Trans-Jurisdictional Transactions

In this three-part series, we are examining the highly complex dispute resolution issues that companies face when engaging in cross-border transactions. The unique nature of these multi-jurisdictional litigation issues can stymie even the most experienced counsel, and a keen understanding of the laws and issues behind such matters is vital to a successful result.

The series began with an examination of the complexities surrounding the post-judgment collection process. In this second installment, we explore the information-gathering phase during the litigation process, and how litigants must navigate through the turbulent trans-jurisdictional waters to prepare their case. In part three, we will discuss how to infuse predictability into the cross border transaction through draftsmanship and forward thinking.

The Information-Gathering Phase

No aspect of the extension of the American legal system beyond the territorial frontier of the United States has given rise to so much friction as the requests for documents in investigation and litigation in the United States.

Restatement (Third) of the Foreign Relations Law of the U.S., Reporter's Note 1

Whether the matter involves U.S. litigants attempting to obtain discovery from foreign parties, foreign litigants availing themselves of U.S. courts, or even international third parties who have been drawn into a cross-border dispute, the issue of trans-jurisdictional discovery can vex even the most experienced litigator. Information gathering in cross-border disputes is governed under the respective locale's rules of procedure, such as the U.S. Federal Rules of Civil Procedure (FCPA), treaty-based laws such as the Hague Convention on the Taking of Evidence Abroad, and increasingly, sovereign statutes that attempt to block extraterritorial discovery (“blocking statutes”). This article examines how the interplay between these forces must be anticipated and managed in order to successfully pursue litigation in trans-jurisdictional disputes.

Federal Rules vs. the Hague Convention

In Societe Nationale Industrielle Aerospatiale v. U.S. District Court, 482 U.S. 522, 541 (1987), the Supreme Court specifically upheld the right of litigants to collect evidence from foreign parties for use in U.S. litigation through the application of the FRCP. This allows, inter alia, for depositions to be taken in a foreign country, along with the production of documents and interrogatories, and mandates compliance through the threat of sanctions.

Overseas discovery is typically procured through multilateral treaties. In the absence of such treaty, a party may employ a tool known as “letters rogatory,” which is a request from one court to another through formal diplomatic channels asking for permission to seek discovery in compliance with the target country's laws and procedures. While letters rogatory may have to be used with non-parties that do not reside in the United States and are not subject to U.S. court jurisdiction, the system can be unduly time-consuming, expensive, and unwieldly for litigants.

Most countries have bilateral or multilateral treaties setting forth the rules for service of process and the collection of judicial evidence. Treaties, such as the Hague Convention, are intended to formulate “methods to reconcile the differing legal philosophies of the Civil Law, Common Law, and other systems,” as well as “methods to satisfy doctrines of judicial sovereignty.” See Rapport de la Commission Speciale, 4 Conf'rence de La Haye de droit international priv': Actes et documents de la Onzieme session 55 (1970). The Convention ultimately created procedures, “Letters of Request,” intended to balance a country's due process with the facilitation of an exchange of discovery, and are similar to letters rogatory but do not involve diplomatic channels. While Letters of Request are faster than letters rogatory, they still remain expensive and painfully slow. Moreover, the Hague Convention contains an important exception. Under Article 23, “A Contracting State may at the time of signature, ratification or accession, declare that it will not execute Letters of Request issued for the purpose of obtaining pre-trial discovery of documents as known in Common Law countries.” Simply stated, nations can elect not to execute Letters of Request for U.S. discovery documents.

The various tools of information exchange, such as the FRCP and the Hague Convention, may occasionally clash with one another. The U.S. Supreme Court addressed this conflict in Aerospatiale. In that case, two corporations owned by the Republic of France designed, manufactured and marketed aircraft. An airliner sold by the two corporations crashed in Iowa, and upon commencing litigation, plaintiffs sought discovery from the two French corporations under the FRCP. The defendant companies argued that the Hague Convention provided the exclusive procedures for discovery of French-sourced information, and that French blocking statutes (to be discussed herein) protected the companies from responding to discovery requests that did not comply with the Hague Convention.

