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Recent Cases Highlight Discovery Issues In Transnational Litigation

by Stuart M. Riback

For companies that do business internationally, it is by now a cliché that the American legal system permits far more extensive pretrial discovery than almost any other country's legal system. American litigation procedures are so extensive because they are based at least nominally on the premise that full access to all the facts is most likely to lead to a correct and just result.

A frequent by-product of this philosophy is that discovery in the United States is intrusive and expensive. When litigation in the United States touches foreign parties, often their temptation is to invoke some aspect of their status as foreigners in order to limit or block discovery in the U.S., for example, by raising jurisdictional objections or by resorting to their home countries' courts. Two recent cases show how difficult it sometimes can be to do that. In Quaak v. Klynveld Peat Marwick Goerdler Bedrijfsrevisoren , 361 F.3d 11 (1st Cir. March 8, 2004), the United States Court of Appeals for the First Circuit (covering Maine, New Hampshire, Massachusetts and Rhode Island) enjoined the defendant, a Belgian accounting firm, from seeking to have the Belgian courts impose fines on American parties who were seeking discovery in a United States court case. In Ratliff v. Davis Polk & Wardwell , 354 F.3d 165 (2d Cir. Dec. 30, 2003), the Second Circuit Court of Appeals (covering New York, Vermont and Connecticut) ordered a New York law firm to produce an overseas client's documents that had been given to the law firm solely for purposes of obtaining legal advice.

In Quaak , the Belgian KPMG auditing firm was named as a defendant in a securities fraud action in Massachusetts that arose from the collapse of Lernout & Hauspie Speech Products, N.V. The plaintiffs in the securities action demanded production of KPMG's audit work papers, and the magistrate judge who was supervising discovery upheld that demand. He rejected KPMG's position that the audit work papers should not be produced because producing them would violate Belgian laws that prohibit disclosure of confidential client information.

KPMG then asked a Belgian court to issue an order prohibiting the plaintiffs from continuing to seek the discovery, and requested the Belgian court to impose a fine of one million Euros for each violation. While that request was pending in Belgium, the plaintiffs countered by asking the American court to prohibit KPMG from seeking the relief in Belgium. The district court granted the plaintiffs' request and issued a preliminary injunction. KPMG appealed.

On appeal the First Circuit considered the delicate question of what circumstances could justify having an American court enjoin a party from seeking relief in a different country's courts. On the one hand, it rejected a rule that would allow this kind of an injunction whenever the parties and issues in the two suits are the same and the American court decides that "simultaneous proceedings would frustrate the speedy and efficient determination of the case."  Id . at 17. The First Circuit felt that this rule (which is followed in the Fifth and Ninth Circuits) gave insufficient weight to considerations of international comity by making it too easy for American courts to issue injunctions against foreign lawsuits. On the other hand, the First Circuit also declined adopt a rule under which an injunction against foreign litigation could issue only where necessary to preserve the American court's jurisdiction or to protect an important public policy.

Instead, the First Circuit adopted a conservative but flexible approach based on a multi-step analysis. First, the U.S. court may consider prohibiting a party from pursuing litigation in another country only if the "parallel suits involve the same parties and issues."  Id . at 18. If the parties or issues are different, there should be no injunction. But if the suits are indeed parallel, the court still should presume that considerations of international comity counsel against prohibiting a party from seeking relief in a foreign court. But that presumption may be overcome, however. The First Circuit listed several factors for a court to consider in deciding whether the presumption is overcome: whether the two actions are really parallel, or whether instead the foreign action was designed to affect the American one; the procedural posture of each of the actions; the parties' conduct, including their good faith; the importance of the policies at stake in each of the lawsuits; and whether and to what extent the foreign action may interfere with the US courts' ability to reach a quick and just decision.

