Session 8: New Products, Product Design and the Lawpicker.uchicago.edu/GSBOnline/F18Set5.pdfPicker,...

Picker, The Legal Infrastructure of Business Booth 42201, Autumn, 2018 201

Session 8: New Products, Product Design and the Law

We will look at some issues effecting new firms. We will start with some early start up financing materials from Y Combinator (blog post 1, blog post 2, investment document).

We will then switch to the Federal Trade Commission’s July 10, 2014 complaint against Amazon regarding the design of its in-app purchase mechanism on devices like the Ama-zon Fire tablet. We will look at how the legal system is responding to new entry in trans-portation including a San Francisco response to entry in the scooter market and an update

on how New York City is regulating Uber and other ride-hail services

.

https://www.ycombinator.com/deal/

https://blog.ycombinator.com/new-standard-deal/

https://www.ycombinator.com/docs/Postmoney%20Safe%20-%20Valuation%20Cap%20-%20v1.0.docx

https://www.sfcityattorney.org/2018/05/23/san-francisco-announces-next-steps-regulating-shared-motorized-scooters/

https://www.nytimes.com/2018/08/08/nyregion/uber-vote-city-council-cap.html

COMPLAINT Federal Trade Commission Case No. __________ 600 Pennsylvania Avenue N.W. Washington, DC 20580 1 (202) 326-2222

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DAVID C. SHONKA Local Counsel Acting General Counsel LAURA M. SOLIS, WA Bar No. 36005 JASON M. ADLER [email protected] DUANE C. POZZA Federal Trade Commission [email protected], [email protected] 915 2nd Avenue, Suite 2896 Federal Trade Commission Seattle, WA 98174 600 Pennsylvania Avenue N.W., CC-10232 P: (206) 220-4544 Washington, DC 20580 F: (206) 220-6366 P: (202) 326-3231, (202) 326-2042 F: (202) 326-3239 Attorneys for Plaintiff FEDERAL TRADE COMMISSION

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON

FEDERAL TRADE COMMISSION,

Plaintiff, v. AMAZON.COM, INC.,

Defendant.

Case No. ____________ COMPLAINT FOR PERMANENT INJUNCTION AND OTHER EQUITABLE RELIEF

Case 2:14-cv-01038 Document 1 Filed 07/10/14 Page 1 of 12


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Plaintiff, the Federal Trade Commission (“FTC”), for its Complaint alleges:

1. The FTC brings this action under Section 13(b) of the Federal Trade Commission

Act (“FTC Act”), 15 U.S.C. § 53(b), to obtain preliminary and permanent injunctive relief,

rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-

gotten monies, and other equitable relief for Defendant’s acts or practices in violation of Section

5(a) of the FTC Act, 15 U.S.C. § 45(a), in connection with Defendant’s billing for charges

related to activity within software applications (“apps”) consumers download to their mobile

devices from Defendant’s app store.

JURISDICTION AND VENUE

2. This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1331, 1337(a),

and 1345, and 15 U.S.C. §§ 45(a) and 53(b).

3. Venue is proper in this district under 28 U.S.C. § 1391(b)(1), (b)(2), (c)(2), and

(d), and 15 U.S.C. § 53(b).

PLAINTIFF

4. The FTC is an independent agency of the United States Government created by

statute. 15 U.S.C. §§ 41-58. The FTC enforces Section 5(a) of the FTC Act, 15 U.S.C. § 45(a),

which prohibits unfair or deceptive acts or practices in or affecting commerce.

5. The FTC is authorized to initiate federal district court proceedings, by its own

attorneys, to enjoin violations of the FTC Act and to secure such equitable relief as may be

appropriate in each case, including rescission or reformation of contracts, restitution, the refund

of monies paid, and the disgorgement of ill-gotten monies. 15 U.S.C. § 53(b).

DEFENDANT

6. Defendant Amazon.com, Inc. (“Amazon”) is a Delaware corporation with its

principal place of business in Seattle, Washington. Amazon transacts or has transacted business

in this district and throughout the United States. At all times material to this Complaint, acting

alone or in concert with others, Amazon has advertised, marketed, promoted, distributed, offered



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for sale, or sold apps that can be downloaded from Amazon’s Appstore and installed on its

Kindle Fire and Kindle Fire HD devices (“Kindle Fires”), or on mobile devices running the

Android operating system (“Android mobile devices”).

COMMERCE

7. At all times material to this Complaint, Amazon has maintained a substantial

course of trade in or affecting commerce, as “commerce” is defined in Section 4 of the FTC Act,

15 U.S.C. § 44.

DEFENDANT’S BUSINESS PRACTICES

8. Amazon offers thousands of apps through its mobile app store, including games

that children are likely to play. In many instances, after installation, children can obtain virtual

items within a game, many of which cost real money. Amazon bills charges for items that cost

money within the app—“in-app charges”—to the parent. Amazon began billing for in-app

charges in November 2011, well after media reports about children incurring unauthorized

charges in similar apps from other mobile app stores. Amazon nonetheless often has failed to

obtain parents’ or other account holders’ informed consent to in-app charges incurred by

children. Just weeks after Amazon began billing for in-app charges, consumer complaints about

unauthorized charges by children on Amazon’s mobile devices reached levels an Amazon

Appstore manager described as “near house on fire[.]” In total, parents and other Amazon

account holders have suffered significant monetary injury, with thousands of consumers

complaining about unauthorized in-app charges by their children, and many consumers reporting

up to hundreds of dollars in such charges.

Background on Amazon’s Appstore

9. Amazon offers apps through its Appstore, a digital store preloaded on Kindle

Fires and available for installation on Android mobile devices. Apps provide a wide variety of

mobile computing functionality, allowing users to, for example, watch television shows, check

the weather, or play games.



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10. Before it agrees to offer any app designed by a third-party developer in the

Appstore, Amazon reviews the app’s functionality, content, and user experience. Amazon

generally assigns each app it sells to at least one topical category, such as “Games” or “News &

Magazines.” Certain categories expand into subcategories. The “Games” category, for instance,

includes subcategories like “Kids” and “Strategy.” Amazon also groups apps by price, including

the top “Free” apps and top “Paid” apps.

11. Amazon offers apps for free or a specific dollar amount. Amazon also charges

account holders for certain user activities within some apps. These in-app charges generally

range from $0.99 to $99.99 and can be incurred in unlimited amounts. In many instances, the

apps containing in-app charges are games that children are likely to play.

12. Amazon controls the billing process for in-app charges and retains 30% of all

revenue from in-app charges, amounting to tens of millions of dollars to date.

Installing an App from Amazon’s Appstore

13. Before consumers can install any app, Amazon requires that consumers link their

mobile device to an Amazon account funded by a payment method such as a credit card or

Amazon.com gift card. To install an app, a parent or other account holder must first locate it by

searching for the app by keyword (e.g., the name of the app) or by browsing the various

categories and subcategories within the Appstore. In both cases, Amazon displays search results

or the contents of a category in rows of app icons accompanied by the name of the app, a user

rating, and the price of the app. An example of the results for a keyword search of the word

“kids” appears below.



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14. By clicking on an app’s icon, the account holder can access the app’s detail page,

such as the one below.



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If an account holder scrolls through the detail page, he or she can view the full app description,

the app’s age rating (e.g., “All Ages”), and other information.

15. Amazon generally appends a note to the end of app descriptions (and often

“below the fold,” meaning that viewers cannot see it without scrolling down) that mentions in-

app charges, but does not explain how or when Amazon seeks account holder authorization for

in-app charges. About a year and a half after it began billing in-app charges, Amazon began

including a “Key Details” section on the upper right-hand side of the app description that

mentions in-app charges, but also does not explain how or when Amazon seeks account holder

authorization for in-app charges.

16. On the left-hand side of each app’s detail page is a button (the “Price Button”)

labeled with the price of the app: either “FREE” or a specific dollar amount. To initiate app

installation, an account holder must press the Price Button. When pressed, the Price Button

changes so that it displays the words “Get App” instead of the price. If pressed again, the app

installation process begins.

Incurring In-App Charges

17. After an account holder installs an app, a user can incur in-app charges. In many

instances—including in apps that children are likely to play and that are, for example, searchable

under the keyword “kids”—these users are children. In many instances, parents have

complained that their children could not or did not understand that their activities while playing

the app could result in charges that cost real money.

18. When a user engages in an activity associated with an in-app charge (e.g., clicking

on a button to acquire virtual treats for use in a game), Amazon displays a popup containing

information about the virtual item and the amount of the charge (the “Charge Popup”). A child,

however, can clear the Charge Popup simply by pressing a button labeled “Get Item.”

19. In many instances, once a user clears the Charge Popup, Amazon does not request

any further action before it bills the account holder for the corresponding in-app charge. In these



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cases, each time a child clears the Charge Popup, Amazon bills the account holder for the in-app

charge without requesting his or her consent. Amazon’s in-app charge project manager

acknowledged this issue the month after Amazon began billing for in-app charges: “[W]e believe

that parents are excluded from the buying process for these apps[.]”

20. In or around March 2012, Amazon began requiring password entry to confirm

individual in-app charges exceeding $20. In deciding to change its framework for charges above

$20, Amazon’s Appstore manager noted that “it’s much easier to get upset about Amazon letting

your child purchase a $99 product without any password protection than a $20 product[.]” An

internal document commented that introducing a password prompt for in-app charges over $20

would ensure that those charges were incurred “by the actual accountholder and not someone

without permission.” Amazon did not implement a password requirement for in-app charges of

$20 and under.

21. Not until early 2013 did Amazon adjust its in-app charge framework to require

password entry in connection with any other in-app charges. Even then, Amazon’s

modifications took effect at different times for different device models and, in some instances,

have operated in different ways for different apps and different account holders. The password

prompts also function differently from the password prompt described in paragraph 20, in that

completing the prompt “caches” (that is, stores) the password for a billing window ranging from

fifteen minutes to an hour. The net result was that, unbeknownst to many consumers, Amazon

sometimes would present account holders with a password prompt to confirm an in-app charge

and sometimes would not.

22. Even in those instances in which Amazon has displayed a password prompt, it

generally only instructs account holders to enter their Amazon password to “Confirm In-App

Purchase” (singular). The prompt in many instances has not provided the amount of the charge

or explained that entering a password means Amazon will bill consumers for subsequent in-app



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charges over an unspecified duration (ranging from fifteen minutes to an hour) without seeking

the account holder’s password. A sample password prompt appears below.

23. In many instances, during the processes described in paragraphs 13 to 22,

Amazon has not obtained account holders’ consent to in-app charges by children.

Amazon Bills Many Parents for Unauthorized In-App Charges Incurred by Children

24. Many of the apps that charge for in-app activities are apps that children are likely

to use. Indeed, many such apps are searchable under the keyword “kids,” are described or

marketed as suitable for children, or are widely used by children.

25. Many of these games invite children to obtain virtual items in contexts that blur

the line between what costs virtual currency and what costs real money. The app “Tap Zoo,” for

example, is a game in which children use “coins” and “stars” to acquire animals, habitats, and

staff to populate a virtual zoo. In many instances, the game displays popups with a column

containing various quantities of coins or stars. Sometimes, transactions from these popups cost



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virtual currency; sometimes, they cost real money. Parents can find the “All Ages” app Tap Zoo

by searching the Appstore for the word “kids.”

26. Similarly, in the app “Ice Age Village,” children manage an ice-age habitat with

instructions offered by characters from the animated “Ice Age” movies. The in-game “Shop”

offers virtual items, each of which cost a certain amount of virtual currency (either “coins” or

“acorns”). The price of each virtual item is displayed on bright green buttons that, when pressed,

allow children to purchase the virtual items without any associated real-money charge. But

another popup offers coins and acorns with similar bright green buttons that initiate real-money

transactions. Children can obtain various quantities of acorns for various amounts of real money,

with the largest quantity (2,100) costing $99.99. Parents can find the “All Ages” app Ice Age

Village by searching the Appstore for the word “kids.”

27. Amazon has received thousands of complaints related to unauthorized in-app

charges by children in these and other games, amounting to millions of dollars of charges. In

fact, by December 2011, the month after Amazon introduced in-app charges, an Appstore

manager commented that “we’re clearly causing problems for a large percentage of our

customers,” describing the situation as “near house on fire.” Seven months later, in July 2012,

the Appstore manager again described this issue as a “house on fire” situation. Not until June

2014 did Amazon change its in-app charge framework to obtain account holders’ informed

consent for in-app charges on its newer mobile devices.

28. Many consumers report that they and their children were unaware that in-app

activities would result in real monetary loss. For example, one Appstore reviewer complaining

about over $80 in unauthorized charges in Tap Zoo commented that her eight-year-old daughter

thought she was purchasing the in-game coin packs with virtual currency, not real money. A

consumer whose child incurred unauthorized in-app charges in Ice Age Village explained that

her daughter “thought she was paying with acorns, but it seems to be hitting my credit card.” As

one Amazon customer service representative acknowledged in responding to a parent’s inquiry



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about unauthorized in-app charges: “It’s not a hack, but nearly as bad: it’s an in-game purchase.

A user, such as a child, can easily misinterpret the option to spend actual money as just part of

the game.”

29. In many games with in-app charges, consumers report that Amazon billed for in-

app activities without obtaining their consent. For example, one consumer whose six-year-old

“click[ed] a lot of buttons at random (she can’t read)” on her Kindle and incurred several

unauthorized charges was “shocked that there is no password protection” for in-app charges.

Another consumer whose daughters incurred $358.42 in unauthorized charges complained that

Amazon allowed the charges without any “step that requires a password to validate payment

information.”

30. Many children incur unauthorized in-app charges without their parents’

knowledge. Even parents who discover the charges and want to request a refund have faced

significant hurdles to doing so. Amazon’s stated policy is that all in-app charges are final. To

the extent consumers have sought an exception to that stated policy, Amazon’s process is unclear

and confusing, involving emails and web pages that do not explain how to seek a refund for in-

app charges, or that suggest that consumers cannot obtain a refund for such charges.

VIOLATIONS OF THE FTC ACT

31. Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), prohibits “unfair or deceptive acts

or practices in or affecting commerce.”

32. Acts or practices are unfair under Section 5 of the FTC Act if they cause or are

likely to cause substantial injury to consumers that consumers themselves cannot reasonably

avoid and that is not outweighed by countervailing benefits to consumers or competition. 15

U.S.C. § 45(n).



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COUNT I

Unfair Billing of In-App Charges

33. In numerous instances, Defendant has billed parents and other Amazon account

holders for children’s activities in apps that are likely to be used by children without having

obtained the account holders’ express informed consent.

