In a long-awaited ruling, the U.S. Supreme Court on June 24, 2010 issued an opinion affirming dismissal of the Morrison v. National Australia Bank case. Among other things, the Court’s opinion will limit securities claims by investors who bought their shares on foreign exchanges. This ruling could have a dramatic impact on many pending cases as well as on future filings.
NAB is Australia’s largest bank. Its shares trade on securities exchanges in Australia, London, Tokyo and New Zealand. Its American Depositary Receipts trade on the New York Stock Exchange. NAB has a mortgage servicing subsidiary, HomeSide, based in Florida. In 2001, NAB disclosed that it was taking a significant write-down due to a recalculation of the amortized valuating of HomeSide’s mortgage servicing rights. Following this announcement, the price of NAB’s shares and ADRs declined, and investors filed a securities class action lawsuit in the Southern District of New York.
The claim was initially brought by four plaintiffs. One of the four purported to represent domestic purchasers of NAB’s securities. The three other plaintiffs bought their shares abroad and sought to represent a class of non-U.S. purchasers. Background regarding the case can be found here.
On October 25, 2006, the District Court granted defendants’ motion to dismiss the complaint. The District Court held that it lacked subject matter jurisdiction over the foreign claimants claim. The court dismissed the domestic plaintiff’s action for failure to state a claim because the domestic plaintiff failed to allege that he suffered damages. The three foreign plaintiffs appealed. The domestic plaintiff’s claim was not before the Second Circuit, and so the appellate court was exclusively concerned with the jurisdictional issue.
As discussed at greater length here, on October 23, 2008, the Second Circuit ruled (here) that U.S. courts lack subject matter jurisdiction over the claims of foreign claimants in that case who bought their NAB shares on a foreign exchange and affirmed the district court’s dismissal of the case. The Second Circuit found that the U.S. based conduct was not sufficient to support jurisdiction under the Circuit’s long-standing two-part test measuring whether there were sufficient domestic actions or effect to support jurisdiction. The plaintiffs filed a petition for writ of certiorari.
The Supreme Court’s Opinion
In an opinion written by Justice Antonin Scalia, the Court affirmed the Second Circuit’s holding, but overturned decades of jurisprudence on the question of the extraterritorial reach of the U.S. securities laws, holding that the U.S. securities laws do not apply extraterritorially.
The opinion opens with a recitation of the "longstanding principle of American law" that "when a statute gives no clear indication of an extraterritorial application, it has none." The opinion notes that despite this presumption, the Second Circuit over the course of many years developed an extensive body of case law intended to "discern" when Congress would have wanted the statute to apply. The opinion notes that "the Second Circuit never put forward a textual or even extratextual basis for these tests."
The opinion completely rejected this entire body of case law and the two-part test on which the Second Circuit had relied in this case, noting that "the results of this judicial-speculation-made-law – diving what Congress would have wanted if it had thought the situation before the court –demonstrate the wisdom of the presumption against extraterritoriality. Rather than guess anew in each case, we apply the presumption in all cases, preserving a stable background against which Congress can legislate with predictable effects."
The majority opinion rejected the arguments of the claimants and of the Solicitor General (that would be Solicitor General Elena Kagan, the current Court nominee) that the securities laws contained statutory support for extraterritorial application, finding that "there is no clear indication in the Exchange Act that Section 10(b) applies extraterritorially, and we therefore conclude that it does not."
The opinion also specifically rejected the argument that the domestic conduct was sufficient to support jurisdiction, observing that "it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States."
What matters is not where alleged deceptive conduct occurred but where the securities were purchased:
The focus of the Exchange Act is not upon the place where the deception originated but upon purchases and sales of securities in the United States. Section 10(b) does not punish deceptive conduct, but only deceptive conduct "in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered."
Based on this analysis, the Court concluded that "only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which Section 10(b) applies."
