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The extraterritorial reach of the Federal Rules of Civil Procedure’s (Federal Rules) evidence-gathering provisions has long been a source of tension in foreign relations. The world we live in is increasingly interconnected and litigation between parties subject to multiple sovereigns has become more commonplace. Often, the discovery provisions of the Federal Rules come into conflict with foreign laws, such as banking secrecy or blocking statutes. Under such a predicament, a litigant that operates both abroad and in the United States is placed in a catch-22: produce discovery in violation of foreign law (and be subject to liability) or refuse to produce discovery (and be subject to sanctions). These types of scenarios can arise in almost every context and implicate the laws of many of nations. For example, consider the Securities and Exchange Commission’s (SEC) recent conflict with Deloitte’s branch in China regarding the production of documents. The SEC sought documents related to Deloitte’s audit of Longtop Financial Technologies, but Deloitte claimed it was barred from doing so by Chinese secrecy laws.
Courts have attempted to resolve these conflicts in a variety of ways. The United States Supreme Court has even offered guidance. Federal courts, however, continue to apply an inconsistent standard that balances various interests. Thus, it is common for courts to decide cases in this area in conflicting fashion. The conflicting decisions, however, run further than a typical circuit split. The United States District Court for the Southern District of New York recently decided virtually identical cases involving the discovery obligations of Chinese banks differently. Neither judge was wrong in either of those cases; rather, the legal standard itself provides the judiciary with almost unlimited discretion to make subjective policy judgments.
Federal judges have a variety of tools to sanction litigants who fail to comply with discovery orders.1 After years of discovery disputes in Linde v. Arab Bank, PLC,2 the district judge issued “severe” sanctions against Arab Bank, which, according to the bank’s attorneys, turned a multi-billion-dollar case “into a show trial.”3 The plaintiffs are thousands of victims and family members of victims of Palestinian terrorist attacks that occurred in Israel between 1995 and 2004.4 The plaintiffs alleged that the bank violated the Anti-Terrorism Act (ATA) by providing material support and resources to foreign terrorists with the knowledge or intention that they would be used in the preparation or execution of the aforementioned attacks.5 The allegations included claims that the bank assisted in administering a “death and dismemberment benefit plan,” and provided other types of financial services to terrorist organizations.6
During the pretrial discovery phase of the case, Arab Bank refused to produce a sizable portion of the requested materials, claiming that doing so would subject them to liability under foreign law. The district court applied a commonly used balancing test, holding that the plaintiffs’ interests in receiving information vital to the litigation, coupled with the United States’ interest in combating terrorism, outweighed the bank’s privacy interests and potential hardship, as well as the interests of the implicated foreign countries in enforcing their banking-secrecy laws.7 The bank, however, refused to produce the requested discovery despite the district court’s order.8 Years after the bank’s initial refusal, the district court issued sanctions.9
The district court’s sanctions will provide the plaintiffs with two key advantages at trial.10 First, it will allow the jury to essentially infer that the missing discovery would have established the bank’s liability. Second, the bank will be precluded from making any argument or offering any evidence at trial that the plaintiffs could have refuted with the missing discovery.
Arab Bank subsequently filed an interlocutory appeal of this order to the Second Circuit, asking the court to vacate it by, among other things, issuing a writ of mandamus. The bank argued that the Second Circuit had jurisdiction to review the sanctions order because the headlines of a potential multi-billion-dollar jury verdict claiming the bank had “blood on [its] hands” could lead to a run on the bank from both its correspondent banks and customers, effectively crippling it before an appeal could be heard.11 Moreover, the bank also contended that compliance with the order would destroy the privacy rights of thousands of customers, and an appeal could not repair that damage once done. The bank asked the court to issue a writ of mandamus to vacate the sanctions order, claiming that it violates the established limits for civil sanctions on parties acting in good faith during discovery. In addition, the Kingdom of Jordan filed an amicus curiae brief arguing the sanctions violated the principles of international comity.12
The plaintiffs countered that the court did not have jurisdiction to vacate the sanctions order because, among other things, the district court’s order was not an indisputable abuse of its discretion.13 The plaintiffs argued that the bank did not, as it claimed, act in good faith, and countered that the order’s inferences would still require the support of independent evidence. Additionally, they posited that the preclusion order only prevents the bank from unjustly benefiting from the evidence they refuse to produce.14
The ATA provides a civil cause of action for the victims of international terrorism. Before its enactment, it was difficult for victims of terrorism to be made whole from the damages inflicted upon them. The statute allows plaintiffs to collect treble damages and attorneys’ fees from those that injure an American citizen “by reason of an act of international terrorism.”15 Although the phrase “international terrorism” was left ambiguous, courts have looked to congressional intent to determine which activities fall within the definition’s scope. In Boim v. Holy Land Foundation for Relief & Development, the Seventh Circuit held that, under certain circumstances, individuals or entities could be liable under the ATA for donating to the Palestinian terrorist organization Hamas.16 Courts have largely relied on this case’s reasoning to establish “material support,” which includes providing financial services, as within the scope of “international terrorism,” and thus creating liability under the ATA.17 Additionally, courts have also required that a financial institution must “knowingly” provide material support to terrorists in order to be found liable.18 Plaintiffs who file suit against banks under the ATA rely heavily on records that document the bank’s actions. Indeed, such evidence is directly relevant to proving a bank acted with the required scienter to be held liable.
