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2nd Circ. weighs court's reach against Chinese banks in Nike counterfeit case

5 minute read

People walk past a store of the sporting goods retailer Nike Inc at a shopping complex in Beijing, China March 25, 2021. REUTERS/Florence Lo

  • Chinese counterfeiters appeal $1.8 billion win for Nike
  • Banks say freeze of counterfeiter assets didn't apply to them
  • Litigation financier wants to hold banks in contempt

(Reuters) - The 2nd U.S. Circuit Court of Appeals heard oral arguments on Monday in Nike Inc's $1.8 billion counterfeit case that could clarify when U.S. courts can go after foreign entities.

The three-judge panel considered whether a group of Chinese banks failed to comply with a lower court's asset freeze against hundreds of counterfeiters. The judges also heard arguments about the limits of New York's "separate entity" rule that treats U.S. branches of foreign banks as separate legal entities.

Nike won rulings from a Manhattan federal court against 636 Chinese counterfeiters from 2013 to 2015 for selling counterfeit Nike and Converse sneakers. The court ordered their assets restrained in the U.S. and abroad.

All of the counterfeiters defaulted, and Nike assigned its judgment in the case to Next Investments LLC, owned by litigation finance firm Tenor Capital Management Co LP, in 2017.

Next Investments subpoenaed six Chinese banks with New York branches where the counterfeiters allegedly had accounts in 2017 and filed to hold them in contempt for failing to comply with an order freezing the counterfeiters' assets.

Senior U.S. District Judge Colleen McMahon rejected Next Investment's motion and bid for a $150 million fine in 2020. McMahon said Next Investments' request "seeks to hold the Banks liable for violating orders that never bound them" because no judge ever clearly concluded the freeze applied to them, and Next Investments never moved to compel their compliance.

McMahon also found that the restraint couldn't apply to the Chinese branches of the Chinese banks because of New York's separate entity rule, which treats local branches of foreign banks as separate legal entities.

Next Investments' attorney Robert Weigel of Gibson, Dunn & Crutcher argued on appeal – before a panel composed of Senior U.S. Circuit Judge Jon Newman, and judges Michael Park and Steven Menashi – that the banks were attempting to use the separate entity rule as a "get-out-of-jail-free card" for enabling counterfeiters.

"There's no policy reason why a court would want to encourage people to aid defendants in violating injunctions," Weigel said.

Weigel also argued that the court had personal jurisdiction over the banks regardless of the rule because the Chinese parent banks received thousands of transactions through accounts they set up in New York.

In his questions to Weigel, Newman appeared particularly focused on whether any of McMahon's orders specifically applied to the banks and whether Next Investments had moved to compel the court to freeze assets at the banks before moving to hold them in contempt. Weigel's response to those questions, the judge said, was made with "hesitation" and "complication."

Menashi questioned whether the banks were subject to the asset freeze. The district court had noted that an analysis of whether it had jurisdiction to apply the freeze to the banks, among other things, would be premature until Next Investments moved to compel them to comply.

"Doesn't that mean the district court thinks that it's not requiring the overseas banks to comply yet?" Menashi said.

Sanford Weisburst of Quinn Emanuel Urquhart & Sullivan argued for five of the banks that the lower court was required to analyze the separate entity rule and comity principles – principles of legal reciprocity with other countries – before they could be compelled to comply or be held in contempt.

Weisburst alternatively argued that the freeze didn't apply to the banks because routine banking activities like withdrawals didn't put them in "active concert or participation" with the counterfeiters. Newman seemed interested in the argument as a simpler way to resolve the case without touching on complex international-relations issues raised by the separate entity rule and comity concerns.

Newman also questioned the banks for not previously seeking to clarify whether routine banking activities tied them to the counterfeiters.

"Aren't you a lot better off getting that ruling early?" Newman said. "Otherwise, you're acting at your peril, as you did here."

Adam Hoffinger of Greenberg & Traurig argued for the Agricultural Bank of China. Among other things, Hoffinger said holding the bank in active concert with the counterfeiters requires something more than merely processing normal banking transactions, such as facilitating the opening of new accounts.

The case is Nike Inc v. Wu, 2nd U.S. Circuit Court of Appeals, No. 20-602.

For Next Investments: Robert Weigel of Gibson, Dunn & Crutcher

For the banks: Sanford Weisburst of Quinn Emanuel Urquhart & Sullivan; Adam Hoffinger of Greenberg & Traurig

Our Standards: The Thomson Reuters Trust Principles.

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