34. Defendant’s practices as described in paragraph 33 have caused or are likely to

cause substantial injury to consumers that consumers themselves cannot reasonably avoid and

that is not outweighed by countervailing benefits to consumers or competition.

35. Defendant’s practices as described in paragraph 33 therefore constitute unfair acts

or practices in violation of Section 5 of the FTC Act, 15 U.S.C. § 45(a) and (n).

CONSUMER INJURY

36. Consumers have suffered and will continue to suffer substantial injury as a result

of Defendant’s violations of the FTC Act. In addition, Defendant has been unjustly enriched as a

result of their unlawful acts or practices. Absent injunctive relief by this Court, Defendant is

likely to continue to injure consumers, reap unjust enrichment, and harm the public interest.

37. Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), empowers this Court to grant

injunctive and such other relief as the Court may deem appropriate to halt and redress violations

of any provision of law enforced by the FTC. The Court, in the exercise of its equitable

jurisdiction, may award ancillary relief, including rescission or reformation of contracts,

restitution, the refund of monies paid, and the disgorgement of ill-gotten monies, to prevent and

remedy any violation of any provision of law enforced by the FTC.

PRAYER FOR RELIEF

Wherefore, Plaintiff FTC, pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b),

and the Court’s own equitable powers, requests that the Court:

A. Enter a permanent injunction to prevent future violations of the FTC Act by

Defendant;



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B. Award such relief as the Court finds necessary to redress injury to consumers

resulting from Defendant’s violations of the FTC Act, including but not limited to, rescission or

reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-

gotten monies; and

C. Award Plaintiff the costs of bringing this action, as well as such other and

additional relief as the Court may determine to be just and proper.

Dated: July 10, 2014 Respectfully submitted,

DAVID C. SHONKA Acting General Counsel s/ Jason M. Adler JASON M. ADLER DUANE C. POZZA [email protected], [email protected] Federal Trade Commission 600 Pennsylvania Avenue N.W., CC-10232 Washington, DC 20580 P: (202) 326-3231, (202) 326-2042 F: (202) 326-3239 LAURA M. SOLIS, WA Bar No. 36005 [email protected] Federal Trade Commission 915 2nd Avenue, Suite 2896 Seattle, WA 98174 P: (206) 220-4544 F: (206) 220-6366


11/5/2018 FTC settlement with Amazon yields $70 million for consumers, advice for business | Federal Trade Commission

https://www.ftc.gov/news-events/blogs/business-blog/2017/05/ftc-settlement-amazon-yields-70-million-consumers-advice 1/2

FTC settlement with Amazon yields $70million for consumers, advice for business

Lesley Fair May 30, 2017

TAGS:

The FTC’s law enforcement action against Amazon for unauthorized billing recently settled, leaving two key takeaways: 1)Consumers are eligible for more than $70 million in refunds; and 2) Businesses need to get customers’ express consentbefore placing charges on their credit or debit cards.

Last year, a federal judge in Seattle ruled in the FTC’s favor in an action against Amazon for billing consumers forunauthorized in-app charges incurred by children. Kid-focused apps available in Amazon’s Appstore prompted children toacquire virtual currency – for example, a “boatload of doughnuts.” But to parents who got stuck with the bill, it was morelike a boatload of dough – millions of dollars in surprise charges they didn’t approve.

The Court agreed that Amazon’s practice of charging parents real live money for make-believe items in kids’ apps withoutparents’ consent violated the FTC Act. The FTC had already settled similar cases with Apple and Google.

The next chapter in the story is to make sure that people who were harmed by Amazon’s illegal practices get their moneyback. Under the terms of the settlement, Amazon is making more than $70 million in refunds available to customers whowere charged for unauthorized in-app purchases made by a child.

Amazon may owe you a refund if:

The refund process is simple. If you’re eligible, you should have received an email from Amazon. If you think Amazonowes you money, but you haven’t received an email, there are two ways to find out more:

1. Go to https://www.amazon.com/gp/mas/refund-orders/in-apprefund/ or

2. Log into your Amazon.com account and go to the Message Center. If you’re eligible, you’ll find more informationunder Important Messages.

Share This Page

Bureau of Consumer Protection Consumer Protection Advertising and Marketing Children

Online Advertising and Marketing Credit and Finance Payments and Billing

You were billed for charges made by a child that you didn’t authorize, and

The charges were for in-app purchases made between November 2011 and May 2016.

https://ftc.gov/news-events/press-releases/2017/05/refunds-now-available-amazon-unauthorized-app-purchases

https://www.ftc.gov/enforcement/cases-proceedings/122-3238/amazoncom-inc

https://www.ftc.gov/enforcement/cases-proceedings/112-3108/apple-inc

https://www.ftc.gov/enforcement/cases-proceedings/122-3237/google-inc

https://www.ftc.gov/enforcement/cases-proceedings/122-3238/amazoncom-inc

https://www.amazon.com/gp/mas/refund-orders/in-apprefund/

https://www.facebook.com/sharer/sharer.php?u=https%3A%2F%2Fwww.ftc.gov%2Fnews-events%2Fblogs%2Fbusiness-blog%2F2017%2F05%2Fftc-settlement-amazon-yields-70-million-consumers-advice

http://twitter.com/intent/tweet?url=https://www.ftc.gov/news-events/blogs/business-blog/2017/05/ftc-settlement-amazon-yields-70-million-consumers-advice

http://www.linkedin.com/shareArticle?mini=true&url=https://www.ftc.gov/news-events/blogs/business-blog/2017/05/ftc-settlement-amazon-yields-70-million-consumers-advice&title=%27FTC%20settlement%20with%20Amazon%20yields%20$70%20million%20for%20consumers,%20advice%20for%20business%27&summary=%27The%20FTC%E2%80%99s%20law%20enforcement%20action%20against%20Amazon%20for%20unauthorized%20billing%20recently%20settled,%20leaving%20two%20key%20takeaways:%201)%20Consumers%20are%20eligible%20for%20more%20than%20$70%20million%20in%20refunds;%20and%202)%20Businesses%20need%20to%20get%20customers%E2%80%99%20express%20consent%20before%20placing%20charges%20on%20their%20credit%20or%20debit%20cards.%27&source=%27Federal%20Trade%20Commission%27

https://www.ftc.gov/bureaus/bureau-consumer-protection

https://www.ftc.gov/mission/consumer-protection

https://www.ftc.gov/consumer-protection/advertising-and-marketing

https://www.ftc.gov/consumer-protection/children

https://www.ftc.gov/consumer-protection/online-advertising-and-marketing

https://www.ftc.gov/consumer-protection/credit-and-finance

https://www.ftc.gov/consumer-protection/payments-and-billing

11/5/2018 FTC settlement with Amazon yields $70 million for consumers, advice for business | Federal Trade Commission

https://www.ftc.gov/news-events/blogs/business-blog/2017/05/ftc-settlement-amazon-yields-70-million-consumers-advice 2/2

The refund request process is online only and consumers don’t have to send anything by mail to submit a refund request.The deadline for applying for a refund is May 28, 2018. Consumers can call Amazon at 866-216-1072 if they havequestions.

The Amazon case also offers compliance currency for companies. Most importantly, as the Judge observed, “Courts haverepeatedly held that billing customers without permission causes injury for the purposes of asserting a claim underSection 5 of the FTC Act.” Prudent businesses are careful to explain the nature of the transaction up front and getcustomers’ express consent before placing charges on their accounts.

Companies that use payment methods other than greenbacks on the barrelhead should pay particular attention to thatprinciple. As the Court held, “Many of Amazon’s arguments improperly assume a familiarity with in-app purchases on thepart of consumers.” It’s unwise for companies simply to assume that people grasp how new payment mechanisms work.A clearer explanation at the outset can reduce the risk of antagonizing customers and violating the law.

Furthermore, the case stands for the established proposition that if the disclosure of information is necessary to prevent apractice from being deceptive or unfair, the disclosure must be clear and conspicuous. Amazon argued that a smallhyperlink that simply said “In-App Purchasing” was sufficient to alert consumers that they would be billed for in-appcharges. Not so, ruled the Court.

If your company is looking for more guidance, consult .com Disclosures: How to Make Effective Disclosures in DigitalAdvertising.

https://www.ftc.gov/tips-advice/business-center/guidance/com-disclosures-how-make-effective-disclosures-digital


Session 9: International Issues

We will look at three different takes on how the international law regime matters for U.S. firms. The Yahoo case involves a tricky procedural situation, but the core legal conflict is straightforward to frame if difficult to solve. The Tianrui case raises issues about the cir-cumstances under which the U.S. will block the importation of goods produced overseas. Finally, we will look at the Foreign Corrupt Practices Act (15 USC 78dd-1 to 15 USC 78dd-3) through the lens of a New York Times story on Walmart’s practices in Mexico.

Yahoo! Inc. v. La Ligue Contre Le Racisme et L’Antisemitisme

433 F.3d 1199 (9th Cir 2006) (en banc)

PER CURIAM: A majority of the en banc court (Judge W.A. Fletcher, joined by Chief Judge Schroeder and Judges Hawkins, Fisher, Gould, Paez, Clifton, and Bea) concludes that the district court had personal jurisdiction over the defendants. Of that majority, three judges (Chief Judge Schroeder, and Judges W.A. Fletcher and Gould) conclude that the action should be dismissed for lack of ripeness. Five judges (Judge Fisher, joined by Judges Hawkins, Paez, Clifton, and Bea) conclude that the case is ripe for adjudication. The three remaining judges (Judges Ferguson, O’Scannlain, and Tashima) conclude that the action should be dismissed because the district court lacked personal jurisdiction over the de-fendants.

A majority of the en banc court having voted therefor, the judgment of the district court is REVERSED and the case REMANDED with directions to dismiss the action without prejudice.

W. FLETCHER, Circuit Judge, with whom SCHROEDER, Chief Circuit Judge, and GOULD, Circuit Judge, join as to the entire opinion, and with whom HAWKINS, FISHER, PAEZ, CLIFTON and BEA, Circuit Judges, join as to Parts I and II: Yahoo!, an American Internet service provider, brought suit in federal district court in diversity against La Ligue Contre Le Racisme et L’Antisemitisme (“LICRA”) and L’Union des Etu-diants Juifs de France (“UEJF”) seeking a declaratory judgment that two interim orders by a French court are unrecognizable and unenforceable. The district court held that the ex-ercise of personal jurisdiction over LICRA and UEJF was proper, that the dispute was ripe, that abstention was unnecessary, and that the French orders are not enforceable in the United States because such enforcement would violate the First Amendment. The dis-trict court did not reach the question whether the orders are recognizable. LICRA and UEJF appeal only the personal jurisdiction, ripeness, and abstention holdings. A majority of the en banc panel holds, as explained in Part II of this opinion, that the district court properly exercised personal jurisdiction over LICRA and UEJF. A plurality of the panel concludes, as explained in Part III of this opinion, that the case is not ripe under the criteria of Abbott Laboratories v. Gardner, 387 U.S. 136, 149 (1967). We do not reach the absten-tion question.

I. Background

Yahoo! is a Delaware corporation with its principal place of business in California. Through its United States-based website yahoo.com, Yahoo! makes available a variety of Internet services, including a search engine, e-mail, web page hosting, instant messaging,

http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced.html

http://scholar.google.com/scholar_case?case=9896137369267907571&q=yahoo+licra&hl=en&as_sdt=2,14&scilh=0


auctions, and chat rooms. While some of these services rely on content created by Yahoo!, others are forums and platforms for user-generated content.

Yahoo! users can, for example, design their own web pages, share opinions on social and political message boards, play fantasy baseball games, and post items to be auctioned for sale. Yahoo! does not monitor such user-created content before it is posted on the web through Yahoo! sites.

Yahoo!’s United States website is written in English. It targets users in the United States and relies on servers located in California. Yahoo!’s foreign subsidiaries, such as Yahoo! France, Yahoo! U.K., and Yahoo! India, have comparable websites for their respective countries. The Internet addresses of these foreign-based websites contain their two-letter country designations, such as fr.yahoo.com, uk.yahoo.com, and in.yahoo.com. Yahoo!’s foreign subsidiaries’ sites provide content in the local language, target local citizens, and adopt policies that comply with local law and customs. In actual practice, however, national boundaries are highly permeable. For example, any user in the United States can type www.fr.yahoo.com into his or her web browser and thereby reach Yahoo! France’s web-site. Conversely, any user in France can type www.yahoo.com into his or her browser, or click the link to Yahoo.com on the Yahoo! France home page, and thereby reach ya-hoo.com.

Sometime in early April 2000, LICRA’s chairman sent by mail and fax a cease and desist letter, dated April 5, 2000, to Yahoo!’s headquarters in Santa Clara, California. The letter, written in English, stated in part:

[W]e are particularly choked [sic] to see that your Company keeps on presenting every day hundreds of nazi symbols or objects for sale on the Web.

This practice is illegal according to French legislation and it is incumbent upon you to stop it, at least on the French Territory.

Unless you cease presenting nazi objects for sale within 8 days, we shall size [sic] the competent jurisdiction to force your company to abide by the law.

On April 10, five (rather than eight) days after the date on the letter, LICRA filed suit against Yahoo! and Yahoo! France in the Tribunal de Grande Instance de Paris. On April 20, UEJF joined LICRA’s suit in the French court. LICRA and UEJF used United States Marshals to serve process on Yahoo! in California.

After a hearing on May 15, 2000, the French court issued an “interim” order on May 22 requiring Yahoo! to “take all necessary measures to dissuade and render impossible any access [from French territory] via Yahoo.com to the Nazi artifact auction service and to any other site or service that may be construed as constituting an apology for Nazism or a contesting of Nazi crimes” (emphasis added). Among other things, the French court required Yahoo! to take particular specified actions “[b]y way of interim precautionary measures.” Yahoo! was required “to cease all hosting and availability in the territory of [France] from the ‘Ya-hoo.com’ site . . . of messages, images and text relating to Nazi objects, relics, insignia, emblems and flags, or which evoke Nazism,” and of “Web pages displaying text, extracts, or quotes from ‘Mein Kampf’ and the ‘[Protocols of the Elders of Zion]’” at two specified Internet addresses. Yahoo! was further required to remove from “all browser directories


accessible in the territory of the French Republic” the “index heading entitled ‘negation-ists’” and any link “bringing together, equating, or presenting directly or indirectly as equiv-alent” sites about the Holocaust and sites by Holocaust deniers.

The May 22 interim order required Yahoo! France (as distinct from Yahoo!) to remove the “negationists” index heading and the link to negationist sites, described above, from fr.yahoo.com. The order further required Yahoo! France to post a warning on fr.ya-hoo.com stating to any user of that website that, in the event the user accessed prohibited material through a search on Yahoo.com, he or she must “desist from viewing the site concerned[,] subject to imposition of the penalties provided in French legislation or the bringing of legal action against him.”

