News 25 Jan. 2024
Counsel Mohannad A. El Murtadi Suleiman Addresses “Africanization” of International Investment Law
News 11 Oct. 2023
Curtis Team Instrumental in Shareholder Approval of a New Multilateral Treaty to Transform Pan-African Housing Finance Institution Shelter Afrique into a Development Bank
Event 18 Aug. 2023
Partner Borzu Sabahi Speaks at FDI Moot Shenzhen
News 25 Jul. 2023
Partner Eric Gilioli Ranked in Top 10 Influential Energy & Natural Resources Lawyers in Kazakhstan in Business Today
Client Alert 28 Dec. 2023
U.S. to Impose Secondary Sanctions on Non-U.S. Banks For Financing Russia’s Defense Industry
Article 22 Aug. 2023
Fuad Zarbiyev Publishes Article in Journal of International Economic Law
Event 22 Aug. 2023
Partner Dr. Claudia Frutos-Peterson to Speak at Arbitration and ADR Commission of the ICC Mexico
Event 11 Jul. 2023
Partner Elisa Botero Speaks on the Role of the ICC in Investment Disputes
News 15 Aug. 2023
Legal Reader Publishes Article on Dr. Majed Alotaibi’s Arrival as Senior Counsel in Curtis’ Riyadh Office
News 31 Jul. 2023
Curtis Welcomes Senior Saudi Advisor, Dr. Majed Alotaibi, to its Riyadh Office
News 24 Aug. 2023
Curtis Attorneys Quoted in CoinDesk on FTX Founder Sam Bankman-Fried’s Strategy Ahead of His Criminal Trial
News 06 Mar. 2023
Russia Sanctions at the First Anniversary: An Overview of Current Sanctions in the US, UK, and EU and How Global Companies Can Navigate Evolving and Conflicting Sanctions Regimes
Client Alert 24 Jun. 2021
Update on Virtual Notarization (Executive Order 202.7) During the COVID-19 (Coronavirus) Pandemic (Updated: June 24, 2021) — U.S. Insight
Update on Virtual Witnessing (New York Executive Order 202.14) During The COVID-19 (Coronavirus) Pandemic (Updated: June 24, 2021) — U.S. Insight
Client Alert 08 Jul. 2022
Click here to download the full alert with footnotes.
Nearly every non-US company involved in international commerce knows and fears the reach of US courts and the scope of US discovery. There is good reason for that concern. US-style discovery can be expensive, burdensome, time-consuming and intrusive. There is nothing analogous in most countries.
Companies do many things to protect themselves from becoming subject to US jurisdiction. They avoid doing business directly in the US and work through subsidiaries and distributors. They carefully structure their relationships with their US subsidiaries and deal with US subs on arm’s-length terms. But having taken all the right steps to avoid becoming subject to US jurisdiction, has a non-US company done all it can to avoid having to produce documents in a US litigation?
The answer is “No.” Even if a company cannot be made a party to a US suit, its documents and information may still be subject to discovery in US litigation in which its subsidiary is involved.
Under US court rules, parties to a case – plaintiffs and defendants – can be required to produce documents in their “possession, custody or control.” When the US subsidiary of a non-US company is sued, plaintiffs often attempt to obtain parent company documents from the subsidiary on the basis that the parent’s documents are within the sub’s “possession, custody or control.”
If a non-US company entrusts copies of its documents to its US subsidiary – if, for example, the parent’s documents are in file cabinets in the US – the subsidiary can be compelled to produce those documents on the basis that they are in the sub’s possession. The subsidiary cannot resist production by arguing that the documents belong to the parent.
Digitally stored information is usually held to be in a sub’s possession as long as the sub can access it. A parent’s electronically stored data that is directly accessible to its US sub, such as emails or documents stored in a shared system, may be subject to production even if it is accessed on a server in Japan.
A subsidiary is generally understood to have control over documents or information possessed by its parent if the subsidiary has the legal right to obtain the documents on demand. Many US courts also find that a sub has control of parent documents if the sub has the “practical ability” to obtain the documents in the ordinary course of business, even if it has no legal right to them.
The ability to obtain something upon request might seem to suggest a lack of control. Nonetheless, many US courts, sometimes with little reflection, interpret evidence that a sub obtained documents on request in the past or would likely have obtained them if it requested them as evidence of “control” for purposes of ordering the sub to produce parent documents. That the parent might refuse to produce the documents when asked to provide them for purposes of the litigation is not evidence that the sub does not control them, and does not relieve the sub of its obligation to produce them.
A sub’s control over parent documents is generally shown through two types of evidence. The plaintiff may try to show (i) that the parent has provided similar kinds of documents in the past; or (ii) that the corporate relationship between parent and sub is sufficiently close that documents available to one are available to the other.
In a typical case, a plaintiff had been injured in a jet ski accident. The plaintiff sued the US sub of the Japanese manufacturer; the parent was not subject to US jurisdiction. The plaintiff asked in discovery for information about the jet ski’s compliance with safety standards. A sub executive testified that he sometimes requested and received information about testing and product specifications from the Japanese parent. The court concluded that the requested information fell within a general type of information that the subsidiary could obtain on request and ordered the subsidiary to produce it.
A non-US company can open the door to broad discovery of its documents by providing documents to its sub to assist the sub in defending itself. The US subsidiary of a Korean manufacturer was sued for damage caused by a washing machine. In response to a document request, the subsidiary produced a diagram of the washing machine’s circuit board. The sub had obtained the document from the Korean parent in the course of preparing to defend the case. The plaintiff moved to compel production of all similar and related parent documents. The sub protested that it did not control these documents. The court held that by obtaining the single circuit board diagram, the subsidiary “has demonstrated its ability to obtain the requested information and documents” and hence was in “control” of them.
