Court Rules China Banks Don’t Have to Freeze Assets Linked to Fake Designer Goods

By Joseph Ax | September 18, 2014

Luxury goods retailers Gucci and Tiffany failed to persuade a U.S. appeals court to require major Chinese banks to freeze the assets of alleged counterfeiters in a pair of cases that have drawn the attention of U.S. and Chinese regulators.

The 2nd U.S. Circuit Court of Appeals in New York directed two lower court judges on Wednesday to reexamine whether they had the authority to force compliance with court orders freezing accounts in China in light of a U.S. Supreme Court decision limiting federal court jurisdiction over foreign corporations.

A lawyer for the retailers declined to comment. A lawyer for the banks did not respond to a request for comment.

New York courts have grappled recently with whether foreign-based banks can be forced to comply with orders freezing overseas assets. On Tuesday, New York State’s highest court heard arguments on whether state law prohibits a Motorola subsidiary from freezing the assets of a Turkish family held in the United Arab Emirates by Standard Chartered Bank.

The Federal Reserve Bank of New York backed foreign banks in a similar case, warning that subjecting bank headquarters to U.S. law via their New York City branches could imperil the city’s status as a global financial center.

In the current litigation, Tiffany & Co and several subsidiaries of French conglomerate Kering SA, including Gucci Group, Bottega Veneta and Yves Saint Laurent, filed lawsuits in New York several years ago against numerous Chinese entities, claiming they sold counterfeit goods online.

The companies asserted the counterfeiters kept their profits in accounts at state-controlled Bank of China Ltd, China Merchants Bank Co Ltd and the Industrial and Commercial Bank of China Ltd.

Two district judges in New York, Richard Sullivan and Naomi Reice Buchwald, separately granted the bid to freeze the funds in 2011 and 2012.

The banks appealed, arguing Chinese banking law prohibited compliance, and that U.S. courts could not exercise jurisdiction over them simply because they had branches in New York.

The 2nd Circuit held the defendants were clearly subject to U.S. jurisdiction. But the court said it was not clear whether the banks themselves were also subject to the judges’ authority, citing the Supreme Court’s January decision in a case involving German-based automaker Daimler AG.

The Supreme Court held that foreign corporations cannot be sued in the United States unless they have substantial business there. Owning a U.S. subsidiary is not enough on its own.

The 2nd Circuit instructed Sullivan and Buchwald to consider, among other things, whether the banks intentionally aided the alleged counterfeiters in violating the freeze order; the nature of the banks’ U.S. business and whether requiring compliance would undermine Chinese law.

The 2nd Circuit cases are Gucci America et al. v. Li et al., 2nd U.S. Circuit Court of Appeals, No. 11-3934, and Tiffany et al. v. Forbse et al. in the same court, No. 12-2317.

(Reporting by Joseph Ax; Additional reporting by Emily Flitter; Editing by Noeleen Walder and Andre Grenon)

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