Daniel J. Tyukody
Robert A. Horowitz

Ever since the U.S. Supreme Court’s March 2010 decision in Morrison v. National Australia Bank courts have struggled with application of the Morrison Court’s standard to securities lawsuits involving transactions in American Depository Receipts. As I noted in a prior blog post, one of the latest court rulings involving the application of Morrison to ADR transactions was the denial of the motion for class certification in the Toshiba case. In the following guest post, Daniel J. Tyukody and Robert A. Horowitz take a closer look that the class certification motion denial in Toshiba and consider the implications of the ruling.  Tyukody and Horowitz are Co-Chairs of Greenberg Traurig, LLP’s Securities Litigation Practice. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Here is the authors’ article.




A recent decision denying class certification in Stoyas v. Toshiba Corp., 2022 U.S. Dist. LEXIS 3996 (C.D. Cal. Jan. 7, 2022), based upon the Ninth Circuit’s interpretation of  the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), invites renewed focus upon the central meaning of Morrison, particularly when it comes to unsponsored American Depository Receipts (“ADRs”).[1]  Toshiba has had an interesting history, with the district court first dismissing the case pursuant to Morrison, only to have the Ninth Circuit reverse and remand after it adopted the “irrevocable liability” test for determining what constitutes a “domestic transaction” for purposes of applying Section 10(b). Stoyas v. Toshiba Corp., 896 F.3d 933, 949 (9th Cir. 2018).


After remand, an amended complaint survived a subsequent motion to dismiss.[2]  However, at the class certification stage where the facts alleged in a complaint can be examined, the district court determined that for the non-sponsored ADRs purchased in the United States (i.e., the vast majority of the alleged class) irrevocable liability occurred in Japan.  The court determined that even though the named plaintiff placed its order and paid for the ADRs in the United States, it became irrevocably liable to pay for the ADRs when the Toshiba shares for conversion to ADRs were purchased in Japan.  Because the ADR purchase was a foreign transaction, plaintiffs could not satisfy the typicality requirement.  The court therefore denied class certification.[3]


On January 21, 2022, plaintiffs filed a petition for permission to appeal the class certification order pursuant to FRCP 23(f), claiming that the district court adopted a standard for determining irrevocable liability that was inconsistent with the Ninth Circuit’s prior decision in Toshiba (and with Morrison), and that it discounted or ignored important evidence.  Toshiba responded on January 31, 2022, arguing largely that the district court’s decision was primarily based upon findings of  fact, and not conclusions of law, and that under Ninth Circuit precedent interlocutory appeal  would be inappropriate in that circumstance.


I. Background

The plaintiffs in Morrison were Australians who owned stock in an Australian bank and alleged fraud by the bank’s U.S. subsidiary.  The Australian bank was a public company, whose shares did not trade on a U.S. exchange.  The Court, in an opinion written by Justice Scalia, held that this set of facts did not state a claim because it concluded that Section 10(b) did not apply extraterritorially, based upon the lack of any “clear indication” in the statute that it was intended to so apply.  Morrison, 561 U.S. at 255, 265.   Morrison established a seemingly simple test, holding that Section 10(b) applies only to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.”  Id. at 267.  Prior to Morrison, the Second Circuit’s “conduct-and-effects” test was used to determine Section 10(b)’s extraterritorial reach, and the Court in Morrison agreed with criticism that the Second Circuit test was too “unpredictable and inconsistent” (id. at 260), and created its new test intended to produce more predictable results.


Regrettably, the predictability that Morrison sought with its new test has not been achieved, as evidenced by the current split among the First, Second, and Ninth Circuits regarding the second prong of the Morrison test––“domestic transactions in other securities”––namely whether the presence of a “domestic transaction” is itself sufficient to trigger application of Section 10(b), or whether other considerations are fairly at issue.  The First and Ninth Circuits adopt a bright-line standard, where if “irrevocable liability” occurred in the United States, the transaction is “domestic” within the meaning of Morrison and Section 10(b) applies to the claim without further inquiry.  In the Second Circuit, however, Section 10(b) applies only if the transaction is both domestic and not “predominantly foreign.”


II. Divergent Case Law After Morrison

The first major case following Morrison was the Second Circuit’s decision in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), which adopted the “irrevocable liability” standard.  Absolute Activist involved nine Cayman Island hedge funds suing foreign promoters of U.S. penny stock companies, whose shares were traded only over-the-counter (and thus not on an “exchange”).  In sending the case back to the district court for further factual determinations, the Second Circuit held that a transaction is “domestic” under Morrison if “irrevocable liability is incurred or title passes within the United States.”  Absolute Activist, 677 F.3d. at 67.  The Second Circuit’s irrevocable liability test was subsequently adopted by the Ninth Circuit in Toshiba, and by the First Circuit in SEC v. Morrone, 997 F.3d 52 (1st Cir. 2021).


