In the Courts

Fourth Circuit Upholds Government Subpoena of Foreign Documents Produced In U.S. Civil Litigation

On June 15, 2011 the U.S. Court of Appeals for the Fourth Circuit affirmed a district court decision denying a motion to quash a subpoena of a foreign company's documents that had been produced to an opposing U.S. litigant. In re Grand Jury Subpoena, No. 10-4815, 2011 WL 2349222, *9 (4th Cir. Jun. 15, 2011).

After an employee of an American company left it and began consulting for a foreign company, the U.S. government opened an investigation (in 2007) into the potential theft of trade secrets. That effort ultimately led to an investigation of the foreign company's use of those trade secrets. In early 2009, having determined that the government's investigation was complete, the American company sued the foreign company civilly based on the same theory at issue in the government investigation.

During the course of the litigation, the American and the foreign companies entered into a protective order that provided various limitations on the distribution of “confidential” materials to third parties. Pursuant to that order, the foreign company produced various documents and materials to the American company.

The government first subpoenaed the American company for documents in August 2009. Leading up to that subpoena, the American company had provided the government with the language it should use and, in response, the American company produced certain documents.

Thereafter, the foreign company produced additional “confidential” documents to the American company. The latter informed the government that it had received one e-mail about which the government had asked. In May 2010, the government served another subpoena, this time seeking the documents that were marked “confidential.”

Pursuant to the terms of the protective order, the American company notified the foreign company of the subpoena and informed the government that it was required to object to the production of the confidential materials. The government indicated that it would file a motion to show cause if the documents were not produced. In June 2010, the foreign company filed a motion to quash the subpoenas. It sought to block production of additional documents and sought the return of the documents that had already been produced. In response, the district court upheld the subpoenas and denied the motion to quash. The foreign company appealed.

The court of appeals affirmed the decision of the district court. It initially rejected the foreign company's argument that the mutual legal assistance treaty (MLAT) between the United States and the foreign country limited the government's ability to subpoena documents under Rule 17 of the Federal Rules of Criminal Procedure. Although the MLAT in question would apply if the government had sought documents from the foreign country, it did not do so in this case, and thus the MLAT was inapplicable. Moreover, the court found no private right of action that arises from the MLAT itself. Although the court did note that the government could not use civil litigation to circumvent the restrictions on criminal discovery, it found no evidence that the government had done so in this case. Specifically, it found that the civil litigation was independently motivated by the American company, even if the government knew of it and was in regular contact with the American company. The court found support in a Ninth Circuit case, In re Grand Jury Subpoenas, 627 F.3d 1143, 1144 (9th Cir. 2010), in which the government was permitted to subpoena documents that came within its subpoena power as a result of discovery in a civil matter.

The court also found that the civil protective order did nothing to overcome the government's subpoena power. And it noted that the other party to the order ' the American company ' had acted in accordance with its duties. Additionally, the court dismissed the foreign company's concerns that this would improperly damage the rights of foreign parties to civil litigation. It found that the risk of subjecting materials to use in later criminal proceedings is present for all parties that litigate in the U.S. and, thus the foreign party's risk was not extraordinary.

Eighth Circuit Allows Defendant to Assert 'No Knowledge' Defense to Imprisonment at Sentencing

On July 13, 2011, the United States Court of Appeals for the Eighth Circuit reversed the sentence of Bryan Behrens and remanded the case to the district court for further proceedings. United States v. Behrens, No. 10-3505, 2011 WL 2694608, *3 (8th Cir. Jul. 13, 2011).

Behrens had pleaded guilty to one count of securities fraud in violation of 15 U.S.C. ' 78j(b), 78ff, and 17 C.F.R. ' 240.10(b)5. At sentencing, however, he argued that he could not be imprisoned based on a provision of ' 78ff that provides “no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.” The district court did not permit Behrens to claim this defense. Rather, it found that he had pleaded guilty to violating a statute and that the “no knowledge provision [was] inapplicable to people convicted of violating criminal securities laws.” The district court sentenced Behrens to 60 months in prison.

The court of appeals found that the district court had erred. Behrens had only violated the statute because he had acted “in contravention of such rules and regulations as the Commission may prescribe.” Thus, the violation of a rule was an essential element of the crime. But the court found that the conviction was for violation of a rule of which Behrens claimed he was not aware.

In fact, the Supreme Court had found the “no knowledge” defense an important “safeguard” to those in the same position as Behrens. In United States v. O'Hagan, 521 U.S. 642, 651-52 (1997), the Court held that the defendant could be liable under a misappropriation theory of securities fraud, noting the importance to that finding of protections such as the “no knowledge” provision. The Eighth Circuit looked to cases as well in which the “no knowledge” provision had not been wholly dismissed in similar situations (even if it had been applied and found inapplicable to particular facts) (citing United States v. Reyes, 577 F.3d 1069, 1079 (9th Cir. 2009)).

The court of appeals found no support for the proposition (put forth by the government and the district court) that the “no knowledge” defense was somehow limited to technical violations. Rather, the language of the statute made no distinction between types of violations and a review of legislative history to establish such a distinction (as was undertaken by the court in United States v. Knueppel, 293 F. Supp. 2d 199, 204 (E.D.N.Y. 2003)) was unnecessary.

In the Courts and Business Crimes Hotline were written by Associate Editor Kenneth S. Clark and Matthew J. Alexander, respectively. Both are associates at Kirkland & Ellis LLP, Washington, DC.

