Quaak v. Klynveld Peat Marwick Goerdeler

• Decision Date: 08 March 2004
• Docket Number: No. 03-2704.,03-2704.
• Citation: 361 F.3d 11
• Parties: Hans A. QUAAK et al., Plaintiffs, Appellees, v. KLYNVELD PEAT MARWICK GOERDELER BEDRIJFSREVISOREN, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

361 F.3d 11

Hans A. QUAAK et al., Plaintiffs, Appellees, v. KLYNVELD PEAT MARWICK GOERDELER BEDRIJFSREVISOREN, Defendant, Appellant.

No. 03-2704.

United States Court of Appeals, First Circuit.

Heard February 5, 2004.

Decided March 8, 2004.

COPYRIGHT MATERIAL OMITTED

Ira M. Feinberg, with whom George A. Salter, John A. Redmon, Nicholas W.C. Corson, Hogan & Hartson LLP, Michael J. Stone, and Posternak Blankstein & Lund LLP were on brief, for appellant.

Glen DeValerio, with whom Jeffrey C. Block, Berman DeValerio Pease Tabacco Burt & Pucillo, Steven E. Cauley, Curtis L. Bowman, Cauley Geller Bowman Coates & Rudman, LLP, Lee S. Shalov, James Bonner, Patrick L. Rocco, Shalov Stone & Bonner LLP, Gregory P. Joseph, Gregory P. Joseph Law Offices LLC, Steven Singer, Erik Sandstedt, Bernstein Litowitz Berger & Grossmann LLP, Jack R. Pirozzolo Professional Corporation, Willcox, Pirozzolo & McCarthy, Terrence K. Ankner, Partridge Ankner & Horstmann LLP, Karen C. Dyer, and Boies Schiller & Flexner were on brief, for appellees.

Before SELYA and LIPEZ, Circuit Judges, and DICLERICO,^* District Judge.

SELYA, Circuit Judge.

It is widely thought that "[n]o aspect of the extension of the American legal system beyond the territorial frontier of the United States has given rise to so much friction as the requests for documents in investigation and litigation in the United States." Restatement (Third) of Foreign Relations Law of the United States § 442, reporters' note 1 (1987). As the imperatives of transnational business shrink the size of the globe, the task of devising an effective yet respectful paradigm for easing this friction becomes more and more urgent. The instant appeal brings the titration into full focus.

The genesis of the problem in this case lies with an auditing engagement accepted by Klynveld Peat Marwick Goerdeler Bedrijfsrevisoren (KPMG-B), a Belgian firm that served as the auditor for a publicly-traded company, Lernout & Hauspie Speech Products, N.V. (L & H). L & H's collapse precipitated a flood of actions against KPMG-B and others in the courts of this country, alleging massive securities fraud. KPMG-B refused to produce relevant auditing records and associated work papers, asserting that to do so would violate Belgian law. A magistrate judge rejected this assertion and ordered production. See In re Lernout & Hauspie Sec. Litig., 218 F.R.D. 348 (D.Mass.2003) (L & H III).

In response, KPMG-B repaired to a Belgian court requesting that substantial penalties be imposed on those who might "take any step of a procedural or other nature in order to proceed with the discovery-procedure." The plaintiffs in the pending American litigation (who had obtained the turnover order in the first instance) implored the district court to enjoin KPMG-B from pursuing the Belgian action. The district court obliged. See In re Lernout & Hauspie Sec. Litig., 2003 WL 22964378, at *2 (D.Mass. Dec.12, 2003) (L & H IV).¹ KPMG-B immediately appealed. We issued a partial stay of the antisuit injunction and expedited the appeal. We now affirm the district court's order.

I. BACKGROUND

As said, this appeal arises out of a welter of cases having a common theme: the allegation that KPMG-B and others perpetrated large-scale securities fraud leading to L & H's collapse. Those cases include several class actions. Some of them were commenced in the United States District Court for the District of Massachusetts and others were transferred to that district. See, e.g., Filler v. Lernout, 2002 WL 227079 (D.Del. Feb.8, 2002). The district court has consolidated all the cases. It would serve no useful purpose to dissect the plaintiffs' allegations, and we urge the reader who thirsts for more detailed background knowledge to consult the district court's published opinions. See, e.g., In re Lernout & Hauspie Sec. Litig., 230 F.Supp.2d 152 (D.Mass.2002) (L & H II); In re Lernout & Hauspie Sec. Litig., 214 F.Supp.2d 100 (D.Mass.2002) (L & H I). We rehearse here only those developments needed to frame the issues on appeal.