The Supreme Court disagreed, and held that the Hague Convention was not the exclusive or mandatory mechanism for discovering party evidence abroad: “An interpretation of the Hague Convention as the exclusive means for obtaining evidence located abroad would effectively subject every American court hearing a case involving a national of a contracting state to the internal laws of that state.” Aerospatiale, 482 U.S. at 539. Instead, the Court ruled that principles of international comity required courts to consider each country's interests and procedures and the likelihood that “resort to those procedures will prove effective.” Id. at 544. A subsequent 1993 amendment to the FRCP facilitated more effective use of the Hague Convention in discovery requests for U.S. litigation.

Effect of Foreign Blocking Statutes

“Blocking statutes” continue to complicate the collection of judicial evidence. Broadly stated, blocking statutes are non-disclosure laws designed to protect the privacy of citizens as well as the judicial authority and integrity of the bench in the adopting country. The statutes either wholly prohibit or place restrictions on inspecting, disclosing, or transmitting documents and information from the home country to a foreign country in compliance with foreign discovery orders. Significantly, most blocking statutes provide serious sanctions, including imprisonment and/or steep fines for anyone, including lawyers and/or parties that violate such restrictions.

In addition to the exposure of sanctions to the requesting party, the responding party faces exposure to the same set of sanctions for complying with the request. In other words, the U.S.-based subsidiary may be faced with the Hobson's choice of violating the FRCP, or violating the blocking statutes of a parent company's home.

Courts here have struggled with this dilemma. In Aerospatiale, the U.S. Supreme Court held that “[blocking] statutes do not deprive an American Court of the power to order a party subject to its jurisdiction to produce evidence even though the act of production may violate that statute.” 482 U.S. at 544-45 n.29.

However, the recent decision of In re Activision Blizzard Inc. Stockholder Litigation, 86 A.3d 531 (Del. Ch. 2014), presented a more pragmatic solution. In In re Activision, a shareholder dispute, plaintiffs requested a French corporation, Vivendi, to produce documents. Vivendi sought protection claiming that French law precluded compliance without adherence to the Hague Convention. The court ultimately offered Vivendi veiled protection by ruling that the parties were first required to cooperate and abide by the formalities of the Hague Convention and apply to the French authorities issue a Letter of Request. If the French judicial system did not authorize the production of the documents, the court ruled that Vivendi would be required to produce the documents under the FRCP, or be sanctioned accordingly.

Similarly, the district court in Motorola Credit Corp. v. Uzan, 73 F.Supp.3d 397 (S.D.N.Y. 2014), applied the same analysis as In re Activision , and found that the French blocking statute should not prevent the relevant discovery request because France itself does not appear to rigorously enforce the law. The federal court noted that the statute “is riddled with loopholes that make it substantially unenforceable. This was no accident ' In practice ' it appears that when a foreign court orders production of French documents even though the producing party has raised the 'excuse' of the French blocking statute, the French authorities do not, in fact, prosecute or otherwise punish the producing party.” Motorola Credit Corp., 73 F.Supp.3d at 403-404. In contrast, the court pointed to the blocking laws of the United Arab Emirates, Jordan and Switzerland and described their rigorous enforcement such that the Swiss law was “an element of that nation's national identity.” Id.

Given these recent court cases, it is evident that U.S. courts are not prone to blindly subjugate discovery interests in U.S. litigation to foreign laws without a thoughtful analysis of the applicability of such laws and the ramifications of any limitations potentially imposed by such laws. However, while the information-collection process may be compelled by the U.S. courts, the same may not hold true if the litigants are embroiled in dispute resolution abroad.

Conclusion: How Litigants Can Prepare

Given the complexity of applying foreign laws and international treaties to the discovery process, it is critical that parties involved in cross-border disputes prepare for the discovery challenges as early in the litigation process as possible. Companies would be wise to research the most optimal forum to bring their dispute, and develop a trans-jurisdictional litigation strategy that will allow a party to acquire as much discovery as required to successfully resolve the issue. Litigants must understand that the process, procedures, and legal hurdles for gathering information in cross-border transactional disputes can be expensive, time-consuming, and unwieldy. The time to collect the needed data, coupled with a realistic budget to allow for such collection, needs to be competently analyzed before suit is filed.

There are, however, viable means to avoid, or at least minimize, such issues for cross-border inevitabilities. The optimal time to prepare the dispute resolution strategy is at the inception of the transactional relationship. With careful, deliberate forethought, coupled with productive bilateral negotiations, parties are able to craft binding dispute resolution procedures designed to maximize predictability and accountability, and minimize the natural inefficiencies arising from disputes.

