The Inter-Continental Conundrum

Corporations with U.S. and overseas operations run the risk that an accident or other alleged wrongdoing abroad will land in both foreign and U.S. courts. Sometimes it is right after the event occurs, and other times, litigation begins in the foreign courts and comes to the U.S. months or years later.

Companies facing incidents that might attract such international attention must assess whether U.S. litigation is reasonably anticipated, thus triggering the need for a litigation hold. Once a U.S. duty to preserve exists, a litigant must carefully think through document preservation strategies and find a balance between preserving what is required to satisfy U.S. courts, while also complying with the preservation and data privacy laws that govern information in a foreign forum.

The Litigation Hold Calculus

Generally, a party must preserve evidence when it “has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation.” See Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003). Deciding when that obligation attaches to a foreign incident or foreign parties can be tricky because the fact of the incident itself and the likelihood that litigation will ensue do not mean that a company anticipates U.S. litigation. Litigants must factor in whether U.S. jurisdiction is possible and, if it is, when a court is likely to find that any duty to preserve attached. A handful of courts have touched on this issue with mixed results, highlighting potential risks and many open questions yet to be answered.

In Reino de Espana v. Am. Bureau of Shipping, 2007 Dist. 2007 WL 168327 (S.D.N.Y. June 6, 2007), Spain faced terminating sanctions for allegedly failing to preserve documents. Relying on an earlier order, the court reiterated its finding that Spain had failed to place a “timely and adequate litigation hold on its agencies and ministries.” Spain had argued that the court was required to specify when the hold duty arose. Spain argued that because it was a foreign country, it was not generally governed by U.S. discovery rules. Instead, Spain urged that the hold obligation attached, at the earliest, when it instructed U.S. counsel to prepare a complaint. The court repeated its previous holding that it did not need to determine the specific day that the obligation arose because Spain had failed to issue a timely hold, whether measured by the date of the incident or by its direction to U.S. counsel. Despite Spain's failure to preserve, the court declined to award terminating sanctions or an adverse inference instruction. Instead, it required Spain to pay the costs associated with the motion to compel.

Later in 2007, an Ohio federal court took a lenient approach to a foreign defendant's preservation failings in Fortis Corporate Ins. v. Viken Ship Management AS, 2007 WL 3287357 (N.D. Ohio 2007). When the plaintiff sought sanctions for the defendant's admitted failure to preserve, the court refused. “To be sure, defendant might have done a better job ' perhaps a good bit better job ' of keeping things that it might possibly have anticipated it would be asked to produce at some point in a lawsuit in Toledo, Ohio, USA.” But the Fortis court found that defendant was “in the business of keeping its vessels afloat and full of cargo ' not of litigating.” Because the defendant was foreign, the court was forgiving, finding that “[p]erhaps in the fullness of time foreign-based companies doing business in the United States will be held to the same 'litigation holds' and other devices now routinely applied by litigants here to make sure pertinent documents and other materials are retained and produced.” But the court was unwilling to do so, even though it recognized the loss of documents potentially compromised plaintiff's case.

Calixto v. Watson Bowman Acme Corp., 2009 WL 3823390 (S.D. Fla. Nov. 16, 2009), illustrates that a U.S. company's preservation duty may not ripen until it understands both that U.S. litigation is threatened and that it will be named. In Calixto, a U.S. company was the beneficiary of a license obtained in an asset purchase agreement between its German affiliate and a Brazilian national. When a dispute arose about the U.S. company's sale of a similar product in an area excluded from the license, the Brazilian national sued the U.S. company for tortious interference with contract. The court found that an initial letter was a royalty demand, not a threat of imminent litigation. The court found that a second letter sent to the German affiliate was not notice of U.S. litigation. Because the letter was between a Brazilian national in Brazil and a German entity in Germany, the court concluded that it was reasonable “to view the letter as threatening legal action outside the United States.”

Most recently, in Lunkenheimer Co. v. Tyco Flow Control Pac. Party Ltd., 2015 WL 631045 (S.D. Ohio Feb. 12, 2015), the Southern District of Ohio concluded that a foreign party's preservation obligation did not begin until it was served with the complaint. The party at issue was Australian and had offices and facilities only in Australia. That country's law governed the license at issue, and Australia was the anticipated forum for any dispute. The party did not have a U.S. presence and had made no sales into the U.S. Accordingly, the court concluded that the only place where the party reasonably anticipated litigation was in Australia.

These cases illustrate that courts still need to clarify when a party's obligation to preserve arises in the U.S. if it is a foreign defendant or if the incident at issue occurred abroad. For example, if U.S. litigation is possible, but not likely, is that enough? If the matter arises abroad but the Company has been sued in the U.S. for foreign activity previously, is that enough? The Fortis court's lenient approach is likely an outlier. Until the courts bring more clarity to the issue, absent a forum selection clause that governs the dispute and selects a foreign forum, a party likely is best served by issuing a litigation hold where there is a colorable argument for personal and subject matter jurisdiction in the U.S., so that it errs on the side of preservation, subject to the data privacy concerns articulated below.

Document Preservation and Data Privacy Concerns

Parties abroad generally lack discovery tools that allow them to take the intrusive document discovery that is allowed in U.S. courts, so foreign counsel often lack experience with the type of litigation hold that is a hallmark of U.S. litigation. A handful of countries recognize some preservation obligation for disputes within their jurisdiction, but when there is such an obligation, it is usually far less stringent than its American cousin. It is important to work closely with local counsel to understand what, if any, preservation obligation exists in the foreign venue.

For U.S. counsel contemplating a hold reaching documents abroad, it is essential to understand whether a hold could run afoul of the data privacy requirements of an interested foreign government. Although the mere preservation of evidence in the U.S. does not usually violate domestic privacy laws, other countries can take a different view. Many consider privacy a fundamental right and have erected complex privacy schemes governing the use of personal data ' including e-mail, which is a favorite target of U.S. discovery.

In places such as the European Union, even the preservation of data for extended periods of time can violate privacy laws. Under those laws, companies often are permitted to keep the data only for as long as necessary for the purposes for which the data has been collected or for which it is further processed. Once that is done, retention is no longer permitted absent a party's ability to invoke an exception recognized by EU law, such as consent or the “legitimate interest” exception. Such a privacy regime does not necessarily accommodate a broad, decade-long hold order while U.S. litigation runs its course. That is especially true where the information being held includes sensitive personal information of third parties not parties to the dispute. It is crucial to work with a data privacy professional who understands local law to strike an appropriate balance of preservation and privacy obligations under U.S. and foreign law.

Although it is beyond the scope of this article, it is also important when moving beyond preservation to production in U.S. litigation to be thoroughly conversant in any “blocking statutes,” such as France's, designed to prevent the export of information for U.S. litigation. See, e.g., In re Activision Blizzard, Inc., 86 A.3d 531 (Del. Ch. 2014) (discussing French blocking statute and its relation to U.S. discovery requests). Litigants also must be familiar with general data transfer restrictions, or any other local impediments to U.S. discovery in effect in the foreign forum. The legislative proceedings for the upcoming EU General Data Protection Regulation are also important to monitor, because the current version of the Regulation foresees enhanced requirements for cross border data transfers in case a court of a “third country,” like the U.S., requests a controller or a processor to disclose personal data (including prior authorization for the transfer or disclosure by the supervisory authority and possibly information of the data subjects of the request).

Caroline N. Mitchell ([email protected]) is a partner in the San Francisco office of Jones Day and David J. DiMeglio ([email protected]) is a partner in the firm's Los Angeles office. Both lawyers are members of Jones Day's Global Disputes Practice. For more information, please go to www.jonesday.com/globaldisputes/.

Corporations with U.S. and overseas operations run the risk that an accident or other alleged wrongdoing abroad will land in both foreign and U.S. courts. Sometimes it is right after the event occurs, and other times, litigation begins in the foreign courts and comes to the U.S. months or years later.

Companies facing incidents that might attract such international attention must assess whether U.S. litigation is reasonably anticipated, thus triggering the need for a litigation hold. Once a U.S. duty to preserve exists, a litigant must carefully think through document preservation strategies and find a balance between preserving what is required to satisfy U.S. courts, while also complying with the preservation and data privacy laws that govern information in a foreign forum.

The Litigation Hold Calculus

Generally, a party must preserve evidence when it “has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation.” See Zubulake v. UBS Warburg LLC , 220 F.R.D. 212, 216 (S.D.N.Y. 2003). Deciding when that obligation attaches to a foreign incident or foreign parties can be tricky because the fact of the incident itself and the likelihood that litigation will ensue do not mean that a company anticipates U.S. litigation. Litigants must factor in whether U.S. jurisdiction is possible and, if it is, when a court is likely to find that any duty to preserve attached. A handful of courts have touched on this issue with mixed results, highlighting potential risks and many open questions yet to be answered.

In Reino de Espana v. Am. Bureau of Shipping , 2007 Dist. 2007 WL 168327 (S.D.N.Y. June 6, 2007), Spain faced terminating sanctions for allegedly failing to preserve documents. Relying on an earlier order, the court reiterated its finding that Spain had failed to place a “timely and adequate litigation hold on its agencies and ministries.” Spain had argued that the court was required to specify when the hold duty arose. Spain argued that because it was a foreign country, it was not generally governed by U.S. discovery rules. Instead, Spain urged that the hold obligation attached, at the earliest, when it instructed U.S. counsel to prepare a complaint. The court repeated its previous holding that it did not need to determine the specific day that the obligation arose because Spain had failed to issue a timely hold, whether measured by the date of the incident or by its direction to U.S. counsel. Despite Spain's failure to preserve, the court declined to award terminating sanctions or an adverse inference instruction. Instead, it required Spain to pay the costs associated with the motion to compel.

Later in 2007, an Ohio federal court took a lenient approach to a foreign defendant's preservation failings in Fortis Corporate Ins. v. Viken Ship Management AS, 2007 WL 3287357 (N.D. Ohio 2007). When the plaintiff sought sanctions for the defendant's admitted failure to preserve, the court refused. “To be sure, defendant might have done a better job ' perhaps a good bit better job ' of keeping things that it might possibly have anticipated it would be asked to produce at some point in a lawsuit in Toledo, Ohio, USA.” But the Fortis court found that defendant was “in the business of keeping its vessels afloat and full of cargo ' not of litigating.” Because the defendant was foreign, the court was forgiving, finding that “[p]erhaps in the fullness of time foreign-based companies doing business in the United States will be held to the same 'litigation holds' and other devices now routinely applied by litigants here to make sure pertinent documents and other materials are retained and produced.” But the court was unwilling to do so, even though it recognized the loss of documents potentially compromised plaintiff's case.

Calixto v. Watson Bowman Acme Corp., 2009 WL 3823390 (S.D. Fla. Nov. 16, 2009), illustrates that a U.S. company's preservation duty may not ripen until it understands both that U.S. litigation is threatened and that it will be named. In Calixto, a U.S. company was the beneficiary of a license obtained in an asset purchase agreement between its German affiliate and a Brazilian national. When a dispute arose about the U.S. company's sale of a similar product in an area excluded from the license, the Brazilian national sued the U.S. company for tortious interference with contract. The court found that an initial letter was a royalty demand, not a threat of imminent litigation. The court found that a second letter sent to the German affiliate was not notice of U.S. litigation. Because the letter was between a Brazilian national in Brazil and a German entity in Germany, the court concluded that it was reasonable “to view the letter as threatening legal action outside the United States.”

