Nike counterfeiting case: Chinese banks spared $150 million in punishment by the 2nd Circuit

September 1, 2021

The 2nd U.S. Circuit Court of Appeals concluded Monday that six Chinese banks were not liable for a potential $150 million in sanctions for failing to freeze the assets of hundreds of Nike counterfeiters.

U.S. Circuit Judge Michael Park wrote for a unanimous three-judge panel that Next Investments LLC, which bought the rights to the $1.8 billion default award from Nike Inc, had failed to seek enforcement of the freeze against the banks for nearly six years before asking the court to hold them in contempt.

A request for comment from Next Investments and its attorney, Robert Weigel of Gibson Dunn & Crutcher, was not immediately returned.

Five of the banks were delighted with the verdict, according to Sandy Weisburst of Quinn Emanuel Urquhart & Sullivan, who represented them.
In 2015, Nike and its Converse Inc subsidiary obtained a default judgment in federal court in Manhattan against over 600 Chinese businesses and people. Judge Shira Scheindlin of the United States District Court for the District of Columbia also issued orders prohibiting the defendants and “any people working in concert or in cooperation” with them from moving their assets.

In 2017, Nike sold their portion of the judgment to Next Investments LLC, a Houston-based subsidiary of litigation finance firm Tenor Capital Management LP. The government then subpoenaed six Chinese banks with New York offices where the counterfeiters allegedly maintained accounts, and launched a contempt action against them in 2019, asking $150 million in compensatory damages for failing to comply with the asset restraining orders.

Next’s application was denied by Senior U.S. District Judge Colleen McMahon in 2020, in part because to New York’s distinct entity law, which recognizes U.S. branches of foreign banks as independent legal entities and prevents the court from enforcing the hold on assets in China.

On appeal, Next contended that the separate entity rule shouldn’t be used as a “get-out-of-jail free card” for counterfeiting and other illegal activities.
Park declined to hold the banks in contempt or implement the injunction, joined by Senior Circuit Judge Jon Newman and Circuit Judge Steven Menashi.

Nike and Next had “explicitly disclaimed” that they were seeking to enforce the orders against four of the banks, Park noted, in addition to not seeking to compel the banks to comply with the orders for over six years.

The court was unable to rule on the banks’ suggested arguments that the orders did not apply as a result of the delay, and Park said that the contempt motion was a “improper vehicle for addressing the banks’ important legal defenses” for the first time.

Park also declined to hold the banks in contempt, citing a “reasonable basis for dispute” about whether the directives applied to them under the separate entity rule.

“We don’t have to decide whether the separate entity rule precludes enforcement,” Park explained. “It’s enough that Next has failed to define a legal theory that clearly binds the Chinese subsidiaries to asset limitations.”

The ruling “reaffirmed our conviction that our client had done nothing unlawful and the case against it should have never been brought,” said Adam Hoffinger of Greenberg Traurig, who represented the Agricultural Bank of China.

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