The concept of US discovery is very alien to the uninitiated litigant and particularly foreign to Chinese parties, because the Chinese litigation process is far different. China proceedings are conducted much like other civil code jurisdictions, with the parties proffering only evidence that supports the claims or defenses. US discovery is intended to uncover both supporting and damaging evidence. US discovery rules provide litigants liberal access to information possessed by opponents, and even third parties, such as internal company emails, documents, records, and policies. Disclosure of requested information may be required, even though such disclosure would be prohibited under PRC law. The Hague Convention provides one avenue of obtaining evidence located in China, but US courts are not always willing to require the use of the Hague Convention procedures where a party has submitted to the jurisdiction of the US court. Recent US cases demonstrate the challenges of requiring discovery from Chinese parties and the challenges that Chinese parties face in US courts.
Overview of discovery in US litigation
The scope of discovery in China is far more restricted than in the US. Under PRC procedural rules, a litigant must only present sufficient evidence to support its own claim or defense. In China, a party is rarely required to produce evidence to support the other's claim or defense, and third parties generally are under no obligation to provide any evidence for the litigation. Judges and arbitrators can order the production of such evidence but obtaining it from the other side is often difficult. In contrast, the US Federal Rules of Civil Procedure ("Federal Rules") allow a litigant to collect from its opponent non-privileged evidence relevant to its own claim or defense, even if disclosure would be adverse to the producing party.1 Common forms of evidence include documentary evidence produced in response to requests for production of documents, oral testimony through depositions, and written testimony through answers to interrogatories.
PRC companies with a presence in the US are often surprised to learn that despite not being a party to the suit, they may be compelled to produce evidence for the litigation. Under the Federal Rules, if a party is within the court's jurisdiction, a court may order a third party, through a subpoena, to produce documents or submit to a deposition. A PRC party may be within the court's jurisdiction if it has assets, a branch office, or affiliate company in the US or if it conducts business in or travels to the US. PRC law, however, strictly prohibits US attorneys and agencies from taking depositions on PRC soil without approval from PRC authorities. Depositions of PRC individuals are often taken voluntarily in Hong Kong or other countries accessible to the deponent. Depositions may also be conducted at the US embassy or consulate, which is considered US soil.
Compliance with a discovery request or subpoena is mandatory. Failure to comply can result in civil and even criminal sanctions. A third party beyond the US court's jurisdiction is generally under no obligation to comply with a litigant's request for information. The failure of a party to litigation to respond to discovery will adversely affect that party's ability to prove its case. The court may take an adverse inference from the failure to produce, e.g. if the defendant refuses to produce an email that the other side contends demonstrates liability, the court may take the adverse inference that if the email had been properly produced it would have proven liability on that point. Thus, failing to produce and refusals to produce key documents may undermine counsel's ability to prosecute or defend the case.
A major focus of discovery is looking for evidence that shows a weakness or inconsistency in the other side's case. As counsel, we look for inconsistencies to show the other side is not being truthful or candid with the court. A witness who testifies for example that an event did not occur might be cross examined with an email or document that confirms the event. As counsel, we can use such evidence to argue that if the witness is lying about this issue the court should find the witness' testimony on other issues equally unreliable. Litigants in US litigation quickly learn that a lie or half truth is easily discerned.
Parties must also be conscious of issues of spoliation of evidence. At the start of litigation or threatened litigation, counsel will ask the company to issue a litigation hold notice. This is a notice to everyone in the company that physical and electronic documents have to be retained until the litigation is completed. If documentary evidence is lost or destroyed after litigation is threatened or commenced, the other side will use this as proof that the party destroyed evidence adverse to its case. Effectively creating and maintaining a litigation hold in China is difficult because so many companies have employees that may use non-company servers for emails exchanges. Similarly, employees tend to use SMS messaging rather than emails. Such messages are often irretrievable. Again this may give the opponent the chance to argue that supporting evidence of a claim never existed or that damaging evidence was destroyed or intentionally sent via text rather than email.
Discovery of information located in China
Under US law, documents located abroad may be obtained pursuant to the Federal Rules or the Hague Convention. The US party will argue for discovery under the Federal Rules because it will be faster and result in broader disclosure of information. The PRC party will aim for discovery though the Hague Convention to limit the scope and avoid the risk of disclosing information in violation of PRC law.
Discovery pursuant to the Federal Rules. If the Federal Rules are applied, all requested information must be produced unless there is a valid basis to object to disclosure. Parties commonly object to disclosure on the basis that information is a privileged communication between attorney and client, is attorney work product, or would be unreasonable and unduly burdensome to produce. The objecting party must have a good faith basis and specifically state its reasons for the objection. Importantly, a successful objection may narrow the scope of disclosure but may not fully defeat the request.