The Court also noted another reason for rejecting a standard that would allow jurisdiction for securities cases solely on the basis that the deceptive conduct took place in the U.S. That is, "some fear that [the U.S.] has become the Shangri-La of class-action litigation for lawyer representing those allegedly cheated in foreign securities markets."
Because this case "involves no securities listed on a domestic exchange, and all aspects of the purchases complained of by those petitioners who still have live claims occurred outside the United States" the Petitioners have "failed to state a claim on which relief can be granted" and the Court therefore affirmed the dismissal.
Justice Breyer wrote a separate opinion concurring in part in the opinion and concurring in the judgment, saying in effect it was sufficient for him that the securities involved in this case were not purchased in the U.S.
Justice Stevens wrote a separate concurring opinion, joining in the judgment, by rejecting the majority’s "transaction test." He would not have rejected the Second Circuit’s two-prong test, saying that the Second Circuit has "refined its test over several decades and dozens of cases, with the tacit approval of Congress and the Commission and with the general assent of its sister Circuits."
Justice Sotomayor did not take part in the case.
The Supreme Court’s opinion in the NAB case seems to put an end to the so-called "f-cubed" cases – that is, claims brought in U.S. courts under U.S. securities laws by foreign domiciled claimants who bought their share in foreign companies on foreign exchanges. Indeed, the opinion seems to sound the death knell for any would-be claimants under the U.S. securities laws who bought their shares on foreign exchanges.
The opinion would seem to have very significant implications for the many pending cases in which the claims of claimants who bought shares on foreign exchanges are involved. Among other very high profile cases, the Vivendi case, which involved primarily foreign domiciled claimants and recently resulted in a plaintiff’s verdict, would seem to be subject to substantial reconsideration in light of this opinion. (UPDATE: At least one reader has raised the question whether the Court's holding will or even can be applied retroactively. to damages suffered before and purchases made before. I am not sure general prohibitions on retroactive application apply here, as this decision is about the basic reach of the securities laws, but I thought it was worth noting this question here.)
The Supreme Court’s transactional test would also seem to suggest that we have seen the end of filings in U.S. court against foreign companies, except those whose shares are traded on U.S. securities exchanges. (UPDATE: One reader has noted that the "except" clause in the prior sentence does raise the question about whether there might still be jurisdiction over "f-squared" cases, that is those that involve either foreign domiciled companies and foreign investors who bought their shares on U.S. exchanges, or foreign domiciled companies and U.S. investors who bought their shares on foreign exchanges. The first of these two categories seems to meet the test of the NAB case, the second category is a more interesting question. In any event these kinds of issues will have to be sorted out in lower courts in the wake of the NAB decision.)
My concern with that possibility is that it could lead foreign companies to decide not to list their shares on U.S. exchanges, or to delist their shares, as a way to avoid the burden and expense of U.S.-based litigation exposure.
It is entirely possible that this entire debate will now shift to Congress. Indeed, during the current Congressional term, there were specific proposals to incorporate a version of the two-prong test directly in the securities laws. While these proposals had been languishing, it is possible that the NAB opinion could give these proposals new life.
While Congress might now reconsider these proposals, one portion of the NAB opinion might weigh against these kinds of statutory revisions. The majority opinion specifically refers to the arguments of many foreign countries in amicus briefs that the extraterritorial application of U.S. securities laws would result in "interference with foreign securities regulation." These concerns and the requirements of comity, which are detailed in the majority opinion, could well weigh against the legislative reform.
But in any event, the Supreme Court’s opinion in the NAB case must now be applied in the lower courts. There are dozens of cases pending in the lower courts involving claimants who purchased their shares on foreign exchanges. These claimants will now be scrambling to try to establish some basis for their cases to be preserved notwithstanding the Supreme Court’s ruling in the NAB case. However, it seems probable that the foreign purchasers’ claims are likely to be dismissed. This will have significant implications for Vivendi and many other pending cases.
Andrew Longstreth's June 24, 2010 Am Law Litigation Daily artice about the decision can be found here.
Many thanks to the several loyal readers who send me copies of the Supreme Court's opinion.