* 3 Chinese banks named in U.S. lawsuits against pirates
* New York Fed opposes suits as threat to foreign lenders
NEW YORK, Oct 4 Two Western luxury-goods giants are taking a controversial tack in the fight on Chinese knockoffs, by targeting the U.S. branches of major Chinese banks that allegedly do business with the pirates.
But the copycat-fighting strategy faces resistance from a surprising source: the Federal Reserve Bank of New York, which sees the cases as a threat to the large community of foreign banks operating in America's financial capital.
European luxury-goods conglomerate Gucci Group and American jewelry house Tiffany & Co. (TIF.N) have each alleged in federal court that major Chinese state-owned banks are maintaining bank accounts for counterfeiters in China who are shipping fake designer goods into the U.S.
The banks - Bank of China (3988.HK)(601988.SS), China Merchants Bank (3968.HK)(600036.SS) and the Industrial and Commercial Bank of China (1398.HK)(601398.SS) - all have branches in New York. The luxury-goods makers have petitioned to have the banks freeze assets in accounts owned by the alleged counterfeiters and turn over information about the clients.
‘FOLLOW THE MONEY’
"Our strategy is to pursue the assets - you follow the money," said Robert Weigel, a lawyer at Gibson Dunn & Crutcher in New York, which is representing the designers.
None of the banks involved in these cases responded to requests through their New York branches for comment. The lawyers for the banks declined to comment. The alleged counterfeiters did not respond to requests via email for comment.
In one case, four units of Gucci Group - the Gucci, Balenciaga, Bottega Veneta and Yves Saint Laurent brands - jointly filed a civil suit in U.S. Court in the Southern District of New York against a group of individuals and businesses in China running websites that sold knockoffs of designer handbags on the Internet. Gucci is a unit of Paris-based PPR Group.(PRTP.PA)
The original suit targeted a handful of businesses, including Bagsmerchant LLC, bagsmerchant.com, Bags Store LTD and bagstore.com. The goal, say lawyers for Gucci, was to shut down the knockoff sites and stop the flow of pirated designs into the U.S.
A $152 FAKE
An image included in the complaint shows a handbag listed for sale on the bagsmerchant.com website, clad in Gucci's signature fabric, priced at $151.78. The authentic bag is now selling on the site of high-end department store Neiman Marcus for $717, down from an original $1,595. Judge Deborah Batts issued a temporary restraining order, telling the counterfeiters to stop making and selling the knock-offs. The designers were awarded $7.8 million in damages and given permission to recover that amount from "asset holders" for the counterfeiters. The designers said they had evidence that the counterfeiters had accounts with Bank of China and China Merchants Bank. Judge Richard Sullivan ordered Bank of China's New York branch in August to turn over to the Gucci brands information about the pirates and money belonging to them.
Tiffany, meanwhile, sued a group including online retailers named Tiffanystores.org and Fashion Style and StoresOrg, accusing them of counterfeiting and seeking orders to bar them from making and selling Tiffany knockoffs. Among them: a $24 version of a silver pendant that Tiffany retails for $345.
THE CHINA TRAIL
Judge William H. Pauley III issued a preliminary injunction against the counterfeiters, but the flow of goods continued. Lawyers for Tiffany traced the flow of money from the counterfeiters' customers back to China. The Chinese banks identified by Tiffany, Bank of China, China Merchants Bank and the Industrial and Commercial Bank of China, refused to turn over information about the alleged counterfeiters' bank accounts.
Lawyers for the banks argued that the lenders weren’t subject to the rules under which Tiffany demanded information. The banks won a judgment ordering Tiffany to request the information from their Chinese headquarters using international law, under the Hague Convention, instead of using U.S. law to get the information via their New York branches. The case is pending.
The cases represent a new tactic in the struggle to beat back Chinese counterfeiters, who are churning out replicas of everything from Louis Vuitton bags to entire Apple Stores, and shunting away billions of dollars from U.S. corporations.
‘HARD TO ENFORCE’
The Intellectual Property Alliance has said U.S. industries face copyright piracy in 52 countries, but China is a prime offender. The United States Trade Representative estimated in 2005 that U.S. businesses were losing between $2.5 billion and $3.8 billion per year to Chinese copies.
Battling Chinese pirates in Chinese courts is extremely difficult, many U.S. businesses have found.
"Injunctions are very hard to enforce," said Mark Cohen, a visiting professor at Fordham University Law School in New York, who served as the intellectual property attache for the U.S. embassy in Beijing from 2004 to 2008. "It's hard to reach the assets, there's a lot of civil or administrative recidivism, companies come back and restructure, and it's very hard to put them out of business."
The Chinese banks named in the two suits are fighting back using the high-powered corporate law firms Allen & Overy and White & Case.
THE BERMUDA MODEL
The new front on pirates stems from a two-year-old ruling that had nothing to do with China. Its implications have alarmed the Federal Reserve Bank of New York.
In 2009, a judge ordered the Bank of Bermuda, which has a New York branch, to hand over stock certificates to a U.S. businessman. The businessman's former partner had allegedly parked money owed to the plaintiff in Bermuda, where he thought it would be out of reach.
New York Court of Appeals Judge Eugene Pigott ruled that the Bank of Bermuda, which had a branch in New York, was subject to U.S. law and had to turn over the disputed money.
"The Bank of Bermuda case is key," said Weigel, the attorney for the designers.
But the precedent has been a mixed one for plaintiffs. In New York State Supreme Court, a bankrupt Korean company won an arbitration in a British court and tried to get the British arbitration order recognized in New York. The order would have forced the New York branches of Bank of China, Bank of Communications and other foreign banks to turn over information about accounts held at their headquarter offices.
New York Supreme Court Justice Jane Solomon ruled against the petition by the Korean company, Samsun Logix, finding that the U.S.-based branches of foreign banks are separate entities, and are subject to laws that can't necessarily be applied to their head offices.
The New York Fed, which regulates New York-based branches of foreign banks, supports the "separate entity" theory and the idea that New York branches can't be used as conduits through which to export U.S. law.
A lawyer for the New York Fed, Katherine Landy, presented an oral argument in the Samsun case, warning that a decision in favor of Samsun could spark "a global asset hunt" in the New York court system, according to a court transcript.
Indeed, an amicus brief the New York Fed filed in the Samsun case on behalf of the Chinese banks became part of a series of arguments in the Tiffany case that led Judge Pauley to rule Tiffany needed to seek information from the banks’ headquarters.
The Fed fears that subjecting the headquarters of foreign banks to U.S. law via their New York branches would cause many to fold their American operations.
"If every global bank in New York can be subpoenaed globally, it doesn't matter what country it's from, the answer will be, 'I'm outta here,'" said Ernest Patrikis, a partner at White & Case and a former lawyer for the New York Fed. "'We'll just do our business in London.'"
(Additional reporting by Paul Eckert; editing by Michael Williams)
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