Oral argument in the Morrison v. National Australia Bank case, now before the U.S. Supreme Court on a petition for writ of certiorari, is scheduled to take place next week, on Monday March 29, 2010. The case presents questions about the extraterritorial application of the U.S. securities laws, questions of growing importance in light of increasing globalization of financial activity. My prior discussion of the Second Circuit’s ruling in the case can be found here.
While the NAB case represents the first time the U.S. Supreme Court will directly address these issues in the context of the U.S. securities laws, this is far from the first time the Court has been called on to address the extraterritorial application of U.S. law.
For example, the court has previously addressed the extraterritorial application of the U.S. antitrust laws. Most recently in the Court’s 2004 decision in Hoffman-LaRoche Ltd. v. Empagran S.A. (here), the Court held that it was unreasonable to apply U.S. antitrust laws to foreign conduct where the resulting foreign injury was independent of any domestic injury.
However, thought the Empagran case does address questions of extraterritorial application of U.S. laws, it may provide relatively little insight into how the Court might address the issues in the NAB case, since the Court in the Empagran case was interpreting an express statutory provision addressing the extraterritorial application of the U.S. antitrust laws, the Foreign Trade Antitrust Improvement Act of 1982. There is no equivalent statutory provision with respect to the securities laws – at least not yet. A brief overview of the extraterritorial application of the U.S. antitrust laws can be found here.
The question of extraterritorial application of U.S. laws comes up in a variety of contexts. Stetson Law Professor Ellen Podgor points out on her White Collar Crime Prof Law Blog (here) that a February 2010 petition for a writ of certiorari in the British American Tobacco case raises the question of the extraterritorial application of RICO. A copy of the cert petition can be found here.
In addition, according to a March 2010 paper by the Hughes Hubbard law firm (here), the question of extraterritoriality also comes up in the bankruptcy context. Just as there are practical advantages that would lead a foreign investor to pursue securities claim in U.S. courts under U.S. laws, there are reasons why a foreign domiciled debtor might decide to "enjoy the shelter of chapter 11 of the U.S. bankruptcy code," which the foreign debtor apparently can do if it has assets in the U.S. and a U.S. bankruptcy court accepts jurisdiction.
The fact is that in a complex global economy where cross-border business transactions are an integral part of financial activity, questions involving the extraterritorial application of law are inevitable.
Because of these fundamental considerations, the NAB case is both an important case and a closely watched case. The case has attracted fifteen amicus briefs, including briefs filed, among others, on behalf of the governments of Australia and of France. The United Kingdom and Northern Ireland also filed an amicus brief, here. The foreign governments urge that principles of comity and respect for the sovereign rights of nations to govern their internal affairs militate against the exercise of jurisdiction by U.S. court over the claims non-U.S. claimants against non- U.S. companies. All of the Supreme Court briefs in the NAB case can be found here.
Among the briefs is an amicus brief filed by the U.S. Solicitor General. The SG has urged that a transnational securities fraud violates the U.S. securities laws if "significant conduct material to its success" occurs in the United States and if the U.S.-based component of the fraud directly causes the claimant’s injury. (The SG’s brief also argues that the questions before the court are not jurisdictional at all, but rather simply the plaintiffs are entitled to relief under the relevant statutory scheme.)
I am going to go out on a limb here and make a prediction that the test that emerges from the Supreme Court is going to look a lot like that urged by the Solicitor General. That is, it will not be enough for claimant to allege merely that the U.S. conduct to be "a substantial component of the fraud," but rather the U.S. conduct must have directly caused the claimant’s injury. That is, the court will look at some sort of nexus to the injury test.
By way of illustration, in the NAB case itself, the alleged underlying financial fraud took place in Florida but the allegedly misleading disclosures were issued in Australia. Under the test urged by the SG, the misleading disclosures caused the claimant’s injury, not the underlying financial misconduct, and therefore the case should not go forward in U.S. courts.
Hiatus: The D&O Diary will be taking a break from its usual publication schedule for the next few days. Normal publication activities will resume the week of April 5, 2010.
Service Announcement: I just wanted to remind readers that I will be changing the service that I use for email notifications. The change will take place during the week of March 29, 2010.
The critical message here is that current email subscribers who wish to continue to receive email notifications will have to reconfirm their subscription.
If all goes according to plan, on March 29, readers will received an email message from me at The D&O Diary. The email message will require you to resubscribe in order to continue to receive email notifications from The D&O Diary. Please follow the links in the resubscription email in order to continue to receive email notifications.
Because of the break in the publication schedule, the first email notification from the new service will not arrive until the week of April 5.