Second Circuit holds foreign banks are not subject to jurisdiction based on the presence of a US branch
On September 17, 2014, in Gucci America, Inc v Li and Tiffany (NJ) LLC v Forbse, the United States Court of Appeals for the Second Circuit held for the first time that foreign banks are not subject to jurisdiction in the United States simply because they operate U.S. branches.
In this groundbreaking opinion in a case involving banks incorporated and headquartered in China, the Second Circuit acknowledged that New York has long exercised jurisdiction over foreign banks that are "doing business" in New York through the operation of New York branches even where the claims did not arise from the business of the New York branch. The Second Circuit recognized, however, that the United States Supreme Court's January 2014 decision in Daimler AG v Bauman has dramatically narrowed the scope of general personal jurisdiction. Under Daimler, a corporation is subject to general jurisdiction only in the jurisdiction where it is "at home." Absent truly exceptional circumstances, that means only the jurisdiction where it is incorporated or has its principal place of business.
The Second Circuit also rejected an argument that the banks had waived their jurisdictional objections by not asserting them in the district court, because until January 2014, when the Supreme Court issued Daimler, any argument that a foreign bank with a New York branch was not subject to general jurisdiction in New York would have been futile because it was contrary to controlling precedent.
Allen & Overy LLP represented Bank of China, and Industrial and Commercial Bank of China in the two appeals.
The banks are not parties to the lawsuits, which involve trademark infringement claims brought by Gucci and Tiffany against defendants who are alleged to have accounts at the banks in China. The plaintiffs obtained pre-judgment asset-freezing injunctions against the defendants, served them on the banks' New York branches, and demanded confirmation that the banks would freeze the defendants' accounts worldwide.
The plaintiffs moved to compel the banks to comply with the freezing injunctions, and the banks cross-moved to modify the injunctions so that they would not require the banks to freeze accounts in China because, among other reasons, Chinese law does not permit a Chinese bank to freeze an account in China under order of a foreign court. The district courts compelled the banks to comply with the asset restraints, asserting general personal jurisdiction on the basis that the banks were doing business in New York by operating branches there.
In one of the cases, the district court also compelled compliance with a document subpoena served on the bank's New York branch for discovery of account records located in China, and subsequently held the bank in contempt based on a finding that the bank had not fully complied with the order compelling production.
The Asset Restraints
Although the Second Circuit held that the freezing injunctions were properly granted as against the defendants, over whom the court had personal jurisdiction, the Court recognized that courts' ability to enforce the injunctions against the non-party banks was a different matter, requiring personal jurisdiction over the banks. There are two forms of personal jurisdiction: (1) general, or "all-purpose" jurisdiction, which is available when a corporation's affiliations with a state are so continuous and systematic that it is essentially "at home" in the state, and which permits the court to hear any and all claims, including those that do not arise from in-state conduct; and (2) specific, or "conduct-linked" jurisdiction, which may be exercised only when the corporation's in-state conduct is continuous and systematic and that conduct gives rise to a claim.
The district courts had asserted general jurisdiction based on the pre-Daimler law that having a branch office in New York was sufficient to expose a foreign corporation to jurisdiction in New York. The Court of Appeals reversed that holding. Under Daimler, held the Court, absent some truly exceptional circumstances, a corporation is subject to general jurisdiction only in the "state that is the company's formal place of incorporation or its principal place of business." In this case, that jurisdiction was China, not New York.
The Court of Appeals went on to reject the plaintiffs' argument that the banks had waived their jurisdictional objections by not asserting them in the district court. As the Second Circuit held, a litigant does not waive an argument that, if raised, would have been contrary to controlling precedent. Before Daimler, the argument that operating a New York branch did not subject a foreign bank to general jurisdiction would have been contrary to controlling case law, including the Second Circuit prior's decisions in Wiwa v Royal Dutch Petroleum Co and Hoffritz for Cutlery, Inc v Amjac Ltd.
The Court of Appeals then remanded the cases so that the district courts can address in the first instance whether there is any basis to exercise specific jurisdiction over the banks.
As Chinese law would prohibit the banks from complying with a U.S. court order to freeze accounts in China, the Second Circuit also directed the district courts that, if they conclude there is some basis to exercise specific jurisdiction over the banks, they must conduct a comity analysis before ordering compliance with the asset restraints, giving "due regard to the various interests at stake," including: (1) the Chinese Government's sovereign interests in its banking laws; (2) the Bank's expectations as a non-party, regarding the regulation to which it is subject in its home state and also in the United States, by reason of its choice to conduct business here; and (3) the United States' interest in enforcing the Lanham Act and providing robust remedies for its violation.
The Document Subpoena
Finally, the Court of Appeals reversed the district court's order compelling compliance with the document subpoena and its decision holding the bank in contempt of that order, holding that a district court must have personal jurisdiction over a non-party "in order to compel it to comply with a valid discovery request under Federal Rule of Civil Procedure 45."
Implications of the Decisions
Tiffany and Gucci have overturned long-standing New York and Second Circuit precedent subjecting foreign banks with a branch office in New York to general jurisdiction. It is now clear, therefore, that foreign banks can no longer be compelled to freeze assets or turn over documents located abroad absent exceptional circumstances or suit-related contacts with the forum state that would establish specific jurisdiction.
The Second Circuit has also endorsed the principle that the courts should not order foreign corporations to engage in conduct that violates foreign law without conducting a comity analysis that balances the various interests at stake, including the sovereign interests of the two jurisdictions and those of the person that will be subject to the order. As the Second Circuit put it, "where the Bank objected to the application of the Asset Freeze Injunction to it, specifically citing an apparent conflict with the requirements of Chinese banking law, comity principles required the district court to consider the Bank's legal obligations pursuant to foreign law before compelling it to comply with the Asset Freeze Injunction."