The order stated that both Yahoo! and Yahoo! France were subject to a penalty of 100,000 Euros per day of delay or per confirmed violation, and stated that the “possibility of liquidation of the penalties thus pronounced” was “reserve[d].” The order also awarded 1 Franc in “provisional damages,” payable by Yahoo! and Yahoo! France to UEJF, and awarded an additional 1 Franc against Yahoo! and Yahoo! France for expenses under Ar-ticle 700 of the New Code of Civil Procedure. The French court also awarded 10,000 Francs against Yahoo! for expenses under Article 700, payable to LICRA, and 10,000 Francs each against Yahoo! and Yahoo! France under Article 700 (a total of 20,000 Francs), payable to UEJF.

Yahoo! objected to the May 22 order. It contended, among other things, that “there was no technical solution which would enable it to comply fully with the terms of the court or-der.” (Emphasis added.) In response, the French court obtained a written report from three experts. The report concluded that under current conditions approximately 70% of Yahoo! users operating from computer sites in France could be identified. The report spe-cifically noted that Yahoo! already used such identification of French users to display ad-vertising banners in French. The 70% number applied irrespective of whether a Yahoo! user sought access to an auction site, or to a site denying the existence of the Holocaust or constituting an apology for Nazism.

With respect to auction sites, the report concluded that it would be possible to identify additional users. Two out of the three experts concluded that approximately an additional 20% of users seeking access to auction sites offering Nazi-related items for sale could be identified through an honor system in which the user would be asked to state his or her nationality. In all, the two experts estimated that almost 90% of such auction site users in France could be identified: “The combination of the two procedures, namely geographical identification of the IP address and declaration of nationality, would be likely to achieve a filtering success rate approaching 90%.” The third expert expressed doubts about the num-ber of additional users of the auction site who would respond truthfully under the honor system. He did not, however, specify an alternative number of users—say, 15% or 10%—who would respond truthfully.

With respect to sites denying the existence of the Holocaust or constituting an apology for Nazism, the report was not able to “propose suitable and effective technical solutions” because no “grievance” against those sites had been made with “sufficient precision.” In consequence, as to these non-auction sites, the report did not estimate how many Yahoo! users above the base 70% number could be identified by an honor system.


In a second interim order, issued on November 20, 2000, the French court reaffirmed its May 22 order and directed Yahoo! to comply within three months, “subject to a penalty of 100,000 Francs per day of delay effective from the first day following expiry of the 3 month period.” (The May 22 order had specified a penalty of 100,000 Euros rather than 100,000 Francs.) The court “reserve[d] the possible liquidation of the penalty” against Ya-hoo!. The French court’s November 20 order required Yahoo! France (as distinct from Yahoo!) to display “a warning to surfers even before they have made use of the link to Yahoo.com, to be brought into effect within 2 months following notification of the pre-sent order.” However, the French court found “that YAHOO FRANCE has complied in large measure with the spirit and letter of the order of 22nd May 2000[.]” (Emphasis added.)

The November 20 order required Yahoo! to pay 10,000 Francs for a report, to be pre-pared in the future by one of the experts previously appointed by the court, to determine whether Yahoo! was in compliance with the court’s orders. It also awarded a total of 20,000 Francs against Yahoo! for expenses under Article 700, payable to LICRA and UEJF, and an unspecified amount of costs against Yahoo!, payable to LICRA and UEJF. The court specifically stated that it was not awarding any expenses or costs against Yahoo! France (which it had found to have complied “in large measure” with its order). LICRA and UEJF used United States Marshals to serve both orders on Yahoo! in Santa Clara, California.

Yahoo! did not pursue appeals of either interim order.

The French court has not imposed any penalty on Yahoo! for violations of the May 22 or November 20 orders. Nor has either LICRA or UEJF returned to the French court to seek the imposition of a penalty. Both organizations affirmatively represent to us that they have no intention of doing so if Yahoo! maintains its current level of compliance. Yet neither organization is willing to ask the French court to vacate its orders. As LICRA and UEJF’s counsel made clear at oral argument, “My clients will not give up the right to go to France and enforce the French judgment against Yahoo! in France if they revert to their old ways and violate French law.”

The record reveals that the French “public prosecutor” participated in the proceedings against Yahoo! and Yahoo! France in the French court, but it does not reveal whether he has the authority to seek a penalty against Yahoo! under the interim orders, either on his own or pursuant to a request by LICRA and/or UEJF. The public prosecutor was not made a party to the suit in the district court, and has made no appearance in the district court or on appeal to this court. If LICRA, UEJF, or the public prosecutor were to seek the imposition of a penalty by the French court pursuant to the interim orders, that court would have to determine the extent of Yahoo!’s violation, if any, of the orders, as well as the amount of any penalty, before an award of a penalty could be entered.

On December 21, 2000, Yahoo! filed suit against LICRA and UEJF in federal district court, seeking a declaratory judgment that the interim orders of the French court are not recognizable or enforceable in the United States. Subject matter jurisdiction is based solely on diversity of citizenship. 28 USC 1332(a)(2). In a thoughtful opinion, the district court concluded that it had personal jurisdiction over LICRA and UEJF. Several months later, in another thoughtful opinion, the district court concluded that the suit was ripe, that ab-stention was not warranted, and that “the First Amendment precludes enforcement within the United States.”


In early 2001, after both interim orders had been entered by the French court, and after Yahoo! had filed suit in federal district court, Yahoo! adopted a new policy prohibiting use of auctions or classified advertisements on Yahoo.com “to offer or trade in items that are associated with or could be used to promote or glorify groups that are known principally for hateful and violent positions directed at others based on race or similar factors.” Ya-hoo! has represented, in this court and elsewhere, that its new policy has not been adopted in response to the French court’s orders, but rather for independent reasons. Yahoo’s new policy eliminates much of the conduct prohibited by the French orders. However, after conducting its own Internet research on yahoo.com, the district court found that even after this policy change, Yahoo! “appear[s]” not to have fully complied with the orders with respect to its auction site. For example, the district court found that Yahoo! continued to allow the sale of items such as a copy of Mein Kampf and stamps and coins from the Nazi period on which the swastika is depicted. The district court also found that access was available through yahoo.com to various sites in response to searches such as “Holo-caust/5 did not happen.”

LICRA and UEJF timely appealed the district court’s rulings on personal jurisdiction, ripeness, and abstention.

II. Personal Jurisdiction

The only bases for personal jurisdiction over LICRA and UEJF in the district court are the actions they have taken in connection with their French suit against Yahoo!. Those actions are sending a cease and desist letter to Yahoo! at its headquarters in Santa Clara, California; serving process on Yahoo! in Santa Clara to commence the French suit; obtain-ing two interim orders from the French court; and serving the two orders on Yahoo! in Santa Clara. *** We therefore analyze all of LICRA and UEJF’s contacts with California relating to its dispute with Yahoo!, irrespective of whether they involve wrongful actions by LICRA and UEJF. There are three such contacts. The first two contacts, taken by themselves, do not provide a sufficient basis for jurisdiction. However, the third contact, considered in conjunction with the first two, does provide such a basis.

The first contact is the cease and desist letter that LICRA sent to Yahoo!, demanding that Yahoo! alter its behavior in California to conform to what LICRA contended were the commands of French law. A cease and desist letter is not in and of itself sufficient to establish personal jurisdiction over the sender of the letter. There are strong policy reasons to encourage cease and desist letters. ***

LICRA and UEJF’s second contact (or, more precisely, set of contacts) with California was service of process on Yahoo! in California. LICRA first effected service of process to commence the French suit. LICRA and UEJF later effected service of the French court’s two interim orders. We do not regard the service of documents in connection with a suit brought in a foreign court as contacts that by themselves justify the exercise of personal jurisdiction over a foreign litigant in a United States court. ***

Third, and most important, LICRA and UEJF have obtained two interim orders from the French court directing Yahoo! to take actions in California, on threat of a substantial penalty. *** It is a close question whether LICRA and UEJF are subject to personal juris-diction in California in this suit. But considering the direct relationship between LICRA and UEJF’s contacts with the forum and the substance of the suit brought by Yahoo!, as


well as the impact and potential impact of the French court’s orders on Yahoo!, we hold that there is personal jurisdiction.

III. Ripeness

Because we conclude that the exercise of personal jurisdiction over LICRA and UEJF is proper, we turn to the question of ripeness. *** The existence of Article III subject matter jurisdiction is, like personal jurisdiction, a close question, but we agree with the district court that the effect of the French court’s orders on Yahoo! is sufficient to create a case or controversy within the meaning of Article III. However, we disagree with the district court’s conclusion that there is prudential ripeness. In its current form, this case presents the sort of “[p]roblems of prematurity and abstractness” that counsel against reaching the First Amendment question that Yahoo! insists is presented by this case. See Socialist Labor Party, 406 U.S. at 588. ***

It is thus important to a ripeness analysis that we specify the precise legal question to be answered. Depending on the legal question, the case may be ripe or unripe. If we ask the wrong legal question, we risk getting the wrong answer to the ripeness question. The legal question presented by this case is whether the two interim orders of the French court are enforceable in this country. These orders, by their explicit terms, require only that Yahoo! restrict access by Internet users located in France. The orders say nothing whatsoever about restricting access by Internet users in the United States. We are asked to decide whether enforcement of these interim orders would be “repugnant” to California public policy.

*** California, along with many other states, has adopted the Uniform Foreign Money-Judgments Recognition Act (“Uniform Act” or “Act”). Cal. Civ. Proc. Code §§ 1713-1713.8. The relevant standard for enforceability under the Act is whether “the cause of action or defense on which the judgment is based is repugnant to the public policy of this state.” Id. § 1713.4(b)(3) (emphasis added). However, the Act is not directly applicable to this case, for it does not authorize enforcement of injunctions. See id. § 1713.1(2) (“‘Foreign judgment’ means any judgment of a foreign state granting or denying recovery of a sum of money, other than . . . a fine or other penalty[.]”) ***

The general principle of enforceability under the Third Restatement is the same as under California’s Uniform Act. That is, an American court will not enforce a judgment if “the cause of action on which the judgment was based, or the judgment itself, is repugnant to the public policy of the United States or of the State where recognition is sought[.]” Re-statement § 482(2)(d). ***

Under the repugnancy standard, American courts sometimes enforce judgments that conflict with American public policy or are based on foreign law that differs substantially from American state or federal law. Inconsistency with American law is not necessarily enough to prevent recognition and enforcement of a foreign judgment in the United States. The foreign judgment must be, in addition, repugnant to public policy.

2. Fitness of the Question for Judicial Decision

With the suit in its current state, it is difficult to know whether enforcement of the French court’s interim orders would be repugnant to California public policy. The first difficulty is evident. As indicated by the label “interim,” the French court contemplated that it might




enter later orders. We cannot know whether it might modify these “interim” orders before any attempt is made to enforce them in the United States.

A second, more important, difficulty is that we do not know whether the French court would hold that Yahoo! is now violating its two interim orders. After the French court entered the orders, Yahoo! voluntarily changed its policy to comply with them, at least to some extent. There is some reason to believe that the French court will not insist on full and literal compliance with its interim orders, and that Yahoo!’s changed policy may amount to sufficient compliance.

In its interim second order, entered on November 20, the French court found that Ya-hoo! France had “complied in large measure with the spirit and letter” of its May 22 order. (Emphasis added.) Based on that level of compliance, the French court was satisfied. It declined to enter any further orders against Yahoo! France. It also declined to award any expenses or costs against Yahoo! France, even though in that same order it awarded ex-penses and costs against Yahoo!. We thus know from this second order that compliance “in large measure” by Yahoo! is very likely to be satisfactory to the French court, just as compliance “in large measure” by Yahoo! France was satisfactory.

LICRA and UEJF insist that Yahoo! has now, in their words, “substantially complied” with the French court’s orders. We take this to be a statement that, in their view, Yahoo! has complied “in large measure” with the orders. For its part, however, Yahoo! insists that it continues to be in serious violation of the orders. The district court did not hold that Yahoo! is in violation, substantial or otherwise, of the French court’s orders. It wrote only that Yahoo! does not “appear” to be in full compliance with the French court’s order with respect to its auction site, and that various anti-semitic sites continue to be accessible through yahoo.com. 169 F.Supp.2d at 1185. There is only one court that can authorita-tively tell us whether Yahoo! has now complied “in large measure” with the French court’s interim orders. That is, of course, the French court.

To the extent that we are uncertain about whether Yahoo! has complied “in large meas-ure” with the French court’s orders, the responsibility for that uncertainty can be laid at Yahoo!’s door. In its November 20 interim order, the French court ordered the appoint-ment of one of the experts who had previously reported on the technical feasibility of restricting access by French users to Yahoo.com. Under the November 20 order, Yahoo! was required to pay the expert, who would be charged “to undertake an assignment to prepare a consultancy report on the conditions of fulfillment of the terms of the afore-mentioned order.” Yahoo! has placed nothing in the record to tell us whether Yahoo! has paid the expert; whether the expert has prepared a report for the French court; and, if a report has been prepared, what it says. There is also nothing in the record to indicate what other steps, if any, Yahoo! has taken to obtain an indication from the French court whether it believes that Yahoo! is in compliance, “in large measure” or otherwise, with the terms of its interim orders. All we know for certain is that Yahoo! abandoned its appeal of the May 22 interim order and declined to appeal the November 20 interim order, and that on December 21, a month and a day after entry of the second interim order, it came home to file suit in the Northern District of California.

A third difficulty is related to the second. Because we do not know whether Yahoo! has complied “in large measure” with the French court’s orders, we cannot know what effect, if any, compliance with the French court’s orders would have on Yahoo!’s protected



speech-related activities. We emphasize that the French court’s orders require, by their terms, only a limitation on access to anti-semitic materials by users located in France. The orders do not by their terms limit access by users outside France in any way. Yahoo! con-tended in the French court that it was technically too difficult to distinguish between users inside and outside France. As described above, the French court commissioned a report by three experts to determine if Yahoo!’s contention were true. The experts disagreed with Yahoo!, concluding that Yahoo! is readily able to distinguish between most users inside and outside France.

With respect to users seeking access to forbidden auction sites, two out of the three experts concluded that Yahoo! could identify almost 90% of its users located in France. The third expert did not dispute that 70% of such auction site users could be identified, but expressed doubt about how many additional such users could be identified. With re-spect to users seeking access to sites of Holocaust deniers and Nazi apologists, the experts declined to propose any solution by which a greater number than 70% of users located in France could be identified.