Based on these factors, the First Circuit upheld the injunction against KPMG, prohibiting it from pursuing the Belgian action. The U.S. court had determined that discovery of KPMG's audit work papers was necessary for a proper adjudication of the U.S. litigation -- not just for the claims against KPMG, but for the claims against all the defendants. Also, KPMG had itself deliberately provoked the "crisis of comity” by commencing the Belgian case in an effort to stop that discovery. Moreover, there were alternative ways to meet the confidentiality concerns other than using the Belgian courts to try to impose fines on the plaintiffs simply for following normal U.S. discovery procedures. The injunction thus was necessary to preserve the U.S. courts' ability to adjudicate the case properly. In the words of the First Circuit: "Where, as here, a party institutes a foreign action in a blatant attempt to evade the rightful authority of the forum court, the need for an antisuit injunction crests." Id. at 20. Under Quaak , therefore, U.S. courts will respect proceeding in other countries, but not if a party is using those proceedings to interfere with U.S. litigation procedures, including discovery.

Discovery of a foreign company's documents in a U.S. court action also was at stake in Ratliff . In that case, the Dutch Ernst & Young accounting firm ("E&Y”) was being investigated by the Securities and Exchange Commission in connection with alleged accounting issues regarding Baan Company. E&Y engaged an American firm, Davis Polk & Wardwell, to represent it in its dealings with the SEC. E&Y would not have been subject to the SEC's personal jurisdiction absent its voluntary cooperation. At the same time, a group of plaintiffs commenced a securities fraud litigation against E&Y (among others). The plaintiffs in the securities fraud action served a subpoena on Davis Polk, seeking discovery of the E&Y documents in Davis Polk's possession.

It is fairly clear that had matters stopped there, the court would not have ordered Davis Polk to produce the documents, based on attorney-client privilege. That is not because each of the individual documents in Davis Polk's possession contained privileged communications. Rather, the privilege would have applied because of the rule of In re Sarrio , S.A., 119 F.3d 143 (2d Cir. 1997). Under Sarrio , if a person who is not otherwise subject to American court process sends its documents to an attorney in the United States for purposes of obtaining legal advice, those documents are protected from discovery by the attorney-client privilege. That is true even though the contents of the documents are not themselves privileged communications. If the presence of those documents in the United States came about solely because they were sent to an attorney for purposes of obtaining legal advice, the attorney-client privilege protects them from disclosure.

In the Ratliff case, though, matters did not end there. As part of E&Y's voluntary cooperation with the SEC, Davis Polk had sent the SEC many of the documents it had received from E&Y. After their subpoena to Davis Polk was challenged, the securities plaintiffs offered to limit their request to cover only documents that had been turned over to the SEC, transcripts of testimony before the SEC and correspondence with the SEC.

The Second Circuit held that the subpoena as limited had to be enforced, so that Davis Polk had to produce the requested documents. The reason is that disclosure to the SEC waived the privilege. Once the documents were given to the SEC, E&Y could no longer assert that they were confidential attorney-client communications. The Second Circuit strongly implied that if the documents had not been given to the SEC, they would otherwise have been shielded from production under Sarrio. [1]

The Quaak and Ratliff cases highlight starkly for foreign businesses the importance American courts place on broad discovery as an aid to getting at the truth in litigation. Often this focus on disclosure will override what non-American businesses would view as equally or more important considerations, such as disruption of business, privacy concerns or preservation of confidentiality.

[1] I do not mean to criticize E&Y and Davis Polk for voluntarily cooperating with the SEC. Often the best course is to cooperate voluntarily because the SEC has an arsenal of highly potent weapons it can use against those who do not cooperate. In certain cases the SEC can effectively kill off a business even in advance of an adjudication of wrong-do-ing. So cooperation is often advisable. All I mean to point out is that there can be collateral damage from such cooperation, including possible disclosure in litigation of communications that otherwise need not be disclosed. There is a body of case law that addresses the degree to which disclosing information to the SEC waives the attorney-client and work product privileges, but a full discussion of that case law is beyond the scope of this memo.

If you have questions about this article or the cases discussed in it, please feel free contact Stuart M. Riback at 212-981-2326.

This article was prepared as a service to our clients and friends. This article does not constitute legal advice and should not be relied upon as legal advice by the reader or any other party.