January 17, 2008
On December 12, 2007, the French Supreme Court upheld the Paris Court of Appeals’ ruling of March 28, 2007, which found a French lawyer criminally liable for violating the 1980 Blocking Statute that prohibits, inter alia, the gathering in France of business-related information to be used in foreign litigation (the "Decision")[1].
Factual Background
The Decision is one aspect of the lengthy Executive Life case.
In 1998, the California Insurance Commissioner launched an investigation against a French consortium for an alleged fraudulent take-over of the U.S. insurance company Executive Life and its assets during the early 1990s. The California Insurance Commissioner considered that the French consortium led by Crédit Lyonnais – a French publicly owned bank – hid the true identity of its controlling interest when it made an application for the Executive Life purchase, allowing it to violate California laws regarding foreign ownership of insurance companies. After a lengthy procedure on both sides of the Atlantic, the case ended with some of the defendants accepting to pay approximately USD 771 million.
During its investigation, the California Insurance Commissioner’s U.S. counsel requested a French local counsel to carry out some investigations on his behalf in France. In particular, the French counsel was required to ask questions from a former employee of MAAF – a major French mutual insurance company and a member of the acquiring consortium. The aim of the questions was to gather evidence proving that the MAAF executive board was aware of the fraud and consciously participated in it. In doing so, the French lawyer tried to gather business-related information with a view to foreign litigation, in violation of the 1980 Blocking Statute.
The 1980 Blocking Statute
Statute N° 80-538 of July 16, 1980 (the "1980 Blocking Statute") was enacted by France in response to perceived abuses in the extraterritorial application of United States laws. Similar blocking statutes were adopted at the time by most Western countries (including the U.K., Australia, Canada, The Netherlands, Norway, etc.). The 1980 Blocking Statute’s objectives are (i) to prohibit most business-related communications, if harmful to France, to foreign public authorities by persons having a presence in France, and (ii) to prohibit the gathering in France of business-related information to be used in foreign litigation.
Article 1 provides that French nationals, French residents and other entities present in France are prohibited from communicating economic, commercial, industrial, financial or technical information to foreign public officials if such communication is harmful to France. It applies "anywhere", including extraterritorially and to all communications, whether in writing, orally, or by any other means. The communications that are prohibited are those capable or likely of harming or prejudicing the sovereignty, security or essential economic interests of France or public order ("ordre public"). Article 1, however, provides that its provisions are subject to treaties and international agreements. The legislative history shows that this provision was added in order to permit ordinary governmental information transfers covered by treaties (such as customs information) and to allow discoveries pursuant to the procedures and requirements of the Hague Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil and Commercial Matters (the "Hague Convention").
Article 1-bis prohibits any person in France from requesting, investigating or communicating the same kind of documents or information to be used in foreign judicial or administrative proceedings. Unlike the prohibition provided for by Article 1, the scope of the prohibition of Article 1-bis is not defined by the nature of the documents (those which transfer would endanger French sovereignty) but by their intended use (as potential evidence in connection with foreign judicial or administrative proceedings, whether pending or prospective). Article 1-bis also states that its provisions are subject to treaties and international agreements, and also that they are subject to "laws and regulations in force". As mentioned earlier with respect to Article 1, one of the purposes of the reference to international agreements is to exclude inquiries pursuant to the Hague Convention from the 1980 Blocking Statute’s prohibitions.
Any violation of the provisions of Article 1 and Article 1-bis is punishable by either imprisonment of six months or a fine of 18,000 Euros; or by both of these criminal sanctions.
The legislative history makes it clear that the 1980 Blocking Statute was intended to block the extraterritorial application of foreign procedural rules on the French territory and to force foreign authorities to comply with the strict requirements and procedures provided by the Hague Convention while gathering information in view of foreign litigation. In that respect, the French Parliament noted critically that although France and the United States are both signatories of the Hague Convention, it has been neglected by many United States’ plaintiffs who have instead obliged French persons with interests in the United States to submit to discovery in France based only on United States’ procedural rules.
Analysis and Impact of the Decision
Article 1 of the 1980 Blocking Statute has never been applied by French courts. Article 1-bis has only been invoked in very rare instances – and always in the context of summary judgments – to justify a refusal to communicate business-related information[2]. The Decision is the first example to date of an enforcement of the criminal sanctions provided for by the 1980 Blocking Statute. The direct and indirect consequences of this decision should therefore be carefully assessed.
First, it should be noted that the person found criminally liable in the Decision is a French qualified attorney acting within the fulfillment of his duties. This does not mean however that a lawyer will be held liable each time information is gathered in France with a view to be used in foreign litigation. The legislative history makes it clear that the 1980 Blocking Statute does not prohibit communications between a French or foreign lawyer and his French client if the communications concern evidence for foreign proceedings.
As stated by the French Ministry of Justice at the time the statute was enacted, "the statute obviously does not have as a purpose […] the limiting or controlling of the relations of international lawyers with their clients"[3]. The 1980 Blocking Statute was not intended to interfere with lawyer-client communications, but only to apply to conversations with witnesses and opponents. In that respect, it should be noted that in the Decision, the French lawyer tried to obtain information not from his client but from the other party’s witness. Moreover, the French lawyer acted with bad faith because he lied to the witness in order to force him to disclose confidential information.