In its briefing to this court, Yahoo! contends that restricting access by French Internet users in a manner sufficient to satisfy the French court would in some unspecified fashion require Yahoo! simultaneously to restrict access by Internet users in the United States. This may or may not be true. It is almost certainly not true if Yahoo! is now complying “in large measure” with the French court’s orders, for in that event the French court will almost certainly hold that no further compliance is necessary. Even if the measures Yahoo! has already taken restrict access by American Internet users to antisemitic materials, this has no bearing on Yahoo!’s First Amendment argument. By its own admission, Yahoo! has taken these measures entirely of its own volition, for reasons entirely independent of the French court’s orders.

However, it is possible, as Yahoo! contends, that it has not complied “in large measure” with the French court orders, and that the French court would require further compliance. It is also possible, as Yahoo! contends, that further compliance might have the necessary consequence of requiring Yahoo! to restrict access by American Internet users. But Yahoo! has been vague in telling us in what ways, and for what reasons, it believes further compli-ance might have that consequence. One possible reason for Yahoo!’s vagueness might be that its contention is ill-founded, and that a detailed explanation would reveal that fact. We are not now in a position to judge this. Another, more important, reason—not merely a possible reason—for its vagueness is that Yahoo! has no way of knowing what further compliance might be required by the French court. Until it knows what further compliance (if any) the French court will require, Yahoo! simply cannot know what effect (if any) further compliance might have on access by American users.

The possible—but at this point highly speculative—impact of further compliance with the French court’s orders on access by American users would be highly relevant to the question whether enforcement of the orders would be repugnant to California public pol-icy. But we cannot get to that question without knowing whether the French court would find that Yahoo! has already complied “in large measure,” for only on a finding of current noncompliance would the issue of further compliance, and possible impact on American users, arise.


Without a finding that further compliance with the French court’s orders would neces-sarily result in restrictions on access by users in the United States, the only question in this case is whether California public policy and the First Amendment require unrestricted ac-cess by Internet users in France. In other words, the only question would involve a deter-mination whether the First Amendment has extraterritorial application. The extent of First Amendment protection of speech accessible solely by those outside the United States is a difficult and, to some degree, unresolved issue.

We are thus uncertain about whether, or in what form, a First Amendment question might be presented to us. If the French court were to hold that Yahoo!’s voluntary change of policy has already brought it into compliance with its interim orders “in large measure,” no First Amendment question would be presented at all. Further, if the French court were to require additional compliance with respect to users in France, but that additional com-pliance would not require any restriction on access by users in the United States, Yahoo! would only be asserting a right to extraterritorial application of the First Amendment. Fi-nally, if the French court were to require additional compliance with respect to users in France, and that additional compliance would have the necessary consequence of restrict-ing access by users in the United States, Yahoo! would have both a domestic and an extra-territorial First Amendment argument. The legal analysis of these different questions is different, and the answers are likely to be different as well.

B. Hardship to the Parties

*** Yahoo! contends that it will suffer real hardship if we do not decide its suit at this time. Yahoo! makes essentially two arguments. First, it argues that the potential monetary pen-alty under the French court’s orders is mounting every day, and that the enforcement of a penalty against it here could be extremely onerous. Second, it argues that the French court’s orders substantially limit speech that is protected by the First Amendment. We take these arguments in turn.

1. Enforceability of the Monetary Penalty

Yahoo! contends that the threat of a monetary penalty hangs like the sword of Damocles. However, it is exceedingly unlikely that the sword will ever fall. We may say with some confidence that, for reasons entirely independent of the First Amendment, the French court’s orders are not likely to result in the enforcement of a monetary penalty in the United States. The French court’s orders threaten monetary sanctions against Yahoo!, which that court explicitly labels “penalties.” In order to obtain an award of a penalty from the French court, LICRA and UEJF would have to return to the French court, to explain to the French court why they believe Yahoo! has violated its interim orders, and to per-suade the French court that Yahoo!’s violation merits the imposition of a penalty. In the nearly five years since the entry of the French court’s second interim order and Yahoo!’s change of policy, LICRA and UEJF have taken none of these steps. Further, LICRA and UEJF have represented that they have no intention of seeking a monetary penalty by the French court so long as Yahoo! does not revert to its “old ways.”

More important, even if the French court were to impose a monetary penalty against Yahoo!, it is exceedingly unlikely that any court in California—or indeed elsewhere in the United States—would enforce it. California’s Uniform Act does not authorize enforce-ment of “fines or other penalties.” Cal. Civ. Proc. Code § 1713.1(2). The Act includes a


savings clause, see Cal. Civ. Proc. Code § 1713.7, but the fine is equally unenforceable under California common law doctrine. ***

There are a number of indications that the French judgments are penal in nature. First, the word used by the French court (“astreinte”) is consistently translated as “penalty” in the record in this case. For example, the May 22 order provides that Yahoo! and Yahoo! France are “subject to a penalty of 100,000 Euros per day of delay and per confirmed violation[.]” The November 20 order provides that Yahoo! is “subject to a penalty of 100,000 Francs per day of delay[.]”

Second, the French court held that Yahoo! was violating Section R645-1 of the French Penal Code, which declares it a “crime” to exhibit or display Nazi emblems, and which prescribes a set of “criminal penalties,” including fines. Fr. C. Pén. § R645-1, translation available at http://www.lex2k.org/yahoo/art645.pdf. The monetary penalties against Ya-hoo! do not lose their character as “penalties” simply because they were obtained in a civil action. ***

Third, the penalties the French court imposed on Yahoo! are primarily designed to deter Yahoo! from creating, in the words of the November 20 order, “a threat to internal public order.” The penalties are payable to the government and not designed to compensate the French student groups for losses suffered. Judgments designed to deter conduct that con-stitutes a threat to the public order are typically penal in nature.

The French court awarded nominal damages of one Franc to LICRA and UEJF in its first (but not its second) order. Balanced against the far more substantial penalties payable to the government (up to 100,000 Francs per day under the second order), this award of one Franc cannot render the orders primarily remedial rather than punitive in nature. Even the “restitution” the court ordered—the printing of its judgment in publications of UEJF’s and LICRA’s choosing—benefits the general public and does not specifically compensate the two student groups for a particular injury.

2. First Amendment

Yahoo! argues that any restriction on speech and speech-related activities resulting from the French court’s orders is a substantial harm under the First Amendment. We are acutely aware that this case implicates the First Amendment, and we are particularly sensitive to the harm that may result from chilling effects on protected speech or expressive conduct. In this case, however, the harm to First Amendment interests—if such harm exists at all—may be nowhere near as great as Yahoo! would have us believe. Yahoo! has taken pains to tell us that its adoption of a new hate speech policy after the entry of the French court’s interim orders was motivated by considerations independent of those orders. Further, Ya-hoo! refuses to point to anything that it is now not doing but would do if permitted by the orders. In other words, Yahoo! itself has told us that there is no First Amendment violation with respect either to its previous (but now abandoned) speech-related activities, or to its future (but not currently engaged in) speech-related activities. Any restraint on such activ-ities is entirely voluntary and self-imposed.

The only potential First Amendment violation comes from the restriction imposed by the interim orders—if indeed they impose any restrictions—on the speech-related activi-ties in which Yahoo! is now engaged, and which might be restricted if further compliance with the French court’s orders is required. For example, Yahoo! continues to allow auc-tions of copies of Mein Kampf, and it maintains that the French court’s orders prohibit it


from doing so. The French court might find that Yahoo! has not yet complied “in large measure” with its orders, and that Yahoo! is prohibited by its orders from allowing auc-tions of copies of Mein Kampf.

Even if the French court took this step, Yahoo!’s claim to First Amendment protection would be limited. We emphasize that the French court’s interim orders do not by their terms require Yahoo! to restrict access by Internet users in the United States. They only require it to restrict access by users located in France. That is, with respect to the Mein Kampf example, the French court’s orders—even if further compliance is required—would by their terms only prohibit Yahoo! from allowing auctions of copies of Mein Kampf to users in France.

The core of Yahoo!’s hardship argument may thus be that it has a First Amendment interest in allowing access by users in France. Yet under French criminal law, Internet service providers are forbidden to permit French users to have access to the materials specified in the French court’s orders. French users, for their part, are criminally forbidden to obtain such access. In other words, as to the French users, Yahoo! is necessarily arguing that it has a First Amendment right to violate French criminal law and to facilitate the violation of French criminal law by others. As we indicated above, the extent—indeed the very existence—of such an extraterritorial right under the First Amendment is uncertain.

3. Summary

In sum, it is extremely unlikely that any penalty, if assessed, could ever be enforced against Yahoo! in the United States. Further, First Amendment harm may not exist at all, given the possibility that Yahoo! has now “in large measure” complied with the French court’s orders through its voluntary actions, unrelated to the orders. Alternatively, if Yahoo! has not “in large measure” complied with the orders, its violation lies in the fact that it has insufficiently restricted access to anti-semitic materials by Internet users located in France. There is some possibility that in further restricting access to these French users, Yahoo! might have to restrict access by American users. But this possibility is, at this point, highly speculative. This level of harm is not sufficient to overcome the factual uncertainty bearing on the legal question presented and thereby to render this suit ripe.

C. The Dissent Addressed to Ripeness

*** The dissent repeatedly states that the French court’s interim orders are facially uncon-stitutional. It writes, “The French orders on their face . . . violate the First Amendment and are plainly contrary to one of America’s, and by extension California’s, most cherished public policies.” It later refers to the French court’s orders as “foreign court orders that so obviously violate the First Amendment.” It writes further, “[T]he absence of a discernible line between the permitted and the unpermitted . . . makes the orders facially unconstitu-tional.”

The dissent is able to conclude that the French court’s interim orders are facially uncon-stitutional only by ignoring what they say. The dissent appears to assume that the orders, on their face, require Yahoo! to block access by United States users. It writes, “[T]he ques-tion we face in this federal lawsuit is whether our own country’s fundamental constitutional guarantee of freedom of speech protects Yahoo! (and, derivatively, at least its users in the United States) against some or all of the restraints the French defendants have deliberately imposed upon it within the United States.” (emphasis in original). Further, “Yahoo! con-front[s] the dilemma of whether or not to stand by its United States constitutional rights


or constrain its speech and that of its user[.]” “Legions of cases permit First Amendment challenges to governmental actions or decrees that on their face are vague, overbroad and threaten to chill protected speech. Indeed, the sweeping injunction here presents just such a paradigmatic case.” Still further, “Under the principles articulated today, a foreign party can use a foreign court decree to censor free speech here in the United States[.]”

If it were true that the French court’s orders by their terms require Yahoo! to block access by users in the United States, this would be a different and much easier case. In that event, we would be inclined to agree with the dissent. But this is not the case. The French court’s orders, by their terms, require only that Yahoo! restrict access by users in France. The boundary line between what is permitted and not permitted is somewhat uncertain for users in France. But there is no uncertainty about whether the orders apply to access by users in the United States. They do not. They say nothing whatsoever about restricting access by users in the United States.

The dissent’s conclusion that the French court’s orders are unconstitutional may be based in part on an assumption that a necessary consequence of compliance with the French court’s orders will be restricted access by users in the United States. But if this is the basis for the dissent’s conclusion, it could hardly say that the orders are unconstitu-tional “on their face.” Whether restricted access by users in the United States is a necessary consequence of the French court’s orders is a factual question that we cannot answer on the current record.

If the only consequence of compliance with the French court’s orders is to restrict access by Internet users in France, Yahoo!’s only argument is that the First Amendment has ex-traterritorial effect. The dissent fails to acknowledge that this is inescapably a central part of Yahoo!’s argument, let alone acknowledge that it may be Yahoo!’s only argument. ***

Conclusion

First Amendment issues arising out of international Internet use are new, important and difficult. We should not rush to decide such issues based on an inadequate, incomplete or unclear record. We should proceed carefully, with awareness of the limitations of our ju-dicial competence, in this undeveloped area of the law. Precisely because of the novelty, importance and difficulty of the First Amendment issues Yahoo! seeks to litigate, we should scrupulously observe the prudential limitations on the exercise of our power.

Yahoo! wants a decision providing broad First Amendment protection for speech and speech-related activities on the Internet that might violate the laws or offend the sensibil-ities of other countries. As currently framed, however, Yahoo!’s suit comes perilously close to a request for a forbidden advisory opinion. There was a live dispute when Yahoo! first filed suit in federal district court, but Yahoo! soon thereafter voluntarily changed its policy to comply, at least in part, with the commands of the French court’s interim orders. This change in policy may or may not have mooted Yahoo!’s federal suit, but it has at least come close. Unless and until Yahoo! changes its policy again, and thereby more clearly violates the French court’s orders, it is unclear how much is now actually in dispute.

It is possible that because of Yahoo!’s voluntary change of policy it has now complied “in large measure” with the French court’s orders. It is also possible that Yahoo! has not yet complied “in large measure.” If further compliance is required, Yahoo! will have to impose further restrictions on access by French users. The necessary consequence of such further restrictions on French users may or may not be that Yahoo! will have to impose


restrictions on access by American users. Until we know whether further restrictions on access by French, and possibly American, users are required, we cannot decide whether or to what degree the First Amendment might be violated by enforcement of the French court’s orders, and whether such enforcement would be repugnant to California public policy. We do not know whether further restrictions are required, and what they might be, because Yahoo! has chosen not to ask the French court. Instead, it has chosen to come home to ask for a declaratory judgment that the French court’s orders—whatever they may or may not require, and whatever First Amendment questions they may or may not present—are unenforceable in the United States.

An eight-judge majority of the en banc panel holds, as explained in Part II of this opin-ion, that the district court properly exercised specific personal jurisdiction over defendants LICRA and UEJF under the criteria of Calder. A three-judge plurality of the panel con-cludes, as explained in Part III of this opinion, that the suit is unripe for decision. When the votes of the three judges who conclude that the suit is unripe are combined with the votes of the three dissenting judges who conclude that there is no personal jurisdiction over LICRA and UEJF, there are six votes to dismiss Yahoo!’s suit.

We therefore REVERSE and REMAND to the district court with instructions to dis-miss without prejudice.

Tianrui Group Company Ltd. v. International Trade Commission

661 F.3d 1322 (Fed. Cir. 2011)

BRYSON, Circuit Judge: This appeal arises from a determination by the International Trade Commission that the importation of certain cast steel railway wheels violated section 337 of the Tariff Act of 1930, 19 USC 1337. The Commission found that the wheels were manufactured using a process that was developed in the United States, protected under domestic trade secret law, and misappropriated abroad. We are asked to decide whether the Commission’s statutory authority over “[u]nfair methods of competition and unfair acts in the importation of articles . . . into the United States,” as provided by section 337(a)(1)(A), allows the Commission to look to conduct occurring in China in the course of a trade secret misappropriation investigation. We conclude that the Commission has authority to investigate and grant relief based in part on extraterritorial conduct insofar as it is necessary to protect domestic industries from injuries arising out of unfair competition in the domestic marketplace.

