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English law prevails in the face of an extra-territorial challenge from the US

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In ACL Netherlands BV, Hewlett-Packard The Hague BV and others v Michael Lynch & Sushovan Hussain [2019] EWHC 249 (Ch) the High Court refused to give permission for witness statements and other disclosed material in English proceedings to be provided to the FBI pursuant to a subpoena issued by a US court.

Background

In spring 2015, the Claimants filed a claim in the High Court for fraudulent misrepresentation against the Defendants in order to recover damages following the acquisition of the First Claimant by the Second Claimant (a wholly owned subsidiary of Hewlett Packard Enterprise ("HPE”), a US company).

The Claimants alleged that the Defendants had fraudulently manipulated the First Claimant’s accounting information which resulted in the Second Claimant paying approximately US$5 billion more than it would have, had it known the company’s true value.

By the time the Claimants had brought civil proceedings against the Defendants in the UK, both Defendants had already been the subject of lengthy related criminal investigations in the US which had resulted in an indictment of the First Defendant and a conviction of the Second Defendant.

 

The application

HPE, who was not a party to the English proceedings, was ordered to comply with a subpoena of the Grand Jury of the US District Court for the Northern District of California (the “Subpoena”) seeking documents that it wished to use in an ongoing criminal investigation in the US. The First, Second and Fourth Claimants (the “Applicants”) filed an application at the High Court seeking permission to provide the FBI with copies of the Defendants’ witness statements and disclosed documents (the “Documents”) arguing they were caught by the Subpoena as subsidiaries of HPE and that the ambit of the request would include documents served in the English proceedings. Their position was that failure to comply could result in a finding of contempt of the US court or obstruction of justice, and they faced a real prospect of sanctions against them.

The Documents were subject to the provisions of the Civil Procedure Rules (“CPR”) 31.22 (in respect of disclosure) and 31.12 (in respect of witness statements) which stipulate that a party may only use such evidence for the purpose of the proceedings in which it has been served unless and until: (a) consent has been given, (b) the evidence has been made public, or (c) the court has given its permission. Since the Defendants did not consent to such use, and the Documents were not considered public documents as they had not yet been deployed in the English proceedings, the Applicants needed permission from the court to comply with the Subpoena.

The decision

The court took guidance from the leading case of Crest Homes Plc v Marks [1987] AC 829 which provides that the court will only release or modify the restrictions under the CPR (i) where there are special circumstances that constitute “cogent and persuasive reasons” for permitting collateral use of documents (“limb 1”), and (ii) the release or modification will not cause injustice to the person that has given disclosure (“limb 2”).

The court opined that it will usually be difficult, if not impossible, to obtain permission for collateral use, especially with witness statements, except “where the Court is persuaded of some public interest in favour of, or even apparently mandating, such use which is stronger than the public interest and policy underlying the restrictions that the rules reflect.” The court confirmed that the most common public policy interest relied on is the public’s interest in ongoing investigations and/or the prosecution of serious fraud or criminal offences.

Limb 1: Cogent and persuasive reasons

The main argument that the court considered in relation to limb 1 of the test was whether or not the Applicants were under a compulsion to provide the documents in the US proceedings, and whether such a compulsion, if it existed, would discharge them of the burden of satisfying the court that these represented sufficiently “cogent and persuasive reasons” for permitting collateral use of the Documents.

Mr Justice Hildyard commented that:

  1. In reality, it was the United States Attorney’s Office (“USAO”) that was driving the Subpoena, and it appeared that the USAO did not consider the Documents to be necessary to determine whether or not there should be an indictment, as one had already been issued;
  2. It also appeared that the USAO only wanted the documents to either explore further evidential issues, for which it had already been satisfied of “probable cause”, or for the purposes of a future or further indictment which it had not yet determined was justified.
  3. It did not appear to the court that the USAO had given any regard to the protections afforded to the Documents under the CPR or English law.
  4. The terms of the Subpoena were drawn in “the widest possible terms”, and there was no attempt to tie the request to specific issues or areas of further investigation.
  5. There was no indication when any of the indictments might come to court.
  6. It appeared that only HPE was obliged to comply with the Subpoena, and that HPE did not have legal control of the Documents, as pursuant to the CPR the court’s permission was required for them to be used other than in the English proceedings, so HPE could not be compelled to hand the Documents over to the FBI as they were not in its control.
  7. No evidence as to why the material was needed by the USAO or the Grand Jury had been submitted.

The court, therefore, found that the Applicants failed to demonstrate that they were compelled to provide the Documents, or that there was a need, let alone an immediate need, for the Documents to be provided.

Limb 2: Injustice

The court considered two issues. First, whether any question of injustice in the US can simply be left to the US courts and, second, whether there was any real risk of injustice in the English proceedings.

With regard to injustice in the US, the court confirmed that it might arise if the witness statements were provided, as the USAO would know the identity of witnesses and the evidence they were prepared to give; something that would not be available to it under ordinary US process. The court was less persuaded of prejudice in relation to disclosed documents, but as limb 1 of the test had not been satisfied, it did not affect the court’s overall decision.

In relation to prejudice in the English proceedings, it was identified that witnesses might well withdraw their witness statements, rather than risk having them handed over to the US authorities, and that handing them over in the absence of “pressing necessity” would likely cause interruption and distraction from ordinary case preparation. This was also to be weighed alongside the strict premise that those providing witness statements did so on the basis they would not be released for any other purpose.

The court, therefore, concluded that prejudice and/or injustice might arise both in the US and the English proceedings.

Conclusion

Whilst there may be a tendency to want to react quickly when allegations of wrongdoing and threats of involvement in criminal prosecutions are levelled at a company, this decision should provide comfort to those caught up in such situations. It confirms that attempts by foreign jurisdictions using extra-territorial powers to compel disclosure will not automatically take priority over a party’s protections under English law.

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