Second, the Decision clearly confirms the exclusivity of the Hague Convention under French law for the gathering of information in France to be used in foreign litigation. This means that if the foreign country where the court proceedings are pending is a party to the Hague Convention, then the strict requirements and procedures of the Hague Convention must be abided by, in order to gather business-related information from French nationals or French residents. In practice, such information can therefore be obtained through (i) letters of request sent by the foreign judicial authorities to the French Ministry of Justice; (ii) depositions conducted by an authorized agent (a diplomatic officer or a consular agent) of the foreign embassy in France; (iii) depositions conducted by a Commissioner properly appointed by the Ministry of Justice (who cannot be an attorney involved in the court proceedings pending abroad)[4]. In that respect, a witness or an opponent can be contacted on a neutral basis in order to verify whether he would accept to be deposed under the Hague Convention procedures by a Commissioner duly appointed.
As a result, the Decision should be interpreted as preventing the formal collection by U.S. courts of any documents, testimony, or other information from French nationals under the Federal rules of procedures, outside the Hague Convention[5].
Third, the Decision brings to light the difficult situation in which French nationals and French residents find themselves due to the conflict between (i) the French law which prohibits the communication of information and (ii) the foreign law that punishes the refusal to communicate.
This issue gave rise to extensive case-law in the U.S. where it is traditionally considered that the existence of a blocking statute does not constitute a "legal excuse" (also referred to as the illegality defense) allowing foreign individuals or companies to refuse providing the requested information. The reasoning of U.S. courts in that respect is two-fold: (i) if a foreign party refuses to execute the request of information — even if such refusal is based on a blocking statute — sanctions (such as contempt of court) can be imposed by U.S. courts; (ii) a "balancing test" should however be applied in order to determine the level of the sanctions to be imposed on the recalcitrant foreign individuals or companies.
The level of the sanction to be imposed should be balanced in view of several conditions, including inter alia: (i) the good faith of the requested party, (ii) the national and international interests at hands, (iii) the existence and severity of the sanctions incurred, (iv) the effectiveness of the sanctions incurred, (v) the relevance of the requested information. The existence of a blocking statute and criminal sanctions might thus constitute mitigating factors in determining the level of the appropriate sanction.
In that respect, U.S. courts have in some instances noted the fact that the 1980 Blocking Statute had never been enforced by French courts and therefore that the risk of criminal sanctions to be imposed in France on French nationals was highly theoretical. The Decision is thus likely to modify this interpretation. French nationals or French residents required to submit information of the kind covered by the 1980 Blocking Statute can now argue before U.S. courts that the theoretical risk has become real and that it should be taken into account while assessing the appropriateness and the level of sanction for refusing to communicate such information outside the Hague Convention procedures.
Finally, the Decision clearly emphasizes the need for increased international cooperation between administrative authorities. Indeed, it should be noted that the procedures of the Hague Convention only apply to judicial proceedings. However, the Hague Convention does not cover requests for information sent by foreign administrative authorities (such as the Securities and Exchange Commission, the Federal Trade Commission or the Public Company Accounting Oversight Board) to French nationals or French residents. Therefore, a strict application of the 1980 Blocking Statute would lead to deadlock situations, where French residents would refuse to submit information pursuant to the 1980 Blocking Statute and would be subject to potential sanctions by these authorities.
One way to avoid such deadlock situations is to foster international cooperation between competent authorities. In that respect, on January 25, 2007, the Securities and Exchange Commission and the College of Euronext Regulators entered into an international agreement concerning consultation, cooperation and the exchange of information relating to market oversight[6]. Similarly, the French accounting authority has recently been granted the power to enter into agreements with its international counterparts — including the U.S. Public Company Accounting Oversight Board — in order to facilitate the exchange of information in a way which is both efficient and respectful of national sovereignty[7]. The European Union and the U.S. antitrust authorities (Federal Trade Commission and DOJ) also have developed strong relationships with respect to the enforcement of their respective rules[8]. These last developments clearly show a shift towards a more pragmatic approach that should foster the implementation of cooperation mechanisms and reduce the risk of blockage situations.
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[2] See TGI Nanterre, 22 December 1993 (n°1993-050136); Cass. 2e Civ., 20 November 2003; TC Paris, 20 July 2005 (n°2005-288978)
[4] It should be borne in mind that depositions must comply with the relevant provisions of the reservations, which France stated when ratifying the Hague Convention. France first stated in 1982 that it would refuse to execute all letters of request (commissions rogatoires) relating to pre-trial discovery of documents. Later in 1987, France modified its position stating that letters of request relating to pre-trial discovery documents would be executed by French courts only if the documents requested are (i) clearly identified and (ii) directly linked to the case matter.
[5] This is contrary to U.S. case-law, the U.S. Supreme Court found in the Aerospatiale case that discovery which should be conducted under the Federal Rules when using the Hague Convention procedures is not more effective (See Aerospatiale v. United States District Court, 482 U.S. 522 (1987)). Under U.S. law, use of the Hague Convention is merely an option for courts to consider for purposes of conducting discovery overseas: "[a]lthough these procedures are not mandatory, the Hague Convention […] is one method of seeking evidence that a court may elect to employ" (Aerospatiale, 482 U.S., at 541). U.S. courts often consider that use of the Hague Convention can "be unduly time consuming and expensive, as well as less certain to produce needed evidence that direct use of the Federal Rules" and that in such cases using the Hague Convention would be "inconsistent with the overriding interest in the ‘just, speedy, and inexpensive determination’ of litigation in our courts" (Id. at 542-543).
[7] It should be noted that a new Article L. 821-5-2 of the French Commercial Code expressly provides that the 1980 Blocking Statute does not apply to the French accounting authority when it concludes international conventions.
[8] See 1991 EU/U.S. Competition Cooperation Agreement – OJ 95, 27.4.1995
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