We are also asked to decide whether the Commission erred by finding that the imported wheels would injure a domestic industry when no domestic manufacturer is currently prac-ticing the protected process. In light of the evidence before the Commission regarding the marketplace for cast steel railway wheels, we affirm the Commission’s determination that the wheel imports threaten to destroy or substantially injure an industry in the United States, in violation of section 337.

I

A

Amsted Industries Inc. is a domestic manufacturer of cast steel railway wheels. It owns two secret processes for manufacturing such wheels, the “ABC process” and the “Griffin


process.” Amsted previously practiced the ABC process at its foundry in Calera, Alabama, but it no longer uses that process in the United States. Instead, Amsted uses the Griffin process at three of its domestic foundries. Amsted has licensed the ABC process to several firms with foundries in China.

TianRui Group Company Limited and TianRui Group Foundry Company Limited (col-lectively, “TianRui”) manufacture cast steel railway wheels in China. In 2005, TianRui sought to license Amsted’s wheel manufacturing technology, but the parties could not agree on the terms of a license. After the failed negotiations, TianRui hired nine employees away from one of Amsted’s Chinese licensees, Datong ABC Castings Company Limited. Some of those employees had been trained in the ABC process at the Calera plant in Ala-bama, and others had received training in that process at the Datong foundry in China.

Datong had previously notified those employees through a written employee code of conduct that information pertaining to the ABC process was proprietary and confidential. Each employee had been advised that he had a duty not to disclose confidential infor-mation. Eight of the nine employees had also signed confidentiality agreements before leaving Datong to begin working for TianRui. In the proceedings brought by Amsted be-fore the International Trade Commission, Amsted alleged that the former Datong employ-ees disclosed information and documents to TianRui that revealed the details of the ABC process and thereby misappropriated Amsted’s trade secrets.

TianRui partnered with Standard Car Truck Company, Inc., (“SCT”) to form the joint venture Barber TianRui Railway Supply, LLC. SCT and Barber have marketed TianRui wheels to United States customers and have imported TianRui wheels into the United States. Other than Amsted, SCT and Barber are the only companies selling or attempting to sell cast steel railway wheels in the United States.

B

Amsted filed a complaint with the Commission alleging a violation of section 337 based on TianRui’s misappropriation of trade secrets. Section 337(a)(1)(A) prohibits “[u]nfair methods of competition and unfair acts in the importation of articles . . . into the United States, . .. the threat or effect of which is . . . to destroy or substantially injure an industry in the United States.”

TianRui moved to terminate the proceedings on the ground that the alleged misappro-priation occurred in China and that Congress did not intend for section 337 to be applied extraterritorially. An administrative law judge at the Commission denied that motion based on his view that section 337 focuses not on where the misappropriation occurs but rather on the nexus between the imported articles and the unfair methods of competition. The administrative law judge also rejected TianRui’s argument that Chinese courts would pro-vide a better forum for Amsted’s complaint.

At the merits stage, the administrative law judge analyzed the alleged misappropriation under Illinois trade secret law. *** He applied Illinois law because Amsted, SCT, and Bar-ber all have their principal place of business in Illinois. He noted, however, that “the Illi-nois law relating to trade secrets does not differ substantially from the law applied in pre-vious Commission trade secret investigations,” and he then applied general principles of trade secret law, including the six factors defining a trade secret set forth in the comments to section 757 of the Restatement (First) of Torts.


Following a 10-day evidentiary hearing, the administrative law judge found that TianRui had misappropriated 128 trade secrets relating to the ABC process from Datong. That conclusion was based on evidence that included an admission by TianRui’s expert that TianRui’s foundry used the asserted trade secrets; his only contention was that the trade secrets were not actually secret. In addition, the administrative law judge compared TianRui’s manufacturing specifications with secret Datong documents outlining the ABC process and found them essentially identical. In fact, some of the TianRui specifications contained the same typographical errors that were found in the Datong documents. The administrative law judge also relied on similarities in foundry layout between the Datong and TianRui plants. The administrative law judge summarized the evidence as to the ap-propriation of the trade secrets by saying that “there is overwhelming direct and circum-stantial evidence that TianRui obtained its manufacturing process for cast steel railway wheel[s] through the misappropriation of [Amsted’s] ABC Trade Secrets.”

Besides contesting the Commission’s authority to apply section 337 extraterritorially, TianRui contended that Amsted did not satisfy the domestic industry requirement of sec-tion 337 based on the fact that Amsted no longer practiced the ABC process in the United States. Because none of Amsted’s domestic operations used the ABC process, TianRui argued that there was no “domestic industry” that could be injured by the misappropria-tion of trade secrets relating to that process.

The administrative law judge rejected that argument, holding that it was not essential that the domestic industry use the proprietary process, as long as the misappropriation of that process caused injury to the complainant’s domestic industry. Applying that standard, the administrative law judge concluded that Amsted’s domestic industry would be sub-stantially injured by the importation of TianRui wheels.

The Commission decided not to review the administrative law judge’s initial determina-tion and issued a limited exclusion order. TianRui then appealed to this court.

II

The main issue in this case is whether section 337 authorizes the Commission to apply domestic trade secret law to conduct that occurs in part in a foreign country. Section 337 authorizes the Commission to exclude articles from entry into the United States when it has found “[u]nfair methods of competition [or] unfair acts in the importation of [those] articles.” 19 USC 1337(a)(1)(A). The Commission has long interpreted section 337 to apply to trade secret misappropriation. *** TianRui focuses on the fact that the disclosure of the trade secret information occurred in China. According to TianRui, section 337 cannot ap-ply to extraterritorial conduct and therefore does not reach trade secret misappropriation that occurs outside the United States.

Amsted argues that the Commission did not apply section 337 extraterritorially, because trade secrets were misappropriated in the United States as a legal matter when railway wheels made by exploiting those trade secrets were imported into the United States and sold to customers or disclosed to the Association of American Railroads for certification purposes. ***

A

At the outset, we reject Amsted’s argument that Illinois trade secret law governs the section 337 inquiry in this case. The question of what law applies in a section 337 proceeding


involving trade secrets is a matter of first impression for this court. We hold that a single federal standard, rather than the law of a particular state, should determine what constitutes a misappropriation of trade secrets sufficient to establish an “unfair method of competi-tion” under section 337. ***

In any event, there is no dispute in this case pertaining to the substantive law of trade secrets. The administrative law judge’s findings establish that TianRui obtained access to Amsted’s confidential information through former Datong employees, who were subject to duties of confidentiality imposed by the Datong code of employee conduct, and that TianRui exploited that information in producing the subject goods. TianRui does not take issue with those findings, which are sufficient to establish the elements of trade secret misappropriation under either Illinois law or the generally understood law of trade secrets, as reflected in the Restatement, the Uniform Trade Secrets Act, and previous Commission decisions under section 337. Therefore, the choice of law issue, although it could be im-portant in other cases, does not affect the outcome of this case.

In this case, TianRui argues that section 337 is inapplicable because Amsted’s confiden-tial information was disclosed in China. The legal issue for us to decide is thus whether section 337 applies to imported goods produced through the exploitation of trade secrets in which the act of misappropriation occurs abroad. To answer that question, we must review the principles that apply to federal statutes that create causes of action based in part on conduct that occurs overseas.

B

It is a “longstanding principle of American law ‘that legislation of Congress, unless a con-trary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’” EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991) (“Aramco”). That pre-sumption expresses a canon of construction that is rooted in the “commonsense notion that Congress generally legislates with domestic concerns in mind.” Smith v. United States, 507 U.S. 197, 204 n.5 (1993). ***

The presumption against extraterritoriality does not govern this case, for three reasons. First, section 337 is expressly directed at unfair methods of competition and unfair acts “in the importation of articles” into the United States. *** The focus of section 337 is on an inherently international transaction—importation. In that respect, section 337 is analo-gous to immigration statutes that bar the admission of an alien who has engaged in partic-ular conduct or who makes false statements in connection with his entry into this coun-try. See, e.g., 8 USC 1101(f)(6), 1182(a). In such cases, the focus is not on punishing the conduct or the false statements, but on preventing the admission of the alien, so it is rea-sonable to assume that Congress was aware, and intended, that the statute would apply to conduct (or statements) that may have occurred abroad.

Second, in this case the Commission has not applied section 337 to sanction purely ex-traterritorial conduct; the foreign “unfair” activity at issue in this case is relevant only to the extent that it results in the importation of goods into this country causing domestic injury. In light of the statute’s focus on the act of importation and the resulting domestic injury, the Commission’s order does not purport to regulate purely foreign conduct. Be-cause foreign conduct is used only to establish an element of a claim alleging a domestic injury and seeking a wholly domestic remedy, the presumption against extraterritorial ap-plication does not apply.

http://scholar.google.com/scholar_case?case=7770935018165221533&q=tianrui&hl=en&as_sdt=2,14&scilh=0




The dissent disregards the domestic elements of the cause of action under section 337 and characterizes this case as involving “conduct which entirely occurs in a foreign country.” That characterization accurately describes most of the events constituting the misappro-priation, but the determination of misappropriation was merely a predicate to the charge that TianRui committed unfair acts in importing its wheels into the United States. In other words, the Commission’s interpretation of section 337 does not, as the dissent contends, give it the authority to “police Chinese business practices.” It only sets the conditions under which products may be imported into the United States.

Under the dissent’s construction of section 337, the importation of goods produced as a result of trade secret misappropriation would be immune from scrutiny if the act of misappropriation occurred overseas. That is, as long as the misappropriating party was careful to ensure that the actual act of conveying the trade secret occurred outside the United States, the Commission would be powerless to provide a remedy even if the trade secret were used to produce products that were subsequently imported into the United States to the detriment of the trade secret owner. We think it highly unlikely that Congress, which clearly intended to create a remedy for the importation of goods resulting from unfair methods of competition, would have intended to create such a conspicuous loop-hole for misappropriators.

Third, the legislative history of section 337 supports the Commission’s interpretation of the statute as permitting the Commission to consider conduct that occurs abroad. ***

C

TianRui argues that the Commission should not be allowed to apply domestic trade secret law to conduct occurring in China because doing so would cause improper interference with Chinese law. We disagree. In the first place, as we have noted, the Commission’s exercise of authority is limited to goods imported into this country, and thus the Commis-sion has no authority to regulate conduct that is purely extraterritorial. The Commission does not purport to enforce principles of trade secret law in other countries generally, but only as that conduct affects the U.S. market. That is, the Commission’s investigations, findings, and remedies affect foreign conduct only insofar as that conduct relates to the importation of articles into the United States. The Commission’s activities have not hin-dered TianRui’s ability to sell its wheels in China or any other country.

Second, TianRui has failed to identify a conflict between the principles of misappropri-ation that the Commission applied and Chinese trade secret law. Indeed, in its forum non conveniens motion TianRui argued that Chinese trade secret law would provide a “more than adequate” remedy for any alleged misappropriation. In addition, China has acceded to the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”), Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C. We cannot discern any relevant difference between the misappropriation requirements of TRIPS article 39 and the principles of trade secret law applied by the administrative law judge in this case. We therefore detect no conflict between the Commission’s actions and Chinese law that would counsel denying relief based on extraterritorial acts of trade secret misappropriation relating to the importation of goods affecting a domestic industry.

Finally, even apart from the acts of importation, the conduct at issue in this case is not the result of the imposition of legal duties created by American law on persons for whom there was no basis to impose such duties. The former Datong employees had a duty not


to disclose Amsted’s trade secrets arising from express provisions in the Datong employee code and, in the case of most of the employees, from confidentiality agreements that they signed during their employment with Datong.7 Thus, the question in this case is whether the disclosure of protected information in breach of that duty is beyond the reach of sec-tion 337 simply because the breach itself took place outside the United States. To answer that question in the affirmative would invite evasion of section 337 and significantly un-dermine the effectiveness of the congressionally designed remedy.

D

Our conclusion that section 337 authorized the Commission’s actions in this case is not inconsistent with court decisions that have accorded a narrow construction to the extra-territorial application of U.S. patent law ***. By contrast, as we have noted, the statutory prohibition on “unfair methods of competition and unfair acts in the importation of arti-cles . . . into the United States” naturally contemplates that the unfair methods of compe-tition and unfair acts leading to the prohibited importation will include conduct that takes place abroad. Because the statute applies to goods that are presented for importation, it would be a strained reading of the statute to bar the Commission from considering acts of trade secret misappropriation that occur abroad. In cases in which misappropriated trade secrets are used in the manufacture of the imported goods, the misappropriation will fre-quently occur overseas, where the imported goods are made. To bar the Commission from considering such acts because they occur outside the United States would thus be incon-sistent with the congressional purpose of protecting domestic commerce from unfair methods of competition in importation such as trade secret misappropriation.

III

TianRui’s second ground for appeal focuses on the requirement of section 337 that the acts of unfair competition threaten “to destroy or substantially injure an industry in the United States.” 19 U.S.C. § 1337(a)(1)(A)(i). TianRui contends that in trade secret cases, the domestic industry must practice the misappropriated trade secret in order for the Com-mission to be authorized to grant relief. Because Amsted has no domestic operations prac-ticing the misappropriated ABC process, TianRui argues that its imported wheels cannot be held to injure or threaten injury to any domestic industry within the meaning of section 337.

Section 337 contains different requirements for statutory intellectual property (such as patents, copyrights, and registered trademarks) than for other, nonstatutory unfair prac-tices in importation (such as trade secret misappropriation). The provisions that apply to statutory intellectual property require that an industry relating to the protected articles ex-ists or is in the process of being established. 19 USC 1337(a)(2). Such an industry will be deemed to exist if there is significant domestic investment or employment relating to the protected articles. Id. § 1337(a)(3). In contrast, the general provision relating to unfair prac-tices is not satisfied by evidence showing only that a domestic industry exists; it requires that the unfair practices threaten to “destroy or substantially injure” a domestic industry.

7 TianRui does not argue that those duties were unenforceable for public policy reasons in any jurisdiction,

and we do not presently address whether policy choices in a foreign jurisdiction can nullify a contractually im-posed duty for the purposes of section 337.