The Federal Rules of Civil Procedure state: “Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense,” and the “[r]elevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.”19 The scope of pretrial discovery has been referred to as “sweeping, virtually creating a presumption of discoverability.”20 Courts can order a party under their jurisdiction to produce discovery under that party’s “possession, custody or control,” no matter where it is located.21 Considered by most of the world’s judicial systems to be invasive and overreaching, the Federal Rules’ discovery provisions demanding production often conflict with foreign laws mandating concealment.
In 1987, the Supreme Court held that foreign law does not “deprive an American court of the power to order a party subject to its jurisdiction to produce evidence.”22 The Court endorsed a balancing test that addresses the sensitive and fact-specific inquiries these issues implicate.23 In ATA banking cases, courts have consistently ordered the production of discovery located abroad in violation of the laws of the country where the discovery is located—generally weighing the interests of the plaintiffs in gathering important evidence to make their case, and of the United States in combating terror, more heavily than the defendant and foreign nation’s interest in avoiding liability and enforcing their laws.24 When a district judge balances the interests at stake and decides to order discovery, despite the potential liability for the producing party under foreign law, failure to obey the court’s orders can result in sanctions. Indeed, the consequences can be devastating; the sanctions at a court’s disposal include the adverse-inference instruction and the right to suppress evidence.25 When imposing sanctions, case law dictates that district courts should consider, among many factors, the harshness of the sanctions, the degree to which the sanctions are needed to reestablish the evidentiary balance upset by the nondisclosure, and the nondisclosing party’s degree of fault.26
Once a district judge orders discovery, the orders are usually interlocutory and not subject to immediate appeal because they can be reviewed after final judgment in the case.27 There are numerous exceptions to this rule, however, which include the issuance of a writ of mandamus. The All Writs Act enables appeals courts to issue a writ of mandamus instructing a district court to remedy an erroneous order.28 Nevertheless, mandamus is warranted only under circumstances such as “judicial usurpation of power” or “clear abuse of discretion” by the lower court.29 Moreover, the party seeking issuance of the writ must have no other suitable means of attaining the relief it seeks. Even if a case falls within the scope of the aforementioned requirements, the court still has discretion to consider whether issuance is “appropriate under the circumstances.”30
In Linde, the Second Circuit held that the privacy implications of a potential judgment, as well as the economic and diplomatic ramifications, were not extraordinary enough to warrant review. The court rejected use of this power “even if the District Court incorrectly resolved any singular factual or legal question.”31 The court held that warnings of a run on the bank or “financial and political destabilization” were too speculative, and indirectly linked to the sanctions at issue.32
Typically, terrorist organizations use foreign banks and financial institutions to fund their attacks and activities. Thus, the circumstances surrounding ATA banking cases will almost always implicate records located abroad and generate discovery disputes that place banks in the catch-22 between United States courts demanding production and foreign laws mandating concealment. If district courts continue to weigh the respective interests in favor of the plaintiff and the production of evidence abroad, the consequences for defendants in these cases could be dire. In Linde, the Second Circuit established that sanctions allowing adverse-inference instructions and evidence-preclusion orders are effectively unreviewable until after a final judgment. If similar sanctions are ordered in ongoing and future ATA banking discovery disputes, the plaintiffs in these cases will proceed to trial with significant settlement leverage.
