November 20, 2014

Luxury Brands Face Setback in Efforts to "Follow the Money" Against Online Merchants

4 min

Second Circuit Limits General Personal Jurisdiction in Gucci America, Inc. et al. v. Li et al.

For years, luxury brand manufacturers like Gucci have been trying to recover profits from online merchants who sell counterfeit goods via offshore websites and ultimately wire the proceeds from these illegal activities to the Bank of China (BOC). Plaintiffs in the underlying action brought an action in the United States District Court for the Southern District of New York against numerous online merchants (Defendants) who were displaying authentic products on their websites, but were manufacturing and selling counterfeit versions to consumers. Bank of China is appealing the case, Gucci America, Inc., et. al. v. Li et. al., 768 F.3d 122 (2d Cir. 2014) (Gucci/BOC), as a nonparty.

Plaintiffs in the Gucci/BOC case obtained an ex parte temporary restraining order against the online merchants, freezing their assets and preventing them from selling counterfeit goods. After the TRO was issued, Plaintiffs gathered sufficient evidence showing that online merchants wired proceeds from the counterfeit sales to their accounts at the BOC. The TRO was then converted into an Asset Freeze Injunction which applied to all BOC accounts associated with or utilized by the online merchants. Plaintiffs served the BOC with the Asset Freeze Injunction and a document subpoena requesting all documents concerning the online merchants and their accounts. The court then ordered the BOC to comply with the subpoena and the Asset Freeze Injunction and BOC appealed, arguing, among other things, that it violated Chinese law.

We are headed into unchartered territory. Previous Supreme Court and New York Court of Appeals cases have long exercised general jurisdiction on the basis that a foreign corporation was doing business through a local branch office in the forum state. Barrow S.S. Co. v. Kane, 170 U.S. 100 (1898); Tauza v. Susquehanna Coal Co., 220 N.Y. 259 (1917) (Cardozo, J.). In light of the U.S. Supreme Court's recent decision in Daimler AG v. Bauman, 134 S. Ct. 746 (2014), the Court of Appeals for the Second Circuit issued its long-awaited decision in Gucci/BOC, holding that foreign banks are not subject to general personal jurisdiction where banks only have branch offices in the U.S., but are incorporated and headquartered elsewhere. In reaching this holding, the Second Circuit vacated its August 23, 2011 order compelling nonparty BOC to comply with the Asset Freeze Injunction and a document subpoena and its May 18, 2012 order denying BOC's motion to reconsider. The Court also reversed its November 15, 2012 order holding the Bank in civil contempt and imposing civil penalties.

After the Second Circuit held oral arguments last December, the Supreme Court threw a curve ball with its decision in Daimler AG v. Bauman, holding that aside from a few rare exceptions, a foreign corporation is only subject to general jurisdiction in a state that is the "company's formal place of incorporation or its principal place of business." 134 S. Ct. 761; id. at n.19. This decision led the Second Circuit to conclude that it did not have general jurisdiction over BOC and therefore, could not enforce the Asset Freeze Injunction against the BOC. As a result, the Second Circuit remanded the case back to the district court to decide whether it had specific jurisdiction, and if it does, to then conduct a comity analysis regarding Chinese asset freezing law using the framework provided by § 403 of the Restatement (Third) of Foreign Relations Law. The comity analysis takes into account the various interests at stake, including:

  1. the Chinese Government's sovereign interest in its banking laws;
  2. the Bank's expectations, as a nonparty, 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.

As a result of the Gucci/BOC decision, foreign banks can no longer be forced to freeze assets or turn over documents located outside the U.S., unless the district court has found that there is specific jurisdiction and has subsequently conducted a comity analysis. What this decision demonstrates is that it is difficult for brand owners to break the chain in counterfeiting online sales where the websites and the domain name registrants are located offshore, the sales are made to U.S. consumers, and the funds wired to a bank that has limited contacts in the United States.

Venable will continue to monitor this case and report on whether the district court finds specific jurisdiction over the BOC and if so, how it conducted its comity analysis.

Jillian A. Centanni co-wrote this article.