Id. § 1337(a)(1)(A). On the other hand, there is no express requirement in the general pro-vision that the domestic industry relate to the intellectual property involved in the investi-gation. Notwithstanding that textual distinction, TianRui contends that investigations in-volving intellectual property under the unfair practices provision require the existence of a domestic industry that relates to the asserted intellectual property in the same manner that is required for statutory intellectual property. ***

In sum, we conclude that the Commission did not err in defining the domestic industry in this case. The parties submitted evidence indicating that the imported TianRui wheels could directly compete with wheels domestically produced by the trade secret owner. That type of competition, the Commission concluded, is sufficiently related to the investigation to constitute an injury to an “industry” within the meaning of section 337(a)(1)(A). We hold that the Commission’s conclusion in that regard is based on a proper construction of the statute and that its factual analysis of the effect of TianRui’s imports on the domestic industry is supported by substantial evidence.

AFFIRMED.

MOORE, Circuit Judge, dissenting: The majority in this case expands the reach of both 19 USC 1337 (§ 337) and trade secret law to punish TianRui Group Company Limited (TianRui) for its completely extraterritorial activities. As a court, however, we must act within the confines set out by the text of the law. Here, there is no basis for the extrater-ritorial application of our laws to punish TianRui’s bad acts in China. As a result, I respect-fully dissent.

The majority in this case holds that 19 USC 1337(a)(1)(A), which applies to “unfair acts in the importation of articles . . . into the United States,” allows the International Trade Commission (Commission) to bar imports because of acts of unfair competition occurring entirely in China. The majority states the issue: “The main issue in this case is whether § 337 authorizes the Commission to apply domestic trade secret law to conduct that occurs in part in a foreign country.” With all due respect, that is not the issue. The issue is whether § 337 authorizes the Commission to apply domestic trade secret laws to conduct which entirely occurs in a foreign country.

The facts of this case are not disputed. A Chinese company, Datong, had a license from a United States company, Amsted, to use in China a process which Amsted kept secret. TianRui, the Chinese company accused of violating § 337 in this case, hired several em-ployees from its Chinese competitor, Datong. These employees disclosed the trade secrets to TianRui in China who used them in China to make railway wheels in China. The acts which arguably constitute misappropriation (theft of a trade secret) all occurred in China.

To be clear, I agree that trade secret misappropriation falls squarely within the terms of § 337: if TianRui carried out its acts of misappropriation in the United States—namely if TianRui came to the United States and stole Amsted’s trade secrets here—then § 337 could be used to bar import of any goods made with the stolen technology. But, as the majority concedes, these are not the facts of this case, and to the extent there was a misappropria-tion of any Amsted trade secret that misappropriation occurred abroad. In this case, none of the acts which constitute misappropriation occurred in the United States. While TianRui is certainly not a sympathetic litigant—it poached employees to obtain confidential infor-mation—none of the unfair acts occurred in the United States and, as such, there is no violation of United States law which amounts to an unfair trade practice under the statute.


United States trade secret law simply does not extend to acts occurring entirely in China. We have no right to police Chinese business practices. Under the majority’s rule today, if the United States government should decide that goods were being produced in a foreign country using what we consider to be unfair business practices, § 337 allows for their ex-clusion from the United States. The potential breadth of this holding is staggering. Suppose that goods were produced by workers who operate under conditions which would not meet with United States labor laws or workers who were not paid minimum wage or not paid at all—certainly United States industry would be hurt by the importation of goods which can be manufactured at a fraction of the cost abroad because of cheaper or forced labor. Would we consider these business practices unfair? Absent clear intent by Congress to apply the law in an extraterritorial manner, I simply do not believe that we have the right to determine what business practices, conducted entirely abroad, are unfair. According to the majority, its interpretation of § 337 does not give the Commission “the authority ‘to police Chinese business practices’”, “[i]t only sets the conditions under which products may be imported into the United States.” This holding could not be clearer—the Com-mission cannot police Chinese business practice unless the Chinese wish to import the goods into the United States. The act of importation opens the door to scrutiny of all business practices of the importer associated with the goods including those conducted entirely within China. Section 337 simply does not authorize this level of scrutiny of en-tirely foreign acts.

I.

Section 337 provides that “[u]nfair methods of competition and unfair acts in the impor-tation of articles . . . into the United States” which substantially injure a domestic industry are unlawful. 19 U.S.C. § 1337(a)(1)(A). The unfair act alleged to violate the statute is not the importation of the wheels into the United States. There is nothing inherently unfair about the wheels or the process by which they are imported in this case. Nor is the pres-ence of the wheels in the United States somehow itself an unlawful act—a stark contrast to the illegal immigration cases relied on by the majority where the mere presence of the person in the United States is the unlawful act. The unfair act in this case is the alleged trade secret misappropriation. And both the majority and dissent agree that the conduct related to the misappropriation occurred entirely in China. Any “unfair act” in this case is wholly extraterritorial.

The question is thus whether § 337 contains a clear indication of congressional intent to extend its reach to wholly extraterritorial unfair acts. Analysis of § 337 must be carried out in view of the “longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’” EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991) (Aramco) (quoting Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949)). “Unless there is the affirmative intention of Congress clearly expressed to give a statute extraterritorial effect, we must presume it is primarily concerned with domestic conditions.” Morrison v. Nat’l Austl. Bank Ltd., 130 S.Ct. 2869, 2877 (2010) (internal quotations omitted). When applying this principle, “we look to see whether ‘language in the [relevant Act] gives any indication of a congressional purpose to extend its coverage beyond places over which the United States has sovereignty or has some measure of legislative control.’” Id. (alteration in original) (quoting Foley Bros., 336 U.S. at 285).







I see nothing in the plain language of the statute that indicates that Congress intended it to apply to unfair acts performed entirely abroad. The majority points to no statutory lan-guage that expresses the clear intent for it to apply to extraterritorial unfair acts. As a result, this is a simple case: without any indication of a congressional intent to extend § 337’s coverage beyond places over which the United States has sovereignty or has some measure of legislative control, we must limit the reach of the statute to unfair acts in the United States. When the statute is silent as to extraterritorial application, the law is clear: “it has none.” Indeed, based on this presumption the Supreme Court has rejected extraterritorial scope for a number of statutes with much stronger textual support than § 337.

The majority claims that importation “is an inherently international transaction,” and analogizes imports to illegal immigrants, false statements during entry into the United States, the failure to pay an excise tax, and the Economic Espionage Act. In each of those circumstances, however, the courts were confronted either with express statutory language indicating their extraterritorial application or the Court held their was no extraterritorial application of the statute at issue.

The proper focus to determine whether there is “an affirmative intention of Congress clearly expressed” is the language of the statute. Section 337 limits the unfair acts to “unfair acts in the importation of articles” into the United States. The majority reads this limitation out of the statute, and claims that Congress “clearly intended to create a remedy for the importation of goods resulting from unfair methods of competition.” Our predecessor court rejected essentially the same argument nearly eighty years ago, and held that § 337 could not be used to exclude from importation goods produced by a process patented in the United States but carried out abroad. In re Amtorg Trading Corp., 75 F.2d 826, 834 (CCPA 1935). *** Section 337 was enacted to solve the problem faced by domestic industry when individuals outside the United States imported products which, upon release into the do-mestic stream of commerce, gave rise to a domestic cause of action. Section 337 provided a means to prevent the unfair act at its source, during the act of importation, thereby avoiding an impossible multiplicity of suits. ***

In sum, there is no indication in § 337 that Congress intended it to apply to wholly extraterritorial unfair acts. In light of the plain language of the statute, the legislative his-tory, the selective Congressional action to grant extraterritorial effect to process patents, and the contrast to other extraterritorial statutes, I conclude § 337 does not reach the mis-appropriation and use of trade secrets in China, even if the product of the misappropriated process is ultimately imported into the United States.

II.

The problem underlying the majority’s analysis is that “[f]oreign conduct is generally the domain of foreign law.” Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 455 (2007) (inter-nal quotations omitted). I sympathize with Amsted and, if the bad acts were carried out in the United States, would not hesitate to find for Amsted. My sympathy, however, is some-what muted since Amsted had a readymade solution to its problem: obtain a process pa-tent. The statute is clear that the extraterritorial acts in this case are subject to § 337 if the process is protected by a patent. In the alternative, Amsted could have also protected its intellectual property by keeping the various processes completely secret. Instead, Amsted chose to deny the public full knowledge of its innovation while simultaneously exploiting the trade secret by licensing it to a Chinese corporation for use in China.





By broadening the scope of trade secret misappropriation to the extraterritorial actions in this case, the majority gives additional incentive to inventors to keep their innovation secret. Of course, this also denies society the benefits of disclosure stemming from the patent system, which are anathema to trade secrets. Moreover, while Amsted (or more likely its Chinese licensee) will benefit from this decision, the burden of preserving Am-sted’s trade secret now falls squarely on the American consumer who misses out on the opportunity for increased competition and concomitant lower prices offered by TianRui’s products.

I understand a restrictive approach to extraterritoriality is not immediately popular in this case. We must, however, work within the confines of the statute and the clear pre-sumption against extraterritoriality. It is not our role to decide what the law should be but to apply it as we find it.


Session 10: Monitoring the Monitors

We will focus in this session on the role critical intermediaries in the functioning of our reporting systems for significant firms. The first set of materials focuses on the Enron case and the ultimate destruction of Arthur Andersen. The second set of materials looks at the issues that arose in connection with the sale of certain tax shelters by KPMG. Finally, the third reading is the September 9, 2015 memo from the U.S. Department of Justice on individual accountability for corporate wrongdoing.

§ 1512. Tampering with a witness, victim, or an informant

*** (b) Whoever knowingly uses intimidation or physical force, threatens, or corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person, with intent to—

(1) influence, delay, or prevent the testimony of any person in an official proceeding;

(2) cause or induce any person to—

(A) withhold testimony, or withhold a record, document, or other object, from an official proceeding;

(B) alter, destroy, mutilate, or conceal an object with intent to impair the object’s integrity or availability for use in an official proceeding;

(C) evade legal process summoning that person to appear as a witness, or to produce a record, document, or other object, in an official proceeding; or

(D) be absent from an official proceeding to which such person has been summoned by legal process; or

(3) hinder, delay, or prevent the communication to a law enforcement officer or judge of the United States of information relating to the commission or possible commission of a Federal offense or a violation of conditions of probation, parole, or release pending judicial proceedings;

shall be fined under this title or imprisoned not more than ten years, or both.

*** (d) In a prosecution for an offense under this section, it is an affirmative defense, as to which the defendant has the burden of proof by a preponderance of the evidence, that the conduct consisted solely of lawful conduct and that the defendant’s sole intention was to encourage, induce, or cause the other person to testify truthfully.

(e) For the purposes of this section—

(1) an official proceeding need not be pending or about to be instituted at the time of the offense; and

(2) the testimony, or the record, document, or other object need not be admissible in evidence or free of a claim of privilege.


United States v. Stein

541 F.3d 130 (2nd Cir. 2008)

DENNIS JACOBS, Chief Judge: The United States appeals from an order of the United States District Court for the Southern District of New York (Kaplan, J.), dismissing an indictment against thirteen former partners and employees of the accounting firm KPMG, LLP. Judge Kaplan found that, absent pressure from the government, KPMG would have paid defendants’ legal fees and expenses without regard to cost. Based on this and other findings of fact, Judge Kaplan ruled that the government deprived defendants of their right to counsel under the Sixth Amendment by causing KPMG to impose conditions on the advancement of legal fees to defendants, to cap the fees, and ultimately to end payment. See United States v. Stein, 435 F.Supp.2d 330, 367-73 (S.D.N.Y. 2006) (“Stein I”). Judge Kaplan also ruled that the government deprived defendants of their right to substantive due process under the Fifth Amendment.1

We hold that KPMG’s adoption and enforcement of a policy under which it conditioned, capped and ultimately ceased advancing legal fees to defendants followed as a direct con-sequence of the government’s overwhelming influence, and that KPMG’s conduct there-fore amounted to state action. We further hold that the government thus unjustifiably interfered with defendants’ relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment, and that the government did not cure the violation. Because no other remedy will return defendants to the status quo ante, we affirm the dis-missal of the indictment as to all thirteen defendants. In light of this disposition, we do not reach the district court’s Fifth Amendment ruling.

BACKGROUND

The Thompson Memorandum

In January 2003, then-United States Deputy Attorney General Larry D. Thompson prom-ulgated a policy statement, Principles of Federal Prosecution of Business Organizations (the “Thompson Memorandum”), which articulated “principles” to govern the Department’s discretion in bringing prosecutions against business organizations. The Thompson Mem-orandum was closely based on a predecessor document issued in 1999 by then-U.S. Dep-uty Attorney General Eric Holder, Federal Prosecution of Corporations. Along with the familiar factors governing charging decisions, the Thompson Memorandum identifies nine addi-tional considerations, including the company’s “timely and voluntary disclosure of wrong-doing and its willingness to cooperate in the investigation of its agents.” Mem. from Larry D. Thompson, Deputy Att’y Gen., U.S. Dep’t of Justice, Principles of Federal Prosecution of Business Organizations (Jan. 20, 2003), at II. The Memorandum explains that prosecutors should inquire

1 In later decisions, Judge Kaplan ruled that defendants Richard Smith and Mark Watson’s proffer session

statements were obtained in violation of their Fifth Amendment privilege against self-incrimination, and that their statements would be suppressed, see United States v. Stein, 440 F.Supp.2d 315 (S.D.N.Y. 2006) (“Stein II”); that the court had ancillary jurisdiction over Defendants-Appellees’ civil suit against KPMG for advancement of fees, see United States v. Stein, 452 F.Supp.2d 230 (S.D.N.Y. 2006) (“Stein III”), vacated, Stein v. KPMG, LLP, 486 F.3d 753 (2d Cir.2007); and that dismissal of the indictment is the appropriate remedy for those constitutional violations, see United States v. Stein, 495 F.Supp.2d 390 (S.D.N.Y. 2007) (“Stein IV”).


whether the corporation appears to be protecting its culpable employees and agents [and that] a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.

Id. at VI (emphasis added and footnote omitted). A footnote appended to the highlighted phrase explains that because certain states require companies to advance legal fees for their officers, “a corporation’s compliance with governing law should not be considered a fail-ure to cooperate.” Id. at VI n. 4. In December 2006—after the events in this prosecution had transpired—the Department of Justice replaced the Thompson Memorandum with the McNulty Memorandum, under which prosecutors may consider a company’s fee ad-vancement policy only where the circumstances indicate that it is “intended to impede a criminal investigation,” and even then only with the approval of the Deputy Attorney General. Mem. from Paul J. McNulty, Deputy Att’y Gen., U.S. Dep’t of Justice, Principles of Federal Prosecution of Business Organizations (Dec. 12, 2006), at VII n. 3.