A US branch office or affiliate of a PRC company may also be the conduit for obtaining documents located in China. Under the Federal Rules, all non-privileged documents within a party's possession, custody, or control must be produced, even if they are located in a separate offshore legal entity. The US entity may be deemed to have control over requested documents if it has the "practical ability" to obtain them.2
Discovery pursuant to the Hague Convention. To obtain discovery under the Hague Convention, the US court must submit a Letter of Request to the PRC Ministry of Justice. The letter is forwarded to the PRC Supreme Court for review, which may take six to twelve months. Like many civil law countries which view US discovery as overly broad, the court will only order production of documents with a "direct and close connection with the subject matter of the litigation."3 The court may also limit the scope of the request, or reject the request altogether, if disclosure would violate PRC law or state sovereignty, security, or public interest. If approved, the letter will be forwarded to a lower PRC court for execution.
Considerations for PRC litigants and third parties
Unless there is a compelling reason to apply the Hague Convention, discovery will be conducted under the Federal Rules. The party seeking application of the Hague Convention has the burden of persuading the court that it is the proper channel for discovery. A US court will consider a number of factors, including the importance of the information sought, the degree of specificity of the request, whether the information originated in the US, the viability of the Hague Convention as an alternative means to obtain the information, and the US and Chinese interests at stake.4 Historically, US courts have been reluctant to order discovery under the Hague Convention because they view it as time consuming, expensive, and ineffective.
Though PRC law prohibits US litigants from obtaining evidence in China by any means other than the Hague Convention or diplomatic channels, this alone will not be enough to convince a US court to deviate from the Federal Rules.5 The PRC party must demonstrate that disclosure of the information without consent from PRC authorities would result in a genuine threat, not just a mere possibility, of civil or criminal penalties. The PRC party will need to point to actual instances of enforcement when the type of information sought was disclosed in violation of PRC law. The US court must also be convinced that application of the Hague Convention will result in production of discoverable information and that China's interest in protecting the information outweighs the US interests at stake. At the onset of US litigation, PRC parties should consider the nature of information which may be requested, whether such information is protected by PRC law, and potential exposure to penalties if disclosed without approval.
Seek application of the Hague Convention early in the proceedings.Foreign litigants often wait too late to object to requests for protected information. Under the Federal Rules, if a litigant or third party refuses to produce requested information, it must notify the requesting party of its reasons for doing so. If information is withheld without a valid objection, the requesting party may ask a court to compel production of such information. Waiting until the requesting party has involved the court is generally not a successful strategy for the objecting party, as the objection may be waived or viewed as a last ditch effort to delay or avoid discovery.6 Involving the court early in pre-trial proceedings may place a PRC party in a better position to narrow disclosure or persuade the court to order discovery under the Hague Convention.
Consider whether the information sought is protected by PRC law. Before seeking application of the Hague Convention, a PRC party should consider whether the information sought is protected by PRC law. State secrets, trade secrets, and bank secrets are common forms of protected information. In addition to establishing the paramount interests of China in protecting the information and a real exposure to liability for unlawful disclosure, the PRC party will also need to demonstrate it has undertaken measures to prevent disclosure of the protected information.7
State secrets. SOE's and parties involved in sensitive industries such as telecommunications, banking, information technology, energy, and natural resources are particularly at risk for possessing state secrets.8 The PRC Law on Guarding State Secrets prohibits a company or individual from disclosing information considered to be a state secret. PRC authorities take an expansive view of information deemed state secrets and even information relating to the internal policies and procedures of a SOE may be considered state secrets under PRC law. A PRC party in possession of potentially sensitive information may want to consult with PRC authorities in advance to determine if any of the information should be designated a state secret. This may reduce exposure to adverse consequences for unlawful disclosure and strengthen an objection to disclosure in US proceedings.
Trade secrets. Requested information often includes internal company emails, documents, and information containing confidential and proprietary company information. A PRC party should consider whether the information sought includes trade secrets owned by it or a third party. If owned by a third party, disclosure of trade secrets may be prohibited by PRC law and application of the Hague Convention may be appropriate. If owned by the PRC party, an objection to disclosure may also be raised. The information may still be discoverable if the requesting party can show the information is not privileged, is relevant and necessary to the litigation, and may not be obtained by other means. In such case, the PRC party may ask the court to issue a protective order to prohibit public disclosure of the information and use of the information for any purpose other than the litigation.
Recent US cases
In two recent cases, the US branches of PRC banks were ordered to produce bank records of PRC defendants, the disclosure of which is prohibited by PRC law. These cases represent the uncertainty PRC parties face when subject to US discovery and the competing views US courts may take when asked to apply the Hague Convention.