Fourth Circuit Upholds Government Subpoena of Foreign Documents Produced In U.S. Civil Litigation

On June 15, 2011 the U.S. Court of Appeals for the Fourth Circuit affirmed a district court decision denying a motion to quash a subpoena of a foreign company's documents that had been produced to an opposing U.S. litigant. In re Grand Jury Subpoena, No. 10-4815, 2011 WL 2349222, *9 (4th Cir. Jun. 15, 2011).

After an employee of an American company left it and began consulting for a foreign company, the U.S. government opened an investigation (in 2007) into the potential theft of trade secrets. That effort ultimately led to an investigation of the foreign company's use of those trade secrets. In early 2009, having determined that the government's investigation was complete, the American company sued the foreign company civilly based on the same theory at issue in the government investigation.

During the course of the litigation, the American and the foreign companies entered into a protective order that provided various limitations on the distribution of “confidential” materials to third parties. Pursuant to that order, the foreign company produced various documents and materials to the American company.

The government first subpoenaed the American company for documents in August 2009. Leading up to that subpoena, the American company had provided the government with the language it should use and, in response, the American company produced certain documents.

Thereafter, the foreign company produced additional “confidential” documents to the American company. The latter informed the government that it had received one e-mail about which the government had asked. In May 2010, the government served another subpoena, this time seeking the documents that were marked “confidential.”

Pursuant to the terms of the protective order, the American company notified the foreign company of the subpoena and informed the government that it was required to object to the production of the confidential materials. The government indicated that it would file a motion to show cause if the documents were not produced. In June 2010, the foreign company filed a motion to quash the subpoenas. It sought to block production of additional documents and sought the return of the documents that had already been produced. In response, the district court upheld the subpoenas and denied the motion to quash. The foreign company appealed.

The court of appeals affirmed the decision of the district court. It initially rejected the foreign company's argument that the mutual legal assistance treaty (MLAT) between the United States and the foreign country limited the government's ability to subpoena documents under Rule 17 of the Federal Rules of Criminal Procedure. Although the MLAT in question would apply if the government had sought documents from the foreign country, it did not do so in this case, and thus the MLAT was inapplicable. Moreover, the court found no private right of action that arises from the MLAT itself. Although the court did note that the government could not use civil litigation to circumvent the restrictions on criminal discovery, it found no evidence that the government had done so in this case. Specifically, it found that the civil litigation was independently motivated by the American company, even if the government knew of it and was in regular contact with the American company. The court found support in a Ninth Circuit case, In re Grand Jury Subpoenas, 627 F.3d 1143, 1144 (9th Cir. 2010), in which the government was permitted to subpoena documents that came within its subpoena power as a result of discovery in a civil matter.

The court also found that the civil protective order did nothing to overcome the government's subpoena power. And it noted that the other party to the order ' the American company ' had acted in accordance with its duties. Additionally, the court dismissed the foreign company's concerns that this would improperly damage the rights of foreign parties to civil litigation. It found that the risk of subjecting materials to use in later criminal proceedings is present for all parties that litigate in the U.S. and, thus the foreign party's risk was not extraordinary.

Eighth Circuit Allows Defendant to Assert 'No Knowledge' Defense to Imprisonment at Sentencing

On July 13, 2011, the United States Court of Appeals for the Eighth Circuit reversed the sentence of Bryan Behrens and remanded the case to the district court for further proceedings. United States v. Behrens, No. 10-3505, 2011 WL 2694608, *3 (8th Cir. Jul. 13, 2011).

Behrens had pleaded guilty to one count of securities fraud in violation of 15 U.S.C. ' 78j(b), 78ff, and 17 C.F.R. ' 240.10(b)5. At sentencing, however, he argued that he could not be imprisoned based on a provision of ' 78ff that provides “no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.” The district court did not permit Behrens to claim this defense. Rather, it found that he had pleaded guilty to violating a statute and that the “no knowledge provision [was] inapplicable to people convicted of violating criminal securities laws.” The district court sentenced Behrens to 60 months in prison.

The court of appeals found that the district court had erred. Behrens had only violated the statute because he had acted “in contravention of such rules and regulations as the Commission may prescribe.” Thus, the violation of a rule was an essential element of the crime. But the court found that the conviction was for violation of a rule of which Behrens claimed he was not aware.

In fact, the Supreme Court had found the “no knowledge” defense an important “safeguard” to those in the same position as Behrens. In United States v. O'Hagan , 521 U.S. 642, 651-52 (1997), the Court held that the defendant could be liable under a misappropriation theory of securities fraud, noting the importance to that finding of protections such as the “no knowledge” provision. The Eighth Circuit looked to cases as well in which the “no knowledge” provision had not been wholly dismissed in similar situations (even if it had been applied and found inapplicable to particular facts) ( citing United States v. Reyes , 577 F.3d 1069, 1079 (9th Cir. 2009)).

The court of appeals found no support for the proposition (put forth by the government and the district court) that the “no knowledge” defense was somehow limited to technical violations. Rather, the language of the statute made no distinction between types of violations and a review of legislative history to establish such a distinction (as was undertaken by the court in United States v. Knueppel , 293 F. Supp. 2d 199, 204 (E.D.N.Y. 2003)) was unnecessary.

In the Courts and Business Crimes Hotline were written by Associate Editor Kenneth S. Clark and Matthew J. Alexander, respectively. Both are associates at Kirkland & Ellis LLP, Washington, DC.