Commencement of the Federal Investigation

After Senate subcommittee hearings in 2002 concerning KPMG’s possible involvement in creating and marketing fraudulent tax shelters, KPMG retained Robert S. Bennett of the law firm Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) to formulate a “coop-erative approach” for KPMG to use in dealing with federal authorities. Stein I, 435 F.Supp.2d at 339. Bennett’s strategy included “a decision to ‘clean house’—a determina-tion to ask Jeffrey Stein, Richard Smith, and Jeffrey Eischeid, all senior KPMG partners who had testified before the Senate and all now [Defendants-Appellees] here—to leave their positions as deputy chair and chief operating officer of the firm, vice chair-tax ser-vices, and a partner in personal financial planning, respectively.” Smith was transferred and Eischeid was put on administrative leave. Stein resigned with arrangements for a three-year $100,000-per-month consultancy, and an agreement that KPMG would pay for Stein’s representation in any actions brought against Stein arising from his activities at the firm. KPMG negotiated a contract with Smith that included a similar clause; but that agreement was never executed.

In February 2004, KPMG officials learned that the firm and 20 to 30 of its top partners and employees were subjects of a grand jury investigation of fraudulent tax shelters. On February 18, 2004, KPMG’s CEO announced to all partners that the firm was aware of the United States Attorney’s Office’s (“USAO”) investigation and that “[a]ny present or former members of the firm asked to appear will be represented by competent coun[sel] at the firm’s expense.” Stein IV, 495 F.Supp.2d at 407 (first alteration in original and internal quotation marks omitted).

The February 25, 2004 Meeting

In preparation for a meeting with Skadden on February 25, 2004, the prosecutors—in-cluding Assistant United States Attorneys (“AUSAs”) Shirah Neiman and Justin Weddle—decided to ask whether KPMG would advance legal fees to employees under investigation. Bennett started the meeting by announcing that KPMG had resolved to “clean house,” that KPMG “would cooperate fully with the government’s investigation,” and that its goal


was not to protect individual employees but rather to save the firm from being indicted. AUSA Weddle inquired about the firm’s plans for advancing fees and about any legal ob-ligation to do so. Later on, AUSA Neiman added that the government would “take into account” the firm’s legal obligations to advance fees, but that “the Thompson Memoran-dum [w]as a point that had to be considered.” Bennett then advised that although KPMG was still investigating its legal obligations to advance fees, its “common practice” was to do so. However, Bennett explained, KPMG would not pay legal fees for any partner who refused to cooperate or “took the Fifth,” so long as KPMG had the legal authority to do so.

Later in the meeting, AUSA Weddle asked Bennett to ascertain KPMG’s legal obliga-tions to advance attorneys’ fees. AUSA Neiman added that “misconduct” should not or cannot “be rewarded” under “federal guidelines.” One Skadden attorney’s notes attributed to AUSA Weddle the prediction that, if KPMG had discretion regarding fees, the govern-ment would “look at that under a microscope.”

Skadden then reported back to KPMG. In notes of the meeting, a KPMG executive wrote the words “[p]aying legal fees” and “[s]everance” next to “not a sign of coopera-tion.” Stein IV, 495 F.Supp.2d at 408.

Communications Between the Prosecutors and KPMG

On March 2, 2004, Bennett told AUSA Weddle that although KPMG believed it had no legal obligation to advance fees, “it would be a big problem” for the firm not to do so given its partnership structure. Stein I, 435 F.Supp.2d at 345 (internal quotation marks omitted). But Bennett disclosed KPMG’s tentative decision to limit the amount of fees and condition them on employees’ cooperation with prosecutors.

Two days later, a Skadden lawyer advised counsel for Defendant-Appellee Carol G. War-ley (a former KPMG tax partner) that KPMG would advance legal fees if Warley cooper-ated with the government and declined to invoke her Fifth Amendment privilege against self-incrimination.

On a March 11 conference call with Skadden, AUSA Weddle recommended that KPMG tell employees that they should be “totally open” with the USAO, “even if that [meant admitting] criminal wrongdoing,” explaining that this would give him good material for cross-examination. Id. (alteration in original and internal quotation marks omitted). That same day, Skadden wrote to counsel for the KPMG employees who had been identified as subjects of the investigation. Id. The letter set forth KPMG’s new fees policy (“Fees Policy”), pursuant to which advancement of fees and expenses would be

[i] capped at $400,000 per employee;

[ii] conditioned on the employee’s cooperation with the government; and

[iii] terminated when an employee was indicted.

Id. at 345-46. The government was copied on this correspondence.

On March 12, KPMG sent a memorandum to certain other employees who had not been identified as subjects, urging them to cooperate with the government, advising them that it might be advantageous for them to exercise their right to counsel, and advising that KPMG would cover employees’ “reasonable fees.”

The prosecutors expressed by letter their “disappoint[ment] with [the] tone” of this memorandum and its “one-sided presentation of potential issues,” and “demanded that


KPMG send out a supplemental memorandum in a form they proposed.” The govern-ment’s alternative language, premised on the “assum[ption] that KPMG truly is committed to fully cooperating with the Government’s investigation,” Letter of David N. Kelley, United States Attorney, Southern District of New York, March 17, 2004, advised employ-ees that they could “meet with investigators without the assistance of counsel,” Stein I, 435 F.Supp.2d at 346 (emphasis omitted). KPMG complied, and circulated a memo advising that employees “may deal directly with government representatives without counsel.”

At a meeting in late March, Skadden asked the prosecutors to notify Skadden in the event any KPMG employee refused to cooperate. Over the following year, the prosecutors reg-ularly informed Skadden whenever a KPMG employee refused to cooperate fully, such as by refusing to proffer or by proffering incompletely (in the government’s view). Skadden, in turn, informed the employees’ lawyers that fee advancement would cease unless the employees cooperated. The employees either knuckled under and submitted to interviews, or they were fired and KPMG ceased advancing their fees. For example, Watson and Smith attended proffer sessions after receiving KPMG’s March 11 letter announcing the Fees Policy, and after Skadden reiterated to them that fees would be terminated absent cooper-ation. They did so because (they said, and the district court found) they feared that KPMG would stop advancing attorneys fees, although Watson concedes he attended a first session voluntarily.3 As Bennett later assured AUSA Weddle: “Whenever your Office has notified us that individuals have not ... cooperat[ed], KPMG has promptly and without question encouraged them to cooperate and threatened to cease payment of their attorney fees and ... to take personnel action, including termination.” Letter of Robert Bennett to United States Attorney’s Office, November 2, 2004.

KPMG Avoids Indictment

In an early-March 2005 meeting, then-U.S. Attorney David Kelley told Skadden and top KPMG executives that a non-prosecution agreement was unlikely and that he had reser-vations about KPMG’s level of cooperation: “I’ve seen a lot better from big companies.” Bennett reminded Kelley how KPMG had capped and conditioned its advancement of legal fees. Kelley remained unconvinced.

KPMG moved up the Justice Department’s chain of command. At a June 13, 2005 meet-ing with U.S. Deputy Attorney General James Comey, Bennett stressed KPMG’s pressure on employees to cooperate by conditioning legal fees on cooperation; it was, he said, “prec-edent[ ]setting.” KPMG’s entreaties were ultimately successful: on August 29, 2005, the firm entered into a deferred prosecution agreement (the “DPA”) under which KPMG admitted extensive wrongdoing, paid a $456 million fine, and committed itself to cooper-ation in any future government investigation or prosecution.

Indictment of Individual Employees

On August 29, 2005—the same day KPMG executed the DPA—the government indicted six of the Defendants-Appellees (along with three other KPMG employees): Jeffrey Stein; Richard Smith; Jeffrey Eischeid; John Lanning, Vice Chairman of Tax Services; Philip Wiesner, a former tax partner; and Mark Watson, a tax partner. A superseding indictment

3 As discussed above, in a decision that is the subject of the summary order filed today, the district court held

that Defendants-Appellees Smith and Watson’s proffer statements were obtained in violation of their Fifth Amendment privilege against self-incrimination and that their statements would be suppressed.


filed on October 17, 2005 named ten additional employees, including seven of the De-fendants-Appellees: Larry DeLap, a former tax partner in charge of professional practice; Steven Gremminger, a former partner and associate general counsel; former tax partners Gregg Ritchie, Randy Bickham and Carl Hasting; Carol G. Warley; and Richard Rosenthal, a former tax partner and Chief Financial Officer of KPMG.4 Pursuant to the Fees Policy, KPMG promptly stopped advancing legal fees to the indicted employees who were still receiving them.

Procedural History

On January 12, 2006, the thirteen defendants (among others) moved to dismiss the indict-ment based on the government’s interference with KPMG’s advancement of fees. In a submission to the district court, KPMG represented that

the Thompson memorandum in conjunction with the government’s statements re-lating to payment of legal fees affected KPMG’s determination(s) with respect to the advancement of legal fees and other defense costs to present or former partners and employees .... In fact, KPMG is prepared to state that the Thompson memo-randum substantially influenced KPMG’s decisions with respect to legal fees....

Stein IV, 495 F.Supp.2d at 405 (internal quotation marks and emphasis omitted).

At a hearing on March 30, 2006, Judge Kaplan asked the government whether it was “prepared at this point to commit that [it] has no objection whatsoever to KPMG exercis-ing its free and independent business judgment as to whether to advance defense costs to these defendants and that if it were to elect to do so the government would not in any way consider that in determining whether it had complied with the DPA?” The AUSA re-sponded: “That’s always been the case, your Honor. That’s fine. We have no objection to that.... They can always exercise their business judgment. As you described it, your Honor, that’s always been the case. It’s the case today, your Honor.”

Judge Kaplan ordered discovery and held a three-day evidentiary hearing in May 2006 to ascertain whether the government had contributed to KPMG’s adoption of the Fees Pol-icy. The court heard testimony from two prosecutors, one IRS agent, three Skadden attor-neys, and one lawyer from KPMG’s Office of General Counsel, among others. Numerous documents produced in discovery by both sides were admitted into evidence.

Stein I

Judge Kaplan’s opinion and order of June 26, 2006 noted, as the parties had stipulated, that KPMG’s past practice was to advance legal fees for employees facing regulatory, civil and criminal investigations without condition or cap. See Stein I, 435 F.Supp.2d at 340. Starting from that baseline, Judge Kaplan made the following findings of fact. At the Feb-ruary 25, 2004 meeting, Bennett began by “test[ing] the waters to see whether KPMG could adhere to its practice of paying its employees’ legal expenses when litigation loomed [by asking] for [the] government’s view on the subject.” Id. at 341 (footnote omitted). It is not clear what AUSA Neiman intended to convey when she said that “misconduct” should not or cannot “be rewarded” under “federal guidelines”; but her statement “was under-stood by both KPMG and government representatives as a reminder that payment of legal

4 The superseding indictment filed on October 17, 2005 charged 19 defendants in 46 counts for conspiring to

defraud the United States and the IRS, tax evasion and obstruction of the internal revenue laws (although not every individual was charged with every offense).


fees by KPMG, beyond any that it might legally be obligated to pay, could well count against KPMG in the government’s decision whether to indict the firm.” Id. at 344 (internal quotation marks omitted). “[W]hile the USAO did not say in so many words that it did not want KPMG to pay legal fees, no one at the meeting could have failed to draw that con-clusion.” Id.

Based on those findings, Judge Kaplan arrived at the following ultimate findings of fact, all of which the government contests on appeal:

[1] “the Thompson Memorandum caused KPMG to consider departing from its long-standing policy of paying legal fees and expenses of its personnel in all cases and investigations even before it first met with the USAO” and induced KPMG to seek “an indication from the USAO that payment of fees in accordance with its settled practice would not be held against it”;

[2] the government made repeated references to the Thompson Memo in an effort to “reinforce[ ] the threat inherent in the Thompson Memorandum”;

[3] “the government conducted itself in a manner that evidenced a desire to mini-mize the involvement of defense attorneys”; and

[4] but for the Thompson Memorandum and the prosecutors’ conduct, KPMG would have paid defendants’ legal fees and expenses without consideration of cost.

Id. at 352-53.

Against that background, Judge Kaplan ruled that a defendant has a fundamental right under the Fifth Amendment to fairness in the criminal process, including the ability to get and deploy in defense all “resources lawfully available to him or her, free of knowing or reckless government interference,” id. at 361, and that the government’s reasons for in-fringing that right in this case could not withstand strict scrutiny, id. at 362-65. Judge Kaplan also ruled that the same conduct deprived each defendant of the Sixth Amendment right “to choose the lawyer or lawyers he or she desires and to use one’s own funds to mount the defense that one wishes to present.” Id. at 366 (footnote omitted). He reasoned that “the government’s law enforcement interests in taking the specific actions in question [do not] sufficiently outweigh the interests of the KPMG Defendants in having the re-sources needed to defend as they think proper against these charges.” Id. at 368. “[T]he fact that advancement of legal fees occasionally might be part of an obstruction scheme or indicate a lack of full cooperation by a prospective defendant is insufficient to justify the government’s interference with the right of individual criminal defendants to obtain re-sources lawfully available to them in order to defend themselves....” Id. at 369.

Judge Kaplan rejected the government’s position that defendants have no right to spend “other people’s money” on high-priced defense counsel: “[T]he KPMG Defendants had at least an expectation that their expenses in defending any claims or charges brought against them by reason of their employment by KPMG would be paid by the firm,” and “any benefits that would have flowed from that expectation the legal fees at issue now were, in every material sense, their property, not that of a third party.” Id. at 367. He further determined that defendants need not show how their defense was impaired: the govern-ment’s interference with their Sixth Amendment “right to be represented as they choose, like a deprivation of the right to counsel of their choice, is complete irrespective of the quality of the representation they receive.” Id. at 369.


As to remedy, Judge Kaplan conceded that dismissal of the indictment would be inap-propriate unless other avenues for obtaining fees from KPMG were first exhausted. To that end, Judge Kaplan invited defendants to file a civil suit against KPMG under the district court’s ancillary jurisdiction. The suit was commenced, and Judge Kaplan denied KPMG’s motion to dismiss. However, this Court ruled that the district court lacked ancil-lary jurisdiction over the action.