The Second Circuit next considered the reach of Section 10(b) in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198 (2d Cir. 2014), where the plaintiffs were a group of international hedge funds that engaged in securities-based swap agreements in the United States (i.e., derivative securities), based upon the share price of Volkswagen AG, a German public company whose shares were not traded on a U.S. exchange.  The funds sued Porsche Automobile Holding SE (“Porsche”) and its senior executive officers based on their allegedly false statements concerning Porsche’s interest in acquiring a controlling interest in Volkswagen.  In considering whether the claim was actionable under Section 10(b), the court in Parkcentral focused on Morrison’s policy concerns, concluding that “while a domestic transaction or listing is necessary to state a claim under § 10(b), a finding that these transactions were domestic would not suffice to compel the conclusion that the plaintiffs’ invocation of § 10(b) was appropriately domestic.”  763 F.3d at 216 (emphasis in the original).  The court found that although the transactions were domestic, the claims were so “predominantly foreign” as to not be actionable under Section 10(b).  Id.  The court observed that “[w]ere this suit allowed to proceed … it would permit the plaintiffs, by virtue of an agreement independent from the reference securities, to hale the European participants in the market for German stocks into U.S. courts and subject them to U.S. securities laws,” and considered the allegations to be “so predominantly German as to compel the conclusion that the complaints fail to invoke § 10(b) in a manner consistent with the presumption against extraterritoriality.”  Id.


The “predominately foreign” test adopted in Parkcentral was rejected by the Ninth Circuit in Toshiba, which characterized it as “an open-ended, under-defined multi-factor test … akin to the vague and unpredictable tests that Morrison criticized and endeavored to replace with a ‘clear,’ administrable rule.”  Toshiba, 896 F.3d at 950.


The Second Circuit recently revisited this issue in Cavello Bay Reinsurance Ltd. v. Stein, 986 F.3d 161 (2d Cir. 2021) where in a private offering, a Bermudan corporation bought shares in a Bermudan holding company that invested in U.S. insurance services.  The holding company operated out of New York, where the allegedly false statements were made.  The court declined to rule where irrevocable liability occurred, because it would be “impossible to do [so] without making state law” and based its decision “solely on the ground that Cavello Bay’s claims are so predominately foreign under Parkcentral.”  Id at 165.


More recently, the First Circuit in Morrone adopted Absolute Activist’s “irrevocable liability” standard. Morrone involved subscription agreements sold to European investors from the company’s office in Boston.  The court concluded that the company became irrevocably liable to deliver the shares in Boston, and that was the end of the inquiry.  Morrone, 997 F.3d at 60 (“The existence of a domestic transaction suffices to apply the federal securities laws under Morrison.  No further inquiry is required.”).


III. Subjective vs. Objective “Bright-Line” Interpretations of Morrison

The key question is which approach is more consistent with Morrison—the more subjective, policy-driven approach taken in Parkcentral focused on potential conflicts with foreign laws, or the one taken in Toshiba, which adopts a bright-line standard where the presence of a domestic transaction is itself enough.


These diverging views arise out of Morrison itself which is based upon two primary grounds: (i) a literalist interpretation of the Exchange Act, namely because “there is no affirmative indication in the Exchange Act that § 10(b) applies extraterritorially … we therefore conclude that it does not,” 561 U.S. at 265; and (ii) a policy-based argument supposedly supporting the former point, i.e., because “[t]he probability of incompatibility with the applicable laws of other countries is so obvious that if Congress intended such foreign application ‘it would have addressed the subject of conflicts with foreign laws and procedures.’”  Id. at 269 (quoting EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 256 (1991)).  While Morrison treats these two grounds as self-reinforcing, they actually can often be in tension, which manifests itself  in the debate as to whether Morrison establishes an objective “bright line” test.  In Parkcentral, the court said it did not believe that “anything in Morrison … requires us to adopt a ‘bright-line’ test of extraterritoriality when deciding every § 10(b) case. 763 F.3d at 217.  The concurring opinion agreed, saying that while “[t]here is language in … Morrison … which might be read as commanding that only bright-line, single-factor rules may be employed to determine when an invocation of § 10(b) would be impermissibly extraterritorial,” that would be a misreading and “it would be a mistake, and a harmful one, to so construe Morrison.”  Id. at 218.[4]


Toshiba, on the other hand, characterized Morrison as having drawn “a line delineating categories of transactions Congress sought to regulate and parties whom Congress sought to protect.”  896 F.3d at 944. While the approach taken in Toshiba certainly has simplicity on its side, Parkcentral has the better view, as considerations as to whether Section 10(b) was truly intended to reach a given transaction are more consistent with Morrison’s central holding and intent. As stated in Parkcentral:


[A] rule making the statute applicable whenever the plaintiff’s suit is predicated on a domestic transaction, regardless of the foreignness of the facts … would seriously undermine Morrison’s insistence that § 10(b) has no extraterritorial application.  It would require courts to apply the statute to wholly foreign activity clearly subject to regulation by foreign authorities solely because a plaintiff in the United States made a domestic transaction, even if the foreign defendants were completely unaware of it.  Such a rule would inevitably place § 10(b) in conflict with the regulatory laws of other nations.


763 F.3d at 215.


The opinion of the Court in Morrison never speaks in terms of “lines” or “bright-lines,” (although Justice Stevens’ concurrence does characterize the Court as having adopted a bright-line rule. Morrison, 561 U.S. at 285).  His concurrence also criticized Morrison’s new test as not being sufficiently protective of investors, saying that in a situation where a stock traded only on a foreign exchange, but the fraudulent scheme was hatched in New York, it would not protect investors even