Courts often assume that a parent company has control of documents in its sub’s possession in virtue of the corporate relationship between them. There is no reason to think that the opposite presumption should apply: subs seldom control their parents.
But courts do sometimes conclude that a parent is so pervasively involved in the activities of its sub and so dominates the sub’s affairs that there is no real distinction between them. In that situation, the court may find that the sub can obtain information from its parent. This concept is similar to the principle that when a parent mingles its business with its subsidiary’s without regard for the corporate form, the two become “alter-egos” and can be responsible for each other’s liabilities. In many US courts, a parent’s control over a subsidiary’s day-to-day activities need not rise to the level required to establish alter-ego liability to show that the parent’s documents are in the subsidiary’s control. Some courts find that a sub controls its parent’s documents based on features that are characteristic of most parent-subsidiary relationships. In many cases, analysis of corporate relationships is combined with consideration of past document-sharing practices to establish the sub’s control of parent documents.
A patent infringement case demonstrates how courts can take into consideration both corporate structure and direct evidence of the subsidiary’s ability to obtain documents from the parent in finding control. The plaintiff asked the court to compel a US subsidiary to produce the documents of its German parent, which had designed and manufactured the allegedly infringing items. The subsidiary’s directors were all officers of the parent; the CEO of the subsidiary was the head of an operating division at the parent, which paid his salary; and the head of the parent’s finance department oversaw the subsidiary’s finances. The parent appeared to control the litigation itself: it assigned patents to the sub after the suit commenced and then filed counterclaims based on them without the knowledge of the sub’s board. The parent had already provided several documents to the sub that the sub produced in the litigation. The court held that the relationship between the companies and their history of sharing documents demonstrated sufficient control to require the sub to produce its parent’s documents.
A subsidiary of a non-US company can be required to produce documents from its parent and to respond to interrogatories – written questions – concerning its parent. The type of documents that a sub can be ordered to provide, in US state or federal court, includes electronically stored information, letters, contracts, emails and cell phone records. Data that is maintained in databases or only preserved in back-up tapes may also have to be produced. The Federal Rules require parties to produce:
any designated documents or electronically stored information – including writings, drawings, graphs, charts, photographs, sound recordings, images, and other data or data compilations – stored in any medium from which information can be obtained either directly or, if necessary, after translation by the responding party into a reasonably usable form.
A subsidiary generally cannot be ordered to provide an employee of the parent company to testify at a deposition, unless the individual is also an employee of the sub. Depositions can sometimes be used to obtain parent company information in one situation. A corporate party can be deposed through a corporate representative, who is required to testify about information known or reasonably available to the corporation. When a subsidiary is found to have control over parent company information, the sub’s corporate representative may be required to testify about information held by its foreign parent company that is subject to the sub’s control. One court stated: “if a corporate [party] controls information possessed by a nonparty foreign affiliate, the knowledge is subject to the . . . deposition notice . . . [and the] corporate designee may be compelled to testify about information possessed by a foreign corporate affiliate.”
The most important step a non-US parent company and its US subsidiary can take to limit the risk that the subsidiary will be required to produce parent company information is to implement document control policies limiting document and information sharing between the companies. Policies should be adopted by the parent and made known to the sub as appropriate.
An effective document control policy must be tailored to the particular circumstances of each company; there is no “one size fits all” solution. A document control policy should protect above all the parent’s most sensitive documents and information, whatever that may be. But document control policies must also be practical. They must address the reality of day to day workplace interaction. A document control policy that looks “perfect” on paper but is unworkable in practice is useless. An effective document control policy requires careful thought and design; guidance from counsel experienced with discovery battles in US litigation seeking non-US parent company documents can be helpful in creating a practical and effective policy. It also must be remembered that applicable legal standards are not consistent across US jurisdictions: procedures that are appropriate in one jurisdiction may be inadequate in another.
The following considerations are often relevant to the design of an effective document control policy:
Avoiding a finding that the sub and parent are alter egos, or that their businesses are so comingled that asking for documents from the sub is no different from asking the parent, raises broader issues than merely limiting discovery risk. An alter-ego finding can subject the parent company to US jurisdiction and even lead to parent company liability for a subsidiary’s actions. Steps taken to limit the risk of jurisdictional and liability exposure will decrease discovery exposure as well.
When a sub is sued and plaintiffs start requesting parent documents, a well-executed document control policy shows its value. The sub should be able to demonstrate that the parent has placed systematic limitations on the sub’s access to parent documents. If limited discovery from the parent occurs – discovery to show that there is no basis for discovery – the parent will be prepared to produce a written document control policy limiting the sub’s access to documents and evidence that the policy was known, acknowledged and followed by employees.
Parent companies also need to proceed with caution when a sub is sued. Among other risks, being forthcoming in providing documents to the sub to assist in its defense could lead to court orders that the sub must provide all similar documents from the parent. When significant litigation arises involving a US sub, risk can be reduced by relying on counsel experienced in US litigation and involving them in communications with the sub concerning the litigation.
Attorney advertising. The material contained in this Client Alert is only a general review of the subjects covered and does not constitute legal advice. No legal or business decision should be based on its contents.
Commercial Disputes - Litigation
International and Transnational Litigation
+1 212 696 6000
Client Alert 28 Feb. 2024
EU Adopts 13th Package of Sanctions Against Russia
Client Alert 26 Feb. 2024
OFAC Marks Second Anniversary of Russo-Ukrainian War with Record Number of Designations
Client Alert 22 Feb. 2024
Curtis Seeks U.S. Court Order to Direct OFAC to Make a Decision on SDN Delisting Application