Don’t Bank on the Billions: Chinese Banks Appeal to Second Circuit in Effort to Dodge Fine for Failing to Help Enforce $1.8 Billion Counterfeiting Judgment

Arent Fox
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The Bank of China and four other Chinese banks (the Banks) are urging the Second Circuit to reject a requested $150 million contempt sanction for allegedly perpetuating the sale of counterfeit Nike and Converse products by failing to freeze assets of counterfeit sellers.
 

The Banks, non-parties to the underlying counterfeiting lawsuit, argued that the fine was an “extreme” sanction that would upend long-standing rules of international banking.

The dispute arose in 2013, when Nike filed suit in the US District Court for the Southern District of New York against hundreds of Chinese entities for selling counterfeit products online in violation of the Lanham Act. Nike won a $1.8 billion default judgment against the counterfeiters, who failed to appear in the case. Finding it impossible to collect on the judgment, Nike assigned its rights to the judgment to a hedge fund, Next Investments, LLC (Next). In response to Next’s motion to hold the counterfeiters in contempt, the District Court imposed an asset restraint on the judgment debtors and all those acting “in concert or in participation with” the defendants. The order did not identify the Banks by name but Next nevertheless filed a motion to hold the Banks in contempt of the asset restraints.

The District Court denied Next’s contempt motion, holding that the asset restraints did not apply to the Banks’ Chinese branches. The court relied on New York’s well-established “separate entity” doctrine, under which post-judgment asset freeze orders do not apply to foreign banks’ branches even if they operate a New York branch.

Earlier this year, Next appealed the District Court’s ruling to the Second Circuit. Nike Inc. et al. v. Wu, 20-602 (2d Cir. Feb. 14, 2020). On appeal, Next argues that the separate entity doctrine is a state law doctrine that cannot prevent the enforcement of a federal court order. Next also argues that the doctrine is inapplicable here where the District Court exercised personal jurisdiction over the Banks in discovery orders.

The Banks recently filed a brief urging the Second Circuit to affirm the District Court’s ruling. The Banks rely on the separate entity doctrine and also argue Next is indirectly attempting to sue the Banks for contributory trademark infringement, which Nike failed to do in the underlying lawsuit. It will now be up to the Second Circuit to determine whether the Banks will face a contempt fine for failing to freeze the counterfeiters’ assets.

This case highlights the challenges fashion and retail companies face in combating online counterfeiting, a serious and growing problem that has only intensified during the COVID-19 pandemic as more and more consumers are shopping online. Even with a sizeable monetary judgment in hand, many companies find it near impossible to enforce judgments against stealthy international counterfeiters. A ruling by the Second Circuit that foreign banks could be ordered to comply with US asset restraint orders would be a significant victory for US brand owners.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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