Privacy Law Blog : Privacy Lawyers & Attorneys : Proskauer Rose Law Firm : CAN-SPAM, FCRA, FACTA

In this case, the court previously determined that R. Allen Stanford, his associates, and various entities under Stanford's control (collectively “Stanford”) operated “a massive Ponzi scheme that stole approximately $8 billion from an estimated 50,000 investors scattered over more than 100 countries,” and accordingly, the Court appointed a Receiver to identify and take control of Stanford’s assets. Id. at *1. As third-party Société Générale Private Banking (Suisse) S.A. (“SocGen”) was believed to hold accounts belonging to Stanford, the Receiver sought to discover account records under the Federal Rules of Civil Procedure (“FRCP”). Id. at *2. SocGen, opposing discovery under the FRCP, argued that as the sought-after documents were located in Switzerland, compliance with the FRCP discovery request would “subject it and its employees to criminal, civil, and administrative penalties under Swiss law.” Id. Instead, SocGen argued that the Receiver should first utilize the discovery procedures of the Hague Convention, of which Switzerland is a signatory.

To determine under which mechanism discovery should proceed, the court applied the balancing of factors set out in Société Nationale Industrielle Aérospatiale v. U.S. District Court, 482 U.S. 522, 538, 107 S.Ct. 2542, 96 L.Ed.2d 461 (1987) (“Aérospatiale”) and Minpeco, S.A. v. Conticommodity Serv., Inc., 116 F.R.D. 517, 523 (S.D.N.Y. 1987). These factors include: (1) the importance to the litigation of the documents or other information requested; (2) the degree of specificity of the request; (3) whether the information originated in the United States; (4) the availability of alternative means of securing the information, (5) the competing interests of the nations whose laws are in conflict; (6) the hardship of compliance on the party or witnesses from whom discovery is sought; and (7) the good faith of the party resisting discovery under the Federal Rules. See id. at *4.

The court’s application of these factors was initially fairly typical. Factors 1, 2, and 4 were found to favor the Receiver, as the documents were “vital” to the receivership proceedings and not available anywhere else. In particular, the court noted that as it considered the Receiver to essentially be SocGen’s customer, the discovery request “constitutes no more than a bank customer asking for a copy of its own records.” Id. at *5-6, 8, and 11. Counseling the opposite conclusion, factors 3, 6, and 7 were found to favor SocGen, as the documents were only located in Switzerland; this defense was not raised in bad faith; and “comity counsels deference” to SocGen’s “potentially well-founded fear” that compliance with the discovery request under the Federal Rules could lead to prosecution. Id. at *7-8, and 12-13.

Where the Court’s analysis deviates significantly from other opinions is its consideration of the fifth factor, which in this case involves the competing interests of the U.S. and Switzerland. Whereas other courts found that U.S. discovery interests trumped foreign privacy concerns, the Stanford court found this factor to be neutral, after noting that any such balancing of interests would be “political” and “especially inapposite in this case, where the legislative authorities of both nations essentially have spoken by adopting the Convention.” Id. at *9.  Compare id. (“the Convention inherently, and adequately, balances the competing sovereign interests here because its use will benefit U.S. interests by providing the needed evidence, and protect Swiss interests by avoiding intrusions upon Swiss sovereignty.”) with Gucci, 2010 WL at *7 (“[T]he Court concludes that the United States interest in fully and fairly adjudicating matters before its courts . . . outweighs Malaysia’s interest in protecting the confidentiality of its banking customers’ records.”).

On balance, the Stanford court found that the comity factors weighed in SocGen’s favor “at least in the first instance.” Id. at *13. Accordingly, the Receiver was to proceed with discovery under the Hague Convention, but was not precluded from renewing its request for discovery under the FRCP should its efforts be unsuccessful. Id. at *13-14. In so holding, the court acknowledged that others relied on the discretion provided by the Supreme Court in Aérospatiale as a “green light to generally ‘discard[ ] the treaty as an unnecessary hassle.’” Id. at *3 (citing In re Automotive Refinishing, 358 F.3d 288, 306 (3rd Cir. 2004)). However, this approach “ignores Aérospatiale's admonition to ‘exercise special vigilance’ in international discovery disputes . . . and exemplifies courts' intrinsic ‘proforum bias’ warned against by . . . the Aérospatiale minority.” Id.

While it is unclear the extent to which this approach will be followed by other courts in the future, this opinion illustrates that it is possible for litigants and third parties to successfully navigate cross border discovery conflicts even where privacy interests are at stake.

On April 26, 2010, as the U.S. Parent allegedly had not complied with the Order, Plaintiffs requested that the U.S. Parent be held in contempt, further asking for the imposition of compensatory sanctions, a daily coercive fine, and an award of incurred legal fees. See Certification of Facts for Contempt Proceeding (the “Certification”) at 2. On May 13, 2010, Magistrate Theodore Katz issued the Certification, recommending that “the District Court hold [the U.S. Parent] in civil contempt and impose daily coercive fine, in an amount to be set by the District Court, until [the U.S. Parent] complies with the Subpoena as directed in the Order.” Certification at 2-3.

