Our April 1, 2010 blog entry discussed the March 8, 2010 Order in Gucci Amer., Inc. v. Curveal Fashion, No. 09 Civ. 8458 (S.D.N.Y.) (the “Order”), compelling the third-party U.S. parent (the “U.S. Parent”) of a foreign bank, to produce documents located at its subsidiary, despite claims that such production was illegal under Malaysian banking secrecy laws.  The entry concluded by noting that:

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.

Id. Subsequent history in this matter further illustrates the seriousness of this predicament.

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.