In the third part of this series, we will discuss some of the provisions that parties may draft directly into the terms of the agreement(s) to establish an efficient alternative dispute resolution process.

ESI Only Complicates the Matter

Since the onslaught of electronically stored information, courts, lawyers and clients alike have struggled with the challenges of producing electronically stored information (ESI). From the first rules under the FRCP that came out in 2006 to sweeping new rule changes set to take effect on Dec. 1, 2015, the laws governing electronic discovery (eDiscovery) have been constantly evolving. Too often, however, these laws and the rights and protections they afford lag behind the crest of the electronic wave.

For example, new developments in record-keeping technology mean that users are now storing virtually all of their information electronically. Many documents and transactional signatures that have been scanned and stored in various electronic image formats (e.g., .PDF or .JPG) are now accepted by counterparties and courts as “original copies.” As employees increasingly use company e-mail and instant messaging systems for both professional and personal communications, privacy issues become more acute. From a jurisdictional standpoint, the advent of cloud computing as well as remote and redundant data storage facilities also means that a company's electronic records (or even a company's servers) may be located in a different country than the company itself.

In such situations, difficult questions inevitably arise. Which country's laws should apply to trans-national data storage questions? Should a company headquartered in France be able to use the protection of French blocking statutes when all of its data is located on servers housed in England? Should the protection of employees' personal privacy trump corporate disclosure obligations, when the companies themselves have fostered the commingling of such data? If a document sought in discovery is fortuitously loaded locally on a laptop in the United States but stored and maintained in the Brazilian company's servers in Brazil, should the U.S. litigant be forced to use the Hague Convention to obtain the document “from Brazil”?

Because of the nebulous nature of the true “location” of electronic records, ESI has the potential for complicating discovery in litigation and place parties (both litigants and third parties alike) in the unenviable position of either violating their own country's laws or running afoul of U.S. court orders to turn over information.

Allan A. Joseph and Stephen H. Wagner are attorneys with Fuerst Ittleman David & Joseph, PL, Miami, FL, and focus their practice on domestic and international litigation and transactions. The authors may be reached at [email protected] and [email protected], respectively.

In this three-part series, we are examining the highly complex dispute resolution issues that companies face when engaging in cross-border transactions. The unique nature of these multi-jurisdictional litigation issues can stymie even the most experienced counsel, and a keen understanding of the laws and issues behind such matters is vital to a successful result.

The series began with an examination of the complexities surrounding the post-judgment collection process. In this second installment, we explore the information-gathering phase during the litigation process, and how litigants must navigate through the turbulent trans-jurisdictional waters to prepare their case. In part three, we will discuss how to infuse predictability into the cross border transaction through draftsmanship and forward thinking.

The Information-Gathering Phase

No aspect of the extension of the American legal system beyond the territorial frontier of the United States has given rise to so much friction as the requests for documents in investigation and litigation in the United States.

Restatement (Third) of the Foreign Relations Law of the U.S., Reporter's Note 1

Whether the matter involves U.S. litigants attempting to obtain discovery from foreign parties, foreign litigants availing themselves of U.S. courts, or even international third parties who have been drawn into a cross-border dispute, the issue of trans-jurisdictional discovery can vex even the most experienced litigator. Information gathering in cross-border disputes is governed under the respective locale's rules of procedure, such as the U.S. Federal Rules of Civil Procedure (FCPA), treaty-based laws such as the Hague Convention on the Taking of Evidence Abroad, and increasingly, sovereign statutes that attempt to block extraterritorial discovery (“blocking statutes”). This article examines how the interplay between these forces must be anticipated and managed in order to successfully pursue litigation in trans-jurisdictional disputes.

Federal Rules vs. the Hague Convention

In Societe Nationale Industrielle Aerospatiale v. U.S. District Court , 482 U.S. 522, 541 (1987), the Supreme Court specifically upheld the right of litigants to collect evidence from foreign parties for use in U.S. litigation through the application of the FRCP. This allows, inter alia, for depositions to be taken in a foreign country, along with the production of documents and interrogatories, and mandates compliance through the threat of sanctions.