In recommending coercive sanctions of “$5000 to $10000 per day appropriate to demand compliance,” the Court noted that it is:

[M]indful of the difficult situation in which [the U.S. Parent] finds itself. If [it] complies with the Order, it must neglect BAFIA; if [it] refuses disclosure because of BAFIA, it violates the Order. But it is this very conundrum that brought the parties before this Court nearly six months ago to resolve their discovery dispute. After hearing the arguments of the parties, this Court ordered disclosure. [The U.S. Parent], however, has yet to comply with the Order for the same reason it refused to comply with the Subpoena in November 2009 – a justification that this Court rejected in the Order [it] now finds itself facing contempt ‘due to its having chosen to do business in jurisdiction in which the laws are at odds with those of its home jurisdiction. In this situation the bank must either surrender to one sovereign or the other in return for the privileges it receives or alternatively . . . accept the consequences.’

Id. at 14-16, n.4 (citations omitted). While noting the U.S. Parent’s efforts to obtain permission for the ordered disclosure from the Malaysian Central Bank, the Magistrate found that “[w]hile disclosure with consent of the Central Bank would serve to alleviate [the U.S. Parent’s] concerns about its obligations under BAFIA, the Court must only consider [its] good faith efforts to comply with the Order, not Malaysian law.” Id. at 13. Neither did the Court credit the U.S. Parent’s compromise offer to not oppose Plaintiff if it filed a proceeding in Malaysian Courts - which could potentially result in a permissible disclosure of the sought-after records. Id. at 14.

In the U.S. Parent’s favor, as it had “attested to the preservation of the Malaysian banking records and the freezing of Defendants' accounts at [the Malaysian branch],” the Court declined to order the requested compensatory sanctions and attorney’s fees. Id. at 16-17.

It is interesting to note that the Certification makes no mention of the possibility of the U.S. Parent’s executives suffering criminal punishment as a result of the ordered production, even though this concern was raised again by counsel in a letter preceding the Certification. See Letter from Nicholas Donovan, Esq. to Hon. Theodore Katz, dated April 12, 2010. It is unclear whether this omission was unintentional, or whether it reflects a continuation of the Court's prior-stated view that such penalties were unlikely. See Gucci Amer., Inc. v. Curveal Fashion, 2010 WL 808639, at *7 (S.D.N.Y. March 8, 2010) (“[the bank’s New York branch] has provided no information that would assist the Court in determining the likelihood that it would be prosecuted for disclosing the requested information, let alone any indication that the maximum penalty would be imposed. While the penalties are not insignificant, the Court cannot conclude that the prospect of significant hardship is anything more than mere speculation.”).

In response to the certification, District Judge Richard Sullivan ordered the U.S. Parent to show cause in writing why “it should not be held in contempt as outlined in Judge Katz's recommendation.” May 14, 2010 Order. The U.S. Parent submitted its brief as ordered, and is scheduled to appear before Judge Sullivan on May 27, 2010. See id.

The U.S. Parent’s continued plight highlights the need for organizations to take seriously third-party subpoenas, including the retention of appropriate expertise, so that cross border issues can be identified early and managed.
 

The potential conflict between foreign blocking statutes and U.S. discovery laws is a well documented problem. See, e.g., Working Document 1/2009 on pre-trial discovery for cross border civil litigation (European Commission, Working Document No.WP 158, 2009). When considering whether to order production despite the applicability of foreign law, Courts in the U.S. apply the test set forth in the Restatement (Third) of Foreign Relations Law of the United States, which includes consideration of:

[T]he importance of the documents or information requested to the litigation; (2) the degree of specificity of the request; (3) whether the information originated in the United States; (4) the availability of alternative means of retrieving the information; and (5) the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the request would undermine the important interests of the state where the information is located.

Gucci, 2010 WL 808639, at *2.  Further, in the Second Circuit, two additional factors are considered, “the hardship of compliance on the party or witness from whom discovery is sought [and] the good faith of the party resisting discovery.” Id.

In Gucci, the Plaintiff sought certain documents and information regarding Defendants’ Malaysian bank accounts by serving a subpoena on the U.S. Parent’s New York Agency in midtown Manhattan. Id. at *1. The U.S. Parent took the position that complying with the subpoena would violate banking secrecy laws in Malaysia. Id. After consideration of the Restatement and Second Circuit factors, the court ordered the production of the sought after records because:

[T]he documents are vital to the litigation, the requests are direct and specific, the documents are not easily obtained through alternative means, the interest of the United States outweighs that of Malaysia under the circumstances, and the likelihood that [the New York branch] would face civil or criminal penalties is speculative. Although [it] has acted in good faith, and the documents are located abroad, this is insufficient to overcome those factors weighing in favor of disclosure.

Id. at *8.

Putting aside the question of whether the court’s analysis was correct, there are two wrinkles to this case that are worthy of note.

First, the U.S. Parent was a third party, and courts are generally less willing to impose burden on third parties during discovery than they are parties. The Gucci court considered the U.S. Parent’s third-party status during its analysis of the “hardship factor,” but determined that this factor did not outweigh the Restatement factors favoring of production. Id. at *7.

Finally, with regard to the importance of the documents sought, it is worth noting that the requested documents were not relevant to a claim or defense, but were instead directed toward the enforcement of a judgment. The court noted that in the absence of the requested discovery, “Plaintiffs are left without a remedy and it cannot be said that the matter has been ‘fully and fairly adjudicated.’” Id. at *5.

This opinion illustrates the no-win situation that foreign corporations continue to be placed in by the tension between U.S. courts and foreign law, and underscores the importance of raising foreign-law based discovery objections as early and in as detailed a manner as possible in order to maximize the chances of successfully navigating this conflict.