The situation: Plaintiffs in an underlying trademark lawsuit have sought contempt penalties for violating asset restriction orders against six non-party Chinese banks that held assets of judgment debtors (hundreds of alleged infringers) in Chinese branches.

The result: In Next Investments LLC v. Bank of China, the Second Circuit denied the sanctions against Chinese banks, arguing that there was a “reasonable basis of doubt” as to whether the mere provision of routine account services at foreign branches to non-compliant judgment debtors constituted a “Concert or active participation” with the debtors for the 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 prevent asset restriction orders meant to bind foreign branches of a bank.

Look ahead: The Second Circuit ruling offers welcome relief to foreign banks in New York whose foreign branches may hold accounts receivable that do not comply with judgments rendered by US courts. However, foreign banks should ensure that they assert and maintain their objections to the potential extraterritorial application of U.S. court asset restrictions on their foreign branches, especially where those branches may face conflicting local laws. .

The underlying dispute

The litigation behind the Second Circuit ruling began with a 2013 trademark infringement action by Nike against several hundred Chinese retailers for selling counterfeit Nike products on the internet. To protect its interests, Nike served pre-judgment restraining orders on the New York branches of six Chinese banks that held the assets of the counterfeit sellers who claimed to apply, that the “assets of the judgment debtors be held in custody. United States or abroad. The banks opposed this possible extraterritorial claim on several grounds, but the District Court for the Southern District of New York dismissed the banks ‘objections as not being’ ripe ‘because Nike said it’ does not seek any enforcement against the banks. ”As a result, in 2015, the district court issued a default judgment of $ 1.8 billion against the counterfeit defendants (who never appeared in the case) which preserved the relevant asset restrictions.

In 2017, Nike ceded its rights in the default judgment to the litigation fund vehicle Next Investments. He then sought and obtained a contempt order against the nonconforming judgment debtors. The banks reaffirmed their objections to the potential extraterritorial application of asset restrictions and, in response, Next said it “is not seeking to enforce the banks”, nor “an order requiring them to enforce the banks. [b]the banks therefore withdrew their objections without prejudice to their renewal if Next sought to enforce the restrictions.

Despite these repeated representations by Nike and then Next, Next in 2019 asked for sanctions against the banks for contempt of the orders of restriction of assets by failing to freeze the accounts concerned. Next argued that it had identified thousands of withdrawals and deposits to the accounts since the entry of the asset restriction orders which constituted the “concert or active participation” of banks with judgment debtors in violation of the Federal Rule of Civil Procedure 65 (d) (2). Next sought $ 150 million in “contempt compensatory damages,” which included statutory damages against the banks for being “participants in the counterfeit networks” and therefore jointly and severally liable with the judgment debtors, in addition the dollar amount of illegal withdrawals from the accounts, and a rotation of the amounts remaining in the accounts. The district court dismissed Next’s motion leading to the appeal.

The decision of the second circuit

On appeal, the Second Circuit accepted the district court’s refusal to reward Next’s “trap tactics” and “gambling” by repeatedly denying and failing to continue enforcement of asset restrictions against the banks. Importantly, he also ruled that the district court had not abused its discretion by denying sanctions because there was “just cause.[s] of doubt “as to whether: (i) the asset restrictions bound banks extraterritorially in light of the New York” separate entity rule “(which treats branches of banks outside New York as separate entities for the purposes of, inter alia, and post-judgment asset restrictions and rotation orders under New York law) and principles of international comity in view of potentially conflicting Chinese law; and (ii) the provision of “current financial services” constituted a “concert or active participation” which “aided and abetted” the judgment debtors in violation of rule 65 (d).

Although the Second Circuit declined to determine whether the provision by banks of “routine” banking services could ever constitute a violation of asset restriction orders in general, the court’s refusal to find that these services provided by banks in that case constituted an “active concert or involvement” with judgment debtors in defiance of asset restrictions provides welcome relief for international banks with a presence in the United States. The Second Circuit’s rejection of the argument from Next that New York’s “separate entity rule” should not apply as it was inconsistent with Federal Rule 65 (d) (which binds non-parties with actual notice to restraining orders) is also welcome. The court held that rule 69, which specifically provides that the “enforcement proceedings [of federal judgments] shall be in accordance with the procedure of the State in which the tribunal is situated ”governed in this context by the more general language of rule 65 (d). Further, finding no New York authority basing the applicability of the separate entity rule on the “nature of the jurisdictional hook”, Circuit II also rejected Next’s argument that the rule does not. should not apply because personal jurisdiction over banks was based on the foreign accounts’ use of correspondent and settlement accounts in New York, rather than on the presence of a branch in New York.

Legal implications

The Second Circuit’s refusal to conclude that the day-to-day banking transactions of account holders at overseas bank branches warranted contempt sanctions against non-party banks in this case offers welcome relief to foreign banks with a presence in states. -United, and in particular in New York. However, given that the Second Circuit declined to determine whether the facilitation of “routine” banking services could ever constitute a violation of restraint orders in general, banks should continue to monitor disputes over Rule 65 ( d) (2).

Further, the court’s dismissal of arguments that New York’s “separate entity rule” is inconsistent with federal rules, or that the rule’s application depends on the nature of personal jurisdiction over a bank. has potentially broader implications and could apply to protect banks from liability in other procedural contexts as well. Nonetheless, the procedural history of this case emphasizes that to mitigate the risk of liability to themselves, international banks should be vigilant in asserting and preserving their rights and objections in any US litigation that may restrict accounts receivable. foreign branches of banks.

Three key points to remember

  1. The Second Circuit found that there was a “basis of reasonable doubt” to support a finding of contempt as to whether the mere provision of routine account and transaction services at overseas bank branches to debtors non-compliant judicial proceedings constituted a “concert or active participation” with them for the purpose of asset restrictions under Federal Rule of Civil Procedure 65 (d) (2). However, the Second Circuit expressly declined to consider whether the provision of “routine” banking services could ever constitute aiding and inducement of violations of asset restriction orders in general. Therefore, foreign banks should continue to closely monitor US decisions that deal with the rule 65 (d) (2).
  2. In concluding that there was a “fair amount of doubt” as to whether the asset restrictions should apply extraterritorially in light of the New York “separate entity rule”, the Second Circuit has rejected arguments that the New York separate entity rule is inconsistent with the federal rule of civil procedure 65, and that the rule’s applicability depends on the nature of the personal jurisdiction over the foreign bank.
  3. This case highlights how foreign banks operating in the United States must vigilantly assert and preserve their rights and objections to asset restriction orders that may impact the accounts receivable of their foreign branches. Plaintiffs in general, and litigation finance vehicles in particular, may seek to recover from banks what they cannot obtain from judgment debtors.