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When a Belgian company turned to its own country’s courts to thwart a U.S. judge’s discovery order, it presented the 1st U.S. Circuit Court of Appeals with a ticklish problem: How to vindicate the powers of U.S. courts without unduly stepping on the toes of its foreign counterparts and perhaps upsetting the foreign policy objectives of the U.S. executive and legislative branches. The problem was made more daunting by the fact that the Supreme Court has given little guidance on the issue. In its decision, Quaak v. Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren, No. 03-2704, handed down on March 8, the 1st Circuit looked to its sister circuits for guidance. It rejected what it termed the “liberal approach” of the 5th and 9th circuits, which tends to favor U.S. judicial power, and adopted instead a modified version of the “conservative approach” of the 2d, 3d, 6th and D.C. circuits, which it deemed more respective of international comity. The Belgian accounting firm, Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren (KPMG-B), became the target of securities fraud lawsuits in the United States following the financial collapse of one of its clients, the speech-recognition technology company Lernout & Hauspie Speech Products, whose stock traded on Nasdaq. KPMG-B balked when the disgruntled investors served subpoenas demanding records of its work for Lernout. The firm asserted that a Belgian financial secrecy law stood in the way. But KPMG-B was not entirely obstructionist. The 1st Circuit noted that KPMG-B itself advised those suing it to become civil co-prosecutors in a criminal investigation of the company being conducted by Belgian authorities. In the words of 1st Circuit Judge Bruce M. Selya, who wrote the opinion for the three-member panel, “Through this participation, [the plaintiffs] were able to examine all the documents that were not deemed confidential by the Belgian prosecutor, but they were not permitted to copy documents for use in the securities fraud litigation.” When U.S. District Judge Patti B. Saris of Massachusetts ordered KPMG-B to comply with subpoenas, the firm asked a Belgian court to enjoin the U.S. plaintiffs from pressing their discovery demands, at a penalty of 1 million euros per violation. Before the Belgian court could act on that request, Saris ordered KPMG-B to put a halt to the Belgian proceedings. The 1st Circuit modified the order to allow KPMG-B to seek a continuance of the Belgian proceedings pending an expedited appeal. “The Belgian court has been fully cooperative,” Selya wrote. The liberal approach, according to Selya, holds that “an international antisuit injunction is appropriate whenever there is a duplication of parties and issues and the [U.S.] court determines that the prosecution of simultaneous proceedings would frustrate the speedy and efficient determination of the case.” Selya wrote that the liberal approach gave too little weight to the U.S. interest in comity among nations and also put the federal courts at risk of violating separation-of-powers principles that give the other branches primary authority over international affairs. The 1st Circuit’s preferred approach contains the same threshold condition as the liberal approach: No injunction will issue unless the U.S. and foreign proceedings have the same parties and issues. When that condition is met, however, the party seeking an injunction must still overcome “a rebuttable presumption against the issuance of an order that has the effect of halting foreign judicial proceedings,” Selya said. Unlike other conservative-approach circuits that insist that only a direct threat to the jurisdiction of a U.S. court or the protection of important national policies justify an injunction, the 1st Circuit rule gives freer reign to consider other factors, as long as comity is put in the balance as well. The 1st Circuit upheld Saris’ order, pointing among other factors to KPMG-B’s “in terrorem tactics” of seeking a 1 million euro battering ram. Young’s e-mail address is [email protected].

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