KPMG-B is a target of an ongoing criminal investigation in Belgium, which arises out of the L & H fiasco. It is also a principal defendant in the aforedescribed securities fraud litigation. KPMG-B has not disputed the district court's in personam jurisdiction. It did seek to secure dismissal of the securities fraud litigation on forum non conveniens grounds, but failed in that effort. See L & H II, 230 F.Supp.2d at 176. At the same time, the district court determined that the consolidated complaint against KPMG-B satisfied the stringent pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b)(2), and Federal Rule of Civil Procedure 9(b). L & H II, 230 F.Supp.2d at 165-66.

Once past these threshold issues, the securities fraud plaintiffs embarked on pretrial discovery. In September of 2002, they served document requests for KPMG-B's work papers. See Fed.R.Civ.P. 34. The plaintiffs did not get very far; KPMG-B refused to comply with the requests, asseverating that Belgian law prohibited it from divulging the information sought. While this game of cat and mouse was taking place, the plaintiffs, acting on KPMG-B's advice, became civil coprosecutors in the ongoing Belgian criminal investigation. Through this participation, they 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.

Tantalized by their glimpse of the work papers, the securities fraud plaintiffs moved to compel their production. A magistrate judge took briefing and heard argument on the applicability of and exceptions to the Belgian secrecy law.² On November 13, 2003, he rejected KPMG-B's arguments and ordered production of the work papers on or before the close of business on December 1, 2003.

On November 27, 2003 — Thanksgiving day — KPMG-B filed an ex parte petition with a court in Brussels, seeking to enjoin the securities fraud plaintiffs from "taking any step" to proceed with the requested discovery. To ensure compliance, they asked the Belgian court to impose a fine of one million Euros for each violation of the proposed injunction.³ The Belgian court refused to act ex parte; instead, it directed that notice be provided to the securities fraud plaintiffs and scheduled a hearing for December 16, 2003. On December 1, KPMG-B gave notice of the institution of the Belgian action to the securities fraud plaintiffs. It also filed an objection to the magistrate judge's decision. That objection is still pending in the district court (there is, among other things, a disagreement as to its timeliness). Finally, KPMG-B moved to stay the turnover order.

Faced with the threat of extravagant fines, the securities fraud plaintiffs sought the district court's protection. On December 9, the magistrate judge issued a report and recommendation urging the entry of an order enjoining KPMG-B from proceeding with its Belgian action. The district judge held a hearing two days later and issued an antisuit injunction, the full text of which is reproduced below:

The Court preliminarily enjoins KPMG-Belgium from proceeding with its writ, orders KPMG-Belgium to withdraw forthwith its writ in the Court of First Instance of Brussels and orders it not to proceed with the hearing scheduled on December 16, 2003. KPMG-Belgium shall file proof of compliance with this order.

L & H IV, 2003 WL 22964378, at *2. Hot on the heels of this order, the magistrate judge denied KPMG-B's motion to stay the turnover order, branding that motion untimely. In re Lernout & Hauspie Sec. Litig., 219 F.R.D. 28, 30-31 (D.Mass.2003) (L & H V). KPMG-B immediately appealed the entry of the antisuit injunction. We granted a limited stay of the injunction, permitting KPMG-B to appear at the December 16 hearing in Brussels for the sole purpose of requesting a continuance. The Belgian court has been fully cooperative, and the foreign action has been continued periodically during the pendency of this expedited appeal. There has been no further action with regard to the turnover order itself.

II. STANDARD OF REVIEW

A grant of a preliminary injunction typically receives deferential review. McGuire v. Reilly, 260 F.3d 36, 42 (1st Cir.2001). The trial court's order will stand unless it "mistook the law, clearly erred in its factual assessments, or otherwise abused its discretion in granting the interim relief." Id. In our view, however, international antisuit injunctions — which involve important considerations of comity — warrant a heightened level of appellate review. Cf. United States v. O'Brien, 895 F.2d 810, 814 (1st Cir.1990) (considering the importance of the interest at stake when ascertaining the appropriate standard of review). Consequently, we deem it appropriate to conduct an independent review of the justification for the issuance of an international antisuit injunction. This is an "intermediate level of scrutiny, more rigorous than the abuse-of-discretion or clear-error standards, but stopping short of plenary or de novo review." United States v. Tortora, 922 F.2d 880, 883 (1st Cir.1990). Given our chosen standard of review, we cede a modest degree of deference to the trier's exercise of discretion, but "we will not hesitate to act upon our independent judgment if it appears that a mistake has been made." El Dia, Inc. v. Hernandez Colon, 963 F.2d 488, 492 (1st Cir.1992).

III. ANALYSIS

Determining the appropriateness of an international antisuit injunction is a highly nuanced exercise. An inquiring court must find a way to accommodate conflicting, mutually inconsistent national policies without unduly interfering with the judicial processes of a foreign sovereign. See Laker Airways Ltd. v. Sabena, Belgian World Airlines, 731 F.2d 909, 916 (D.C.Cir.1984). This task is particularly formidable given the absence of...