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A federal appeals court has handed a loss to Next Investments in a long-running legal battle that originally centered on counterfeit Nike sneakers. In an opinion issued on Monday, the U.S. Court of Appeals for the Second Circuit upheld a lower court’s refusal to grant Next’s motion to hold six Chinese banks in contempt for failing to implement court-ordered asset restraints to prevent 600-plus counterfeit-selling defendants – which had been sued by Nike in a trademark case in 2013 – from withdrawing and/or transferring money from their bank accounts in order to enable Nike to recoup the $1.8 billion default judgment that it was awarded when none of the defendants responded to or participated in the case filed against them. In siding with the banks, the appeals court held that they are not on the hook for $150 million in contempt sanctions. 

The win for the banks, including Bank of China, follows from a July 2019 bid from Next, which argued that the banks had never frozen any of the counterfeit-seller defendants’ accounts and as a result, were acting in contempt of the asset-restraints put in place by the district court that served to prevent the defendant counterfeit-sellers and “all persons acting in concert or in participation [with them] .. from transferring, withdrawing or disposing of any money of the defendants, or otherwise paying or transferring money or other assets into or out of any accounts held by, associated with, or utilized by the defendants, regardless of whether such money [is] held in the U.S. or abroad.” 

Based on documents produced by the banks, Next – which purchased a handful of court judgments tied to the counterfeiting case filed by Nike totaling $1.8 million from Nike in early 2017 (and thus, the right to collect the nearly $2 billion sum from the defendants) – asserted that the banks had allowed “at least 36,000 transactions in violation of the asset restraints, including withdrawals and deposits.” Next further argued that the banks should further be sanctioned, as they engaged in a discovery violation by “producing just a small fraction of their relevant documents and thus failing to display reasonable diligence in complying with the [court’s] discovery order.” According to Next, the missing documents would have shown “additional violative transactions” by the banks. 

Beyond that, Next also argued in its quest to holsepard the banks in contempt that the banks’ conduct made them participants in the original defendants’ counterfeit networks and thus, jointly and severally liable for at least $118 million in statutory damages on top of the initial $150 million in sanctions that Next sought from the banks. 

Faced with the contempt motion in July 2019, the U.S. District Court for the Southern District of New York sided with the banks, holding that Next was attempting to hold the banks liable violating orders “that never bound them.” Among other things, U.S. District Judge Colleen McMahon determined that the asset freeze did not apply to the Chinese branches of the banks due to New York’s separate entity rule, which required the court to treat the banks’ foreign branches as entities separate from their New York branches for the purpose of “enforcement of post-judgment asset restraints.” 

Despite Next’s arguments that the separate entity rule should not be used as a “get-out-of-jail-free card” by the banks, the lower court, nonetheless, held that Next failed to offer “proof showing that the banks aided and abetted the [counterfeit-seller defendants’] unlawful activity” by providing them with “routine banking activities.” 

In light of the loss, Next sought intervention from the Second Circuit, which sided with the banks in its August 30 decision for a number of reasons, including that for six years, neither Nike nor Next – sought to enforce the asset restraints against the banks before Next sought to hold the banks in contempt and seek sanctions of upwards of $150 million. As it turns out, despite the district court issuing asset restraint orders in Nike’s favor, the Oregon-based sportswear giant “never sought to enforce the orders against the financial institutions that might have access to or control over the [defendants’] assets,” and Next did not see to enforce the orders until it moved the hold the banks in contempt in July 2019, alleging that the banks had violated the orders as far back as November 2013 by “facilitat[ing] tens of thousands of transactions in violation of the orders, which caused $150 million in damages to Next.”

Upholding the lower court’s decision, the Second Circuit held this week that, among other things, the financial services company’s “delay made a contempt motion an improper vehicle for addressing the banks’ substantial legal defenses to the orders for the first time.” Additionally, like the district court, the appeals panel highlighted “the gamesmanship at the foundation of Next’s motion,” stating that “the $150 million in contempt sanctions reflects injuries that [Next] allowed to accumulate while resting on their rights for six years and disclaiming enforcement for four.” 

“These dilatory tactics undermine Next’s claim to such a large amount in damages,” Judge Michael Park wrote for the Second Circuit panel. “In sum, the district court did not abuse its discretion by denying Nike and Next’s motion for $150 million in contempt sanctions in light of the plaintiffs’ years-long delay in seeking enforcement of the orders.”  

Beyond that, a panel held that “there is a fair ground of doubt as to whether, in light of New York’s separate entity rule” – which treats local branches of foreign banks as separate legal entities – and principles of international comity, the orders could reach assets held at foreign bank branches,” just as there is “a fair ground of doubt as to whether the banks’ activities amounted to ‘active concert or participation’ in violation of the asset restraints that could be enjoined under federal law.” And still yet, in denying Next’s quest for discovery sanctions, Judge Park stated that it failed to “provide clear and convincing proof” that the banks’ “efforts to comply with the discovery orders fell below the standard of reasonable diligence.” 

The decision comes amid a closely-watched legal battle that sheds lights on the limits of U.S. entities and courts to pursue foreign entities, a particularly relevant issue in counterfeit-centric cases, the majority of which involve Chinese parties, and in which the plaintiff rights holders routinely struggle to find any meaningful form of monetary relief. Not the first if its kind, the case follows from two Second Circuit trademark infringement/counterfeiting cases involving Gucci and Tiffany & Co., respectively, which saw Chinese banks challenge the enforceability of discovery orders and prejudgment asset freezes overseas.

The case is Next Investments LLC v. Bank of China, U.S. Court of Appeals for the Second Circuit, No. 20-602.