A Second Circuit conflict involving a $1.8 billion victory by
At issue is a request for a $150 million penalty that Next Investments LLC tried to have a court impose on six Chinese banks for allegedly violating a court-ordered asset freeze by shifting $69 million of illicit proceeds beyond the reach of U.S. courts.
Nike had won a $1.8 billion default judgment against a bevy of counterfeiters in New York federal court after they failed to show up. It sold the rights to collect to Next, which is appealing that lower court’s rejection of its proposed penalty to the U.S. Court of Appeals for the Second Circuit.
The appeals court could draw important lines regarding what plaintiffs and courts can do to restrain U.S. branches of foreign banks that hold illicit revenue. A reversal could present a new tool for brand owners to block movement of illicit funds out of U.S. jurisdiction by outlining when and how courts can impose and enforce asset freezes on those branches.
Oral argument was scheduled for Dec. 7, though the Chinese banks have asked the court to move it to a different week.
Banking groups call New York’s separate entity rule, which bars courts from enforcing judgments on a bank’s branches outside their jurisdictions, crucial to order in international banking and to the state’s position as a banking mecca.
Brand owners, though, are “fed up” with counterfeiters’ impunity, as even court victories often prove fruitless, trademark attorney Monica Riva Talley of Sterne Kessler Goldstein Fox PLLC in Washington said.
“They’re allowed to take advantage of being in the U.S., but they’re not open to any sort of downside of that relationship,” Talley said of the banks. “The playing field isn’t equal. And these counterfeiters are criminal actors. The playing field shouldn’t even be level.”
But the Banking Law Committee for the New York City Bar Association and the European Banking Federation both backed the Chinese banks. Their briefs primarily focused on the importance of the separate entity rule, which they said creates legal order where banks could otherwise face conflicting laws.
The rule guards against double-liability and mitigates “potentially enormous burdens” on courts and banks of global asset searches and judgment enforcement, the NYCBA brief said.
”Courts have consistently upheld the separate entity rule both because its abolition would endanger the vibrancy and prosperity of New York, and because it is supported by numerous compelling rationales,” the NYCBA added.
Nike and subsidiary Converse Inc. won their default judgment in 2015, after the alleged counterfeiters failed to appear in the U.S. District Court of the Southern District of New York. Third-party Chinese banks cited the separate entity rule in a letter objecting—to no avail—to a proposed broad injunction freezing defendant assets, whether currently located in the U.S. or abroad.
The fact that Next acquired rights to pursue the award in 2017 by itself reflects the difficulty of collecting judgments from overseas entities, trademark attorney Julia Anne Matheson of Potomac Law Group PLLC in Washington said.
“If that approach does not indicate that Nike doesn’t think there’s a likelihood of getting a recovery, I don’t know what does,” Matheson said. “‘Here, go collect on your subprime mortgage.’”
After collecting a small sum of counterfeiters’ money still held within the U.S., Next took a last shot at substantial remuneration when it asked for the $150 million penalty. It said the banks allowed tens of thousands of pre- and post-judgment transactions that allegedly violated the freeze. A new judge, assigned the case when the original one retired, denied the request in January.
The terms of the freeze, said U.S. District Judge Colleen McMahon, don’t unambiguously apply to the Chinese banks, which include the Bank of China, Agricultural Bank of China, Bank of Communications, China Construction Bank, China Merchants Bank, and Industrial and Commercial Bank of China Ltd.
Also, the separate entity rule bars post-judgment restraints of assets held in foreign bank branches, she said, pointing, among other cases, to the Second Circuit’s 2014 decision in Motorola Credit Corp. v. Std. Chtd. Bank.
Next said the freeze’s validity already had been decided and not appealed, but McMahon said that was before the banks were a litigating party.
‘Head Off the Snake’
Next’s Second Circuit briefs said most banks operating in New York “honor asset freezes every day,” and that the proposed penalty doesn’t involve the separate entity rule because it wouldn’t touch foreign-held assets. It also said federal court rules bar anyone with notice of an order from knowingly aiding its violation.
But the Chinese banks said failing to prevent routine banking transactions doesn’t mean the banks were in “active concert and participation” with the counterfeiters, as federal rules require for an injunction to apply. They also countered that federal court rules governing post-judgment freezes explicitly defer to state law, such as the separate entity rule.
The banks also said asset freezes related to federal trademark law known as the Lanham Act are designed to prevent further counterfeiting, in which Next has no interest.
The American Association of Publishers, backing Next in a brief, drew parallels between international counterfeiting and copyright piracy in a brief.
The contested freeze is an “equitable power” of the federal court, which isn’t something state law can override, the brief’s author, Matthew J. Openheim of Oppenheim + Zebrak LLP, said. The separate entity rule also doesn’t stop the court from punishing banks for violating “fundamental, basic court orders,” he added.
“Banks are facilitating that illegal commerce. That undermines not only the specific victim in the case, but also has a broader ripple effect on the economy,” Oppenheim said. “Once you cut off the money supply involved in this blatant illegal conduct, you’ve cut the head off the snake, and the illegal conduct will end.”
The U.S. has treaties with some countries to respect each other’s court judgments, but not with China—the source of 85% of counterfeit contraband seized by customs enforcement, according to a January Department of Homeland Security report.
American companies can ask China’s Intermediate People’s Court to enforce judgments. But only two U.S. judgments have ever been enforced in China—in 2017 and 2018—and neither of them were counterfeit cases.
Talley said trying to have judgments ratified in China is usually cost-prohibitive, especially since identified accounts often only contain a fraction of the award. Currently, the more efficient practice is to have known producers shut down in China through Chinese courts, she said. She called Next’s move “a great creative play.”
“I love that they’re doing it. I hope it gives anti-counterfeit teams another tool to use,” Talley said.
Matheson said court and executive actions probably wouldn’t substantially inhibit counterfeiters’ cash flow, and Congress should step in.
“Ultimately the way this has to be solved is legislatively,” Matheson said, specifically suggesting regulating the middleman between counterfeiter and buyer. “You have to stop U.S. companies from processing those payments.”
The case is Nike v. Wu, 2d Cir., No. 20-602, Unsealed Reply Brief 10/14/20.