Stein IV

Judge Kaplan dismissed the indictment against the thirteen defendants on July 16, 2007. ***

III

Judge Kaplan found that “KPMG’s decision to cut off all payments of legal fees and ex-penses to anyone who was indicted and to limit and to condition such payments prior to indictment upon cooperation with the government was the direct consequence of the pressure applied by the Thompson Memorandum and the USAO.” Stein I, 435 F.Supp.2d at 353 (emphasis added); see also Stein II, 440 F.Supp.2d at 334 (relying on this finding to conclude that KPMG’s conduct was fairly attributable to the State for Fifth Amendment purposes). The government protests that KPMG’s adoption and enforcement of its Fees Policy was private action, outside the ambit of the Sixth Amendment. ***

KPMG’s adoption and enforcement of the Fees Policy amounted to “state action” be-cause KPMG “operate[d] as a willful participant in joint activity” with the government, and because the USAO “significant[ly] encourage[d]” KPMG to withhold legal fees from defendants upon indictment. Flagg v. Yonkers Sav. & Loan Ass’n, 396 F.3d 178, 187 (2d Cir. 2005). The government brought home to KPMG that its survival depended on its role in a joint project with the government to advance government prosecutions. The government is therefore legally “responsible for the specific conduct of which the [criminal defendants] complain[ ].” Blum v. Yaretsky, 457 U.S. 991, 1004 (1982) (emphasis omitted).

The government argues that “KPMG’s decision to condition legal fee payments on co-operation, while undoubtedly influenced by the Thompson Memorandum, was not co-erced or directed by the Government.” But that argument runs up against the district court’s factual finding (which we do not disturb) that the fees decision “was the direct consequence” of the Memorandum and the prosecutors’ conduct. Nevertheless, it remains a question of law whether the facts as found by the district court establish state action.

State action is established here as a matter of law because the government forced KPMG to adopt its constricted Fees Policy. The Thompson Memorandum itself—which prose-cutors stated would be considered in deciding whether to indict KPMG—emphasizes that cooperation will be assessed in part based upon whether, in advancing counsel fees, “the corporation appears to be protecting its culpable employees and agents.” Since defense counsel’s objective in a criminal investigation will virtually always be to protect the client, KPMG’s risk was that fees for defense counsel would be advanced to someone the gov-ernment considered culpable. So the only safe course was to allow the government to become (in effect) paymaster.

The prosecutors reinforced this message by inquiring into KPMG’s fees obligations, re-ferring to the Thompson Memorandum as “a point that had to be considered,” and warn-ing that “misconduct” should not or cannot “be rewarded” under “federal guidelines.”


Stein I, 435 F.Supp.2d at 341-42. The government had KPMG’s full attention. It is hardly surprising, then, that KPMG decided to condition payment of fees on employees’ coop-eration with the government and to terminate fees upon indictment: only that policy would allow KPMG to continue advancing fees while minimizing the risk that prosecutors would view such advancement as obstructive. ***

An adversarial relationship does not normally bespeak partnership. But KPMG faced ruin by indictment and reasonably believed it must do everything in its power to avoid it. The government’s threat of indictment was easily sufficient to convert its adversary into its agent. KPMG was not in a position to consider coolly the risk of indictment, weigh the potential significance of the other enumerated factors in the Thompson Memorandum, and decide for itself how to proceed.

We therefore conclude that KPMG’s adoption and enforcement of the Fees Policy (both before and upon defendants’ indictment) amounted to state action. The government may properly be held “responsible for the specific conduct of which the [criminal defendants] complain[ ],” Blum, 457 U.S. at 1004 (emphasis omitted), i.e., the deprivation of their Sixth Amendment right to counsel, if the violation is established.

IV

The district court’s ruling on the Sixth Amendment was based on the following analysis (set out here in précis). The Sixth Amendment protects “an individual’s right to choose the lawyer or lawyers he or she desires,” Stein I, 435 F.Supp.2d at 366 (citing Wheat v. United States, 486 U.S. 153, 164 (1988)), and “to use one’s own funds to mount the defense that one wishes to present,” id. (citing Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, 624 (1989)). The goal is to secure “a defendant’s right to spend his own money on a de-fense.” Id. at 367. Because defendants reasonably expected to receive legal fees from KPMG, the fees “were, in every material sense, their property.” Id. The government’s in-terest in retaining discretion to treat as obstruction a company’s advancement of legal fees “is insufficient to justify the government’s interference with the right of individual criminal defendants to obtain resources lawfully available to them in order to defend themselves.” Id. at 369. Defendants need not make a “particularized showing” of how their defense was impaired, id. at 372, because “[v]irtually everything the defendants do in this case may be influenced by the extent of the resources available to them,” such as selection of counsel and “what the KPMG Defendants can pay their lawyers to do,” id. at 371-72. Therefore, the Sixth Amendment violation “is complete irrespective of the quality of the representa-tion they receive.” Id. at 369.10

10 In Stein IV, Judge Kaplan nevertheless expanded his findings as to Sixth Amendment harms suffered by

particular defendants: defendants Gremminger, Hasting and Watson were deprived of their chosen counsel, “lawyers who had represented them as long as KPMG was paying the bills”; and defendant Ritchie was deprived of the services of Cadwalader Wickersham & Taft, “which was to have played an integral role in his defense.” 495 F.Supp.2d at 421. In addition:

All of the [present] KPMG Defendants ... say that KPMG’s refusal to pay their post-indictment legal fees has caused them to restrict the activities of their counsel, limited or precluded their attorneys’ review of the documents produced by the government in discovery, prevented them from interviewing witnesses, caused them to refrain from retaining expert witnesses, and/or left them without information technology assistance necessary for dealing with the mountains of electronic discovery. The government has not contested these assertions. The Court therefore has no reason to doubt, and hence finds, that all of them have been forced to limit their defenses in the respects claimed for economic reasons and


A

Most of the state action relevant here—the promulgation of the Thompson Memoran-dum, the prosecutors’ communications with KPMG regarding the advancement of fees, KPMG’s adoption of a Fees Policy with caps and conditions, and KPMG’s repeated threats to employees identified by prosecutors as being uncooperative—pre-dated the in-dictments of August and October 2005. (Of course, after the indictments were filed KPMG ceased advancing fees to all thirteen of the present defendants who were still receiving fees up to that point. As explained in Part III, this was also state action.) So we must determine how this pre-indictment conduct may bear on defendants’ Sixth Amendment claim. ***

Although defendants’ Sixth Amendment rights attached only upon indictment, the dis-trict court properly considered pre-indictment state action that affected defendants post-indictment. When the government acts prior to indictment so as to impair the suspect’s relationship with counsel post-indictment, the pre-indictment actions ripen into cogniza-ble Sixth Amendment deprivations upon indictment. As Judge Ellis explained in United States v. Rosen, 487 F.Supp.2d 721 (E.D. Va. 2007), “it is entirely plausible that pernicious effects of the pre-indictment interference continued into the post-indictment period, ef-fectively hobbling defendants’ Sixth Amendment rights to retain counsel of choice with funds to which they had a right.... [I]f, as alleged, the government coerced [the employer] into halting fee advances on defendants’ behalf and the government did so for the purpose of undermining defendants’ relationship with counsel once the indictment issued, the gov-ernment violated defendants’ right to expend their own resources towards counsel once the right attached.” Id. at 734.

Since the government forced KPMG to adopt the constricted Fees Policy—including the provision for terminating fee advancement upon indictment—and then compelled KPMG to enforce it, it was virtually certain that KPMG would terminate defendants’ fees upon indictment. We therefore reject the government’s argument that its actions (virtually all pre-indictment) are immune from scrutiny under the Sixth Amendment.

B

We now consider “what the [Sixth Amendment] right guarantees.” Rothgery, 128 S.Ct. at 2592 (Alito, J., concurring).

The Sixth Amendment ensures that “[i]n all criminal prosecutions, the accused shall en-joy the right ... to have the Assistance of Counsel for his defence.” U.S. Const. amend. VI. Thus “the Sixth Amendment guarantees the defendant the right to be represented by an otherwise qualified attorney whom that defendant can afford to hire, or who is willing to represent the defendant even though he is without funds.” Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, 624-25 (1989). “[A]n element of this right is the right of a defendant who does not require appointed counsel to choose who will represent him.” United States v. Gonzalez-Lopez, 548 U.S. 140, 144 (2006).

that they would not have been so constrained if KPMG paid their expenses subject only to the usual sort of administrative requirements typically imposed by corporate law departments on outside counsel fees.

Id. at 418-19 (footnote omitted). Judge Kaplan explained that even though many defendants had net assets ranging from $1 million to $5 million, their resources were inadequate “to defend this case as they would have defended it absent the government’s actions.” Id. at 423.


The government must “honor” a defendant’s Sixth Amendment right to counsel:

This means more than simply that the State cannot prevent the accused from ob-taining the assistance of counsel. The Sixth Amendment also imposes on the State an affirmative obligation to respect and preserve the accused’s choice to seek this assistance.... [A]t the very least, the prosecutor and police have an affirmative obli-gation not to act in a manner that circumvents and thereby dilutes the protection afforded by the right to counsel.

Maine v. Moulton, 474 U.S. 159, 170-71 (1985). This is intuitive: the right to counsel in an adversarial legal system would mean little if defense counsel could be controlled by the government or vetoed without good reason. ***

The government, relying on Caplin & Drysdale, Chartered v. United States, 491 U.S. 617 (1989), contends that a defendant has no Sixth Amendment right to a defense funded by someone else’s money. In that case, the Supreme Court ruled that a defendant’s Sixth Amendment right to retain counsel of choice was not violated when the funds he ear-marked for defense were seized under a federal forfeiture statute, because title to the for-feitable assets had vested in the United States. Id. at 628.

The government focuses on the following passage from Caplin & Drysdale:

Whatever the full extent of the Sixth Amendment’s protection of one’s right to retain counsel of his choosing, that protection does not go beyond “the individual’s right to spend his own money to obtain the advice and assistance of ... counsel.” Walters v. National Assn. of Radiation Survivors, 473 U.S. 305, 370, 105 S.Ct. 3180, 87 L.Ed.2d 220 (1985) (Stevens, J., dissenting). A defendant has no Sixth Amendment right to spend another person’s money for services rendered by an attorney, even if those funds are the only way that that defendant will be able to retain the attorney of his choice. A robbery suspect, for example, has no Sixth Amendment right to use funds he has stolen from a bank to retain an attorney to defend him if he is apprehended. The money, though in his possession, is not rightfully his ....

Caplin & Drysdale, 491 U.S. at 626 (emphasis added and first omission in original). The holding of Caplin & Drysdale is narrow: the Sixth Amendment does not prevent the gov-ernment from reclaiming its property from a defendant even though the defendant had planned to fund his legal defense with it. It is easy to distinguish the case of an employee who reasonably expects to receive attorneys’ fees as a benefit or perquisite of employment, whether or not the expectation arises from a legal entitlement. As has been found here as a matter of fact, these defendants would have received fees from KPMG but for the gov-ernment’s interference. Although “there is no Sixth Amendment right for a defendant to obtain counsel using tainted funds, [a defendant] still possesses a qualified Sixth Amend-ment right to use wholly legitimate funds to hire the attorney of his choice.” United States v. Farmer, 274 F.3d 800, 804 (4th Cir. 2001) (emphasis added).

It is axiomatic that if defendants had already received fee advances from KPMG, the government could not (absent justification) deliberately interfere with the use of that money to fuel their defenses. And the government concedes that it could not prevent a lawyer from furnishing a defense gratis. Presumably, such a lawyer could pay another law-yer to represent the defendant subject, of course, to ethical rules governing third-party payments to counsel. And if the Sixth Amendment prohibits the government from inter-


fering with such arrangements, then surely it also prohibits the government from interfer-ing with financial donations by others, such as family members and neighbors and em-ployers. In a nutshell, the Sixth Amendment protects against unjustified governmental in-terference with the right to defend oneself using whatever assets one has or might reason-ably and lawfully obtain.

The government points out that KPMG’s past fee practice was voluntary and subject to change, and that defendants therefore could have had no reasonable expectation of the ongoing advancement of fees. But this argument simply quarrels with Judge Kaplan’s find-ing that absent any state action, KPMG would have paid defendants’ legal fees and ex-penses without regard to cost. Defendants were not necessarily entitled to fee advance-ment as a matter of law, but the Sixth Amendment prohibits the government from imped-ing the supply of defense resources (even if voluntary or gratis), absent justification. There-fore, unless the government’s interference was justified, it violated the Sixth Amendment. ***

It is also urged that a company may pretend cooperation while “circling the wagons,” that payment of legal fees can advance such a strategy, and that the government has a legitimate interest in being able to assess cooperation using the payment of fees as one factor. Even if that can be a legitimate justification, it would not be in play here: prosecu-tors testified before the district court that they were never concerned that KPMG was “circling the wagons.” Moreover, it is unclear how the circling of wagons is much different from the legitimate melding of a joint defense.

The government conceded at oral argument that it is in the government’s interest that every defendant receive the best possible representation he or she can obtain. A company that advances legal fees to employees may stymie prosecutors by affording culpable em-ployees with high-quality representation. But if it is in the government’s interest that every defendant receive the best possible representation, it cannot also be in the government’s interest to leave defendants naked to their enemies.

Judge Kaplan found that defendants Gremminger, Hasting, Ritchie and Watson were unable to retain the counsel of their choosing as a result of the termination of fee advance-ments upon indictment. The government does not contest this factual finding, and we will not disturb it. A defendant who is deprived of counsel of choice (without justification) need not show how his or her defense was impacted; such errors are structural and are not subject to harmless-error review. *** Therefore, the government deprived defendants Gremminger, Hasting, Ritchie and Watson of their Sixth Amendment right to counsel of choice.

The remaining defendants—Bickham, DeLap, Eischeid, Lanning, Rosenthal, Smith, Stein, Warley, and Wiesner—do not claim they were deprived of their chosen counsel. Rather, they assert that the government unjustifiably interfered with their relationship with counsel and their ability to defend themselves. In the district court, the government con-ceded that these defendants are also entitled to dismissal of the indictment, assuming the correctness of Stein I. We agree: these defendants can easily demonstrate interference in their relationships with counsel and impairment of their ability to mount a defense based on Judge Kaplan’s non-erroneous findings that the post-indictment termination of fees “caused them to restrict the activities of their counsel,” and thus to limit the scope of their pre-trial investigation and preparation. Defendants were indicted based on a fairly novel


theory of criminal liability; they faced substantial penalties; the relevant facts are scattered throughout over 22 million documents regarding the doings of scores of people; the sub-ject matter is “extremely complex;” technical expertise is needed to figure out and explain what happened; and trial was expected to last between six and eight months. As Judge Kaplan found, these defendants “have been forced to limit their defenses ... for economic reasons and ... they would not have been so constrained if KPMG paid their expenses.” We therefore hold that these defendants were also deprived of their right to counsel under the Sixth Amendment.

For the foregoing reasons, we AFFIRM the judgment of the district court dismissing defendants’ indictment.

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