While these discovery and evidentiary disputes raise difficult questions and implicate a variety of important interests, courts should continue to order the production of evidence abroad and sanction litigants that refuse to comply. The alternative would render the ATA moot. If foreign banking-secrecy laws effectively shield evidence located abroad, plaintiffs bringing suit under the ATA would be unable to prove their cases. Indeed, the plaintiffs in these cases must prove that the banks acted with the requisite scienter to be held liable. When foreign banks are the accused parties, almost all evidence required to prove such a claim will inevitably be located abroad. Congress intended for the ATA to “empower victims” of international terrorism “with all the weapons available in civil litigation,” including discovery.33 While concerns of international comity should be considered, it is well established that legislative intent can override those concerns.34 Congress’s intent was to use discovery as one of those weapons; limiting discovery would effectively render the ATA moot, hardly ‘empowering’ the victims of terrorism.
Although harsh, the sanctions at issue are not unjust, nor will their application create a “show trial.” The plaintiffs will still be required to submit independent evidence in support of their claim and then the jury will decide, based on the merits of the evidence presented, whether the documents the bank withheld likely had the content they are allowed (but not required) to infer. Additionally, limiting evidence the bank can offer prevents the bank from benefiting from evidence it withheld from the plaintiffs. Without this order, Arab Bank officials could testify at trial that they closed terrorist accounts but then invoke banking secrecy and refuse to answer questions about when or why they did so. It would be analogous to a criminal defendant taking the stand and answering direct examination, but then refusing cross-examination on the grounds of Fifth Amendment privilege.35 The absence of these orders would actually lead to “show trials,” where banks could escape liability by withholding important documents—effectively enjoying the benefits and avoiding the hindrances of the laws and courts of the United States.
If ATA plaintiffs are unable to access vital discovery to prove their cases, they will not be the only ones harmed; the United States public will suffer as well. The possibility of significant civil damages in United States courts and the subsequent economic ramifications of such awards can deter banks from doing business with terrorists. The ATA’s legislative history suggests that Congress viewed private suits under the Act as “infused with the public interest.”36 Indeed, there is some evidence that ATA suits have already begun to incentivize banks to implement greater efforts to prevent terrorists from utilizing their services.37 In fact, this would not be the first time private civil litigation could play a role in bankrupting terrorism. The Ku Klux Klan was “brought to its knees” by private civil litigation, as opposed to government or military action.38
Today, more than ever before, foreign banks enjoy the benefits of our markets and protections of our laws. It would be unjust if foreign banks could enjoy those advantages while simultaneously avoiding their hindrances. Banks that conduct business in the United States make a choice, and sometimes that choice can present disadvantages as well. If foreign banks decide that it would be more beneficial to turn a blind eye to terrorists that utilize their services than to remain under the personal jurisdiction of United States courts, then that is their prerogative. Until a bank (or any organization or individual) makes that choice, however, it has impliedly accepted the risks of being under control of two legal systems that may, at times, conflict with each other. While under the control of two legal systems, banks should fail in any argument that suggests the United States’ interest in combatting terrorism and providing remedies to victims of terrorism should yield to foreign interests by enforcing banking secrecy. There will always be banks willing to provide material support for terrorist organizations, as long as it makes financial sense for them to do so.39 Ordering discovery, and implementing sanctions that will balance the evidentiary gap stemming from noncompliance, will fulfill congressional intent and allow plaintiffs to present their case. There is no doubt that the victims of international terrorism deserve to hold accountable those providing material support to the terrorists that victimize them. The most important outcome of ATA litigation, however, will be the threat of civil litigation as a significant deterrent against rendering material support to terrorists in the future.40 By cutting off the “oxygen of terrorism,” civil litigation will decrease the operational capacity of terrorists and, in turn, will inevitably shorten the list of victims (and plaintiffs) able to file suit under the ATA.41
Matthew J. Smith, Case Note, Discovering New Ways to Deter Terrorism: The ATA and the Cross-Border Discovery Catch-22, 1 Suffolk U. L. Rev. Online 25 (Feb. 25, 2013), http://www.suffolklawreview.org/smith-discovery.