Next's argument that the rule should not apply because personal jurisdiction over the banks was based on the foreign accounts' use of New York correspondent and settlement accounts, rather than on the presence of a New York branch.

Legal Implications

The Second Circuit's refusal to find that routine banking transactions by accountholders at bank branches abroad warranted contempt-sanctions against the non-party banks in this case provides welcome relief to foreign banks with a U.S., and specifically New York, presence. However, because the Second Circuit declined to address whether the facilitation of "routine" banking services could ever constitute aiding and abetting violations of asset-restraint orders in general, banks should continue to monitor litigation concerning Rule 65(d)(2).

Additionally, the court's rejection of arguments that New York's "separate entity rule" is inconsistent with the Federal Rules, or that the application of the rule depends on the nature of the personal jurisdiction over a bank has potentially wider implications and could apply to shield banks from liability in other procedural contexts as well. Nonetheless, the procedural history of this case underscores that to mitigate the risk of liability to themselves, international banks should be vigilant in asserting and preserving their rights and objections in any U.S. litigation potentially restraining customer-accounts at the banks' foreign branches.

Three Key Takeaways

  1. The Second Circuit held that that there was "fair ground of doubt," to support a contempt finding, as to whether the mere provision of routine account and transaction services at bank branches abroad to non-compliant judgment-debtors constituted "active concert or participation" with them for purposes of asset restraints under Federal Rule of Civil Procedure 65(d)(2). However, the Second Circuit expressly declined to address whether the provision of "routine" banking services could ever constitute aiding and abetting violations of asset-restraint orders in general. As a result, foreign banks should continue to closely monitor U.S. decisions that address Rule 65(d)(2).
  2. In concluding that there were "fair grounds of doubt" as to whether asset restraints should apply extraterritorially in light of New York's "separate entity rule," the Second Circuit rejected arguments that New York's separate entity rule is inconsistent with Federal Rule of Civil Procedure 65, and that the applicability of the rule depends on the nature of the personal jurisdiction over the foreign bank.
  3. This case underscores how foreign banks with a U.S. presence should vigilantly assert and preserve their rights and objections to asset-restraint orders potentially impacting customer-accounts in their foreign branches. Plaintiffs in general, and litigation finance vehicles in particular, may seek to recover from the banks what they are unable to obtain from judgment debtors.