In Tiffany v. Andrew, plaintiffs brought a trademark infringement suit against PRC defendants in the Southern District of New York and requested defendants' bank records from the New York branches of Bank of China, China Merchant's Bank, and ICBC.9 The banks agreed to produce records located in New York but refused to produce records located in China because disclosure was prohibited by PRC law. The US branches also argued the records located in China were beyond their control. Though the court considered records held by the PRC headquarters to be within the control of the US branches, the banks were successful in persuading the court to apply the Hague Convention. In doing so, the court dismissed what it considered to be outdated notions that the Hague Convention was time consuming and unlikely to lead to discoverable information. Instead, it was persuaded by new evidence that PRC authorities have and are willing to execute Letters of Requests and viewed the Hague Convention as a viable means to obtain evidence in China. The court also viewed the PRC interests in protecting confidential bank records and existence of harsh penalties for violating PRC bank secrecy laws to outweigh the US interest in enforcing intellectual property rights. The banks' status as third parties, not parties to the litigation, was also an important factor in favor of the banks' arguments.
Less than one month later, however, a judge in the same judicial district reached the opposite conclusion. In Gucci America, Inc. v. Weixing Li, also a trademark infringement action involving PRC defendants, Bank of China's New York branch was again asked to produce bank records located in China.10 Unlike the Tiffany case, the court was not persuaded the Hague Convention would lead to production of discoverable evidence. It was also unconvinced that Bank of China faced a real threat of liability for disclosing account records in violation of PRC law. The court viewed the US interest in protecting intellectual property to be dominant to the PRC interest in protecting bank secrets and compelled production of the account records under the Federal Rules.
In a third recent matter, (US Securities and Exchange Commission v. Deloitte Touche Tohmatsu CPA Ltd., Miscellaneous Action No. 11-0512 GK/DAR (US DC DC January 4, 2012)), the US District Court for the District of Columbia, Magistrate Judge Deborah A. Robinson has issued a show cause order to the Chinese entity Deloitte Touche Tohmatsu CPA Ltd., requiring that the defendant show cause as to why it has failed to produce certain evidence. Deloitte has sought the approval of the PRC authorities to release the information and the PRC authorities have apparently advised that such production would be in violation of PRC law. It remains to be seen what accommodation will ultimately be reached in this case where US and PRC interests are in clear opposition.
As one can see, these discovery battles will continue to be fought on a case by case basis.US courts view discovery as a tool to "make a trial less a game of blind man's bluff and more a fair contest with the basic issues and facts disclosed to the fullest practicable extent."11 Accordingly, US judges are reluctant to limit the scope of discoverable information that a litigant or third party must produce. The likelihood of convincing a US court to narrow disclosure and apply the Hague Convention is uncertain and will depend on the circumstances of each case. Chinese litigants may find navigating the US discovery maze difficult. The key to success is understanding the challenges. We strongly recommend that if you are involved in litigation you train the employees handling the case regarding the US litigation and discovery process, the obligations and the risks. Only then can the team effectively deal with these issues in a proactive and successful way.
1 See Federal Rules of Civil Procedure
("Federal Rules") 26(b)(i). The US court system is
divided into federal and state courts. Because most litigation
involving foreign parties takes place in federal courts, this
article is based on the Federal Rules. Procedural rules in state
courts vary by state.
2 See In re NTL, Inc. Sec. Litig., 244 F.R.D. 179, 195 (S.D.N.Y. 2007). To limit documents deemed within the control of their US branches or subsidiaries, PRC companies may consider implementing corporate borders to prevent the free-flow of information between the PRC and US entities.
3 See Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters, Article 33 and Status Table ("Hague Convention"), available at http://www.hcch.net/index_en.php?act=conventions.status&cid=82.
4 See Societe Nationale Industrielle Aeropostiale v. U.S. District Court for the Southern District of Iowa,482 U.S. 522, 544, n.28 (1987). Some courts will also consider hardship of compliance on the party from whom discovery is sought and whether the resisting party acted in good faith.
5 See PRC Civil Procedure Law, Article 261.
6 See, e.g., Richmark Corp. v. Timber Falling Consultants, 952 F.2d 1468 (9th Cir. 1992) (rejecting defendant's objection to discovery because defendant failed to object to disclosure of PRC state secrets until late in pretrial proceedings after defendant failed to comply with court-ordered discovery, was held in contempt, and subject to sanctions).
7 See id. (rejecting defendant's objection to disclosure of PRC state secrets and request for application of the Hague Convention because, among other things, defendant previously released some of the information sought in commercial dealings, did not present convincing evidence that disclosure would affect PRC interests, and did not face a genuine threat of adverse consequences for disclosure).
8 Sensitive industries also include defense, agriculture, infrastructure, transportation, equipment-manufacturing, and technology industries.
9 See Tiffany, 2011 U.S. Dist. Lexis 80677.
10 See Gucci America v. Weixing Li, 2011 U.S. Dist. Lexis 97814 (S.D.N.Y. August 23, 2011).
11 United States v. Proctor & Gamble Co., 356 U.S. 677, 682-83 (1958).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.