Most recently, in Lunkenheimer Co. v. Tyco Flow Control Pac. Party Ltd., 2015 WL 631045 (S.D. Ohio Feb. 12, 2015), the Southern District of Ohio concluded that a foreign party's preservation obligation did not begin until it was served with the complaint. The party at issue was Australian and had offices and facilities only in Australia. That country's law governed the license at issue, and Australia was the anticipated forum for any dispute. The party did not have a U.S. presence and had made no sales into the U.S. Accordingly, the court concluded that the only place where the party reasonably anticipated litigation was in Australia.

These cases illustrate that courts still need to clarify when a party's obligation to preserve arises in the U.S. if it is a foreign defendant or if the incident at issue occurred abroad. For example, if U.S. litigation is possible, but not likely, is that enough? If the matter arises abroad but the Company has been sued in the U.S. for foreign activity previously, is that enough? The Fortis court's lenient approach is likely an outlier. Until the courts bring more clarity to the issue, absent a forum selection clause that governs the dispute and selects a foreign forum, a party likely is best served by issuing a litigation hold where there is a colorable argument for personal and subject matter jurisdiction in the U.S., so that it errs on the side of preservation, subject to the data privacy concerns articulated below.

Document Preservation and Data Privacy Concerns

Parties abroad generally lack discovery tools that allow them to take the intrusive document discovery that is allowed in U.S. courts, so foreign counsel often lack experience with the type of litigation hold that is a hallmark of U.S. litigation. A handful of countries recognize some preservation obligation for disputes within their jurisdiction, but when there is such an obligation, it is usually far less stringent than its American cousin. It is important to work closely with local counsel to understand what, if any, preservation obligation exists in the foreign venue.

For U.S. counsel contemplating a hold reaching documents abroad, it is essential to understand whether a hold could run afoul of the data privacy requirements of an interested foreign government. Although the mere preservation of evidence in the U.S. does not usually violate domestic privacy laws, other countries can take a different view. Many consider privacy a fundamental right and have erected complex privacy schemes governing the use of personal data ' including e-mail, which is a favorite target of U.S. discovery.

In places such as the European Union, even the preservation of data for extended periods of time can violate privacy laws. Under those laws, companies often are permitted to keep the data only for as long as necessary for the purposes for which the data has been collected or for which it is further processed. Once that is done, retention is no longer permitted absent a party's ability to invoke an exception recognized by EU law, such as consent or the “legitimate interest” exception. Such a privacy regime does not necessarily accommodate a broad, decade-long hold order while U.S. litigation runs its course. That is especially true where the information being held includes sensitive personal information of third parties not parties to the dispute. It is crucial to work with a data privacy professional who understands local law to strike an appropriate balance of preservation and privacy obligations under U.S. and foreign law.

Although it is beyond the scope of this article, it is also important when moving beyond preservation to production in U.S. litigation to be thoroughly conversant in any “blocking statutes,” such as France's, designed to prevent the export of information for U.S. litigation. See, e.g., In re Activision Blizzard, Inc., 86 A.3d 531 (Del. Ch. 2014) (discussing French blocking statute and its relation to U.S. discovery requests). Litigants also must be familiar with general data transfer restrictions, or any other local impediments to U.S. discovery in effect in the foreign forum. The legislative proceedings for the upcoming EU General Data Protection Regulation are also important to monitor, because the current version of the Regulation foresees enhanced requirements for cross border data transfers in case a court of a “third country,” like the U.S., requests a controller or a processor to disclose personal data (including prior authorization for the transfer or disclosure by the supervisory authority and possibly information of the data subjects of the request).

Caroline N. Mitchell ([email protected]) is a partner in the San Francisco office of Jones Day and David J. DiMeglio ([email protected]) is a partner in the firm's Los Angeles office. Both lawyers are members of Jones Day's Global Disputes Practice. For more information, please go to www.jonesday.com/globaldisputes/.