Overseas discovery is typically procured through multilateral treaties. In the absence of such treaty, a party may employ a tool known as “letters rogatory,” which is a request from one court to another through formal diplomatic channels asking for permission to seek discovery in compliance with the target country's laws and procedures. While letters rogatory may have to be used with non-parties that do not reside in the United States and are not subject to U.S. court jurisdiction, the system can be unduly time-consuming, expensive, and unwieldly for litigants.

Most countries have bilateral or multilateral treaties setting forth the rules for service of process and the collection of judicial evidence. Treaties, such as the Hague Convention, are intended to formulate “methods to reconcile the differing legal philosophies of the Civil Law, Common Law, and other systems,” as well as “methods to satisfy doctrines of judicial sovereignty.” See Rapport de la Commission Speciale, 4 Conf'rence de La Haye de droit international priv': Actes et documents de la Onzieme session 55 (1970). The Convention ultimately created procedures, “Letters of Request,” intended to balance a country's due process with the facilitation of an exchange of discovery, and are similar to letters rogatory but do not involve diplomatic channels. While Letters of Request are faster than letters rogatory, they still remain expensive and painfully slow. Moreover, the Hague Convention contains an important exception. Under Article 23, “A Contracting State may at the time of signature, ratification or accession, declare that it will not execute Letters of Request issued for the purpose of obtaining pre-trial discovery of documents as known in Common Law countries.” Simply stated, nations can elect not to execute Letters of Request for U.S. discovery documents.

The various tools of information exchange, such as the FRCP and the Hague Convention, may occasionally clash with one another. The U.S. Supreme Court addressed this conflict in Aerospatiale. In that case, two corporations owned by the Republic of France designed, manufactured and marketed aircraft. An airliner sold by the two corporations crashed in Iowa, and upon commencing litigation, plaintiffs sought discovery from the two French corporations under the FRCP. The defendant companies argued that the Hague Convention provided the exclusive procedures for discovery of French-sourced information, and that French blocking statutes (to be discussed herein) protected the companies from responding to discovery requests that did not comply with the Hague Convention.

The Supreme Court disagreed, and held that the Hague Convention was not the exclusive or mandatory mechanism for discovering party evidence abroad: “An interpretation of the Hague Convention as the exclusive means for obtaining evidence located abroad would effectively subject every American court hearing a case involving a national of a contracting state to the internal laws of that state.” Aerospatiale, 482 U.S. at 539. Instead, the Court ruled that principles of international comity required courts to consider each country's interests and procedures and the likelihood that “resort to those procedures will prove effective.” Id. at 544. A subsequent 1993 amendment to the FRCP facilitated more effective use of the Hague Convention in discovery requests for U.S. litigation.

Effect of Foreign Blocking Statutes

“Blocking statutes” continue to complicate the collection of judicial evidence. Broadly stated, blocking statutes are non-disclosure laws designed to protect the privacy of citizens as well as the judicial authority and integrity of the bench in the adopting country. The statutes either wholly prohibit or place restrictions on inspecting, disclosing, or transmitting documents and information from the home country to a foreign country in compliance with foreign discovery orders. Significantly, most blocking statutes provide serious sanctions, including imprisonment and/or steep fines for anyone, including lawyers and/or parties that violate such restrictions.

In addition to the exposure of sanctions to the requesting party, the responding party faces exposure to the same set of sanctions for complying with the request. In other words, the U.S.-based subsidiary may be faced with the Hobson's choice of violating the FRCP, or violating the blocking statutes of a parent company's home.

Courts here have struggled with this dilemma. In Aerospatiale, the U.S. Supreme Court held that “[blocking] statutes do not deprive an American Court of the power to order a party subject to its jurisdiction to produce evidence even though the act of production may violate that statute.” 482 U.S. at 544-45 n.29.

However, the recent decision of In re Activision Blizzard Inc. Stockholder Litigation, 86 A.3d 531 (Del. Ch. 2014), presented a more pragmatic solution. In In re Activision, a shareholder dispute, plaintiffs requested a French corporation, Vivendi, to produce documents. Vivendi sought protection claiming that French law precluded compliance without adherence to the Hague Convention. The court ultimately offered Vivendi veiled protection by ruling that the parties were first required to cooperate and abide by the formalities of the Hague Convention and apply to the French authorities issue a Letter of Request. If the French judicial system did not authorize the production of the documents, the court ruled that Vivendi would be required to produce the documents under the FRCP, or be sanctioned accordingly.

Similarly, the district court in Motorola Credit Corp. v. Uzan , 73 F.Supp.3d 397 (S.D.N.Y. 2014), applied the same analysis as In re Activision , and found that the French blocking statute should not prevent the relevant discovery request because France itself does not appear to rigorously enforce the law. The federal court noted that the statute “is riddled with loopholes that make it substantially unenforceable. This was no accident ' In practice ' it appears that when a foreign court orders production of French documents even though the producing party has raised the 'excuse' of the French blocking statute, the French authorities do not, in fact, prosecute or otherwise punish the producing party.” Motorola Credit Corp., 73 F.Supp.3d at 403-404. In contrast, the court pointed to the blocking laws of the United Arab Emirates, Jordan and Switzerland and described their rigorous enforcement such that the Swiss law was “an element of that nation's national identity.” Id.

Given these recent court cases, it is evident that U.S. courts are not prone to blindly subjugate discovery interests in U.S. litigation to foreign laws without a thoughtful analysis of the applicability of such laws and the ramifications of any limitations potentially imposed by such laws. However, while the information-collection process may be compelled by the U.S. courts, the same may not hold true if the litigants are embroiled in dispute resolution abroad.

Conclusion: How Litigants Can Prepare

Given the complexity of applying foreign laws and international treaties to the discovery process, it is critical that parties involved in cross-border disputes prepare for the discovery challenges as early in the litigation process as possible. Companies would be wise to research the most optimal forum to bring their dispute, and develop a trans-jurisdictional litigation strategy that will allow a party to acquire as much discovery as required to successfully resolve the issue. Litigants must understand that the process, procedures, and legal hurdles for gathering information in cross-border transactional disputes can be expensive, time-consuming, and unwieldy. The time to collect the needed data, coupled with a realistic budget to allow for such collection, needs to be competently analyzed before suit is filed.

There are, however, viable means to avoid, or at least minimize, such issues for cross-border inevitabilities. The optimal time to prepare the dispute resolution strategy is at the inception of the transactional relationship. With careful, deliberate forethought, coupled with productive bilateral negotiations, parties are able to craft binding dispute resolution procedures designed to maximize predictability and accountability, and minimize the natural inefficiencies arising from disputes.

In the third part of this series, we will discuss some of the provisions that parties may draft directly into the terms of the agreement(s) to establish an efficient alternative dispute resolution process.

ESI Only Complicates the Matter

Since the onslaught of electronically stored information, courts, lawyers and clients alike have struggled with the challenges of producing electronically stored information (ESI). From the first rules under the FRCP that came out in 2006 to sweeping new rule changes set to take effect on Dec. 1, 2015, the laws governing electronic discovery (eDiscovery) have been constantly evolving. Too often, however, these laws and the rights and protections they afford lag behind the crest of the electronic wave.

For example, new developments in record-keeping technology mean that users are now storing virtually all of their information electronically. Many documents and transactional signatures that have been scanned and stored in various electronic image formats (e.g., .PDF or .JPG) are now accepted by counterparties and courts as “original copies.” As employees increasingly use company e-mail and instant messaging systems for both professional and personal communications, privacy issues become more acute. From a jurisdictional standpoint, the advent of cloud computing as well as remote and redundant data storage facilities also means that a company's electronic records (or even a company's servers) may be located in a different country than the company itself.

In such situations, difficult questions inevitably arise. Which country's laws should apply to trans-national data storage questions? Should a company headquartered in France be able to use the protection of French blocking statutes when all of its data is located on servers housed in England? Should the protection of employees' personal privacy trump corporate disclosure obligations, when the companies themselves have fostered the commingling of such data? If a document sought in discovery is fortuitously loaded locally on a laptop in the United States but stored and maintained in the Brazilian company's servers in Brazil, should the U.S. litigant be forced to use the Hague Convention to obtain the document “from Brazil”?

Because of the nebulous nature of the true “location” of electronic records, ESI has the potential for complicating discovery in litigation and place parties (both litigants and third parties alike) in the unenviable position of either violating their own country's laws or running afoul of U.S. court orders to turn over information.

Allan A. Joseph and Stephen H. Wagner are attorneys with Fuerst Ittleman David & Joseph, PL, Miami, FL, and focus their practice on domestic and international litigation and transactions. The authors may be reached at [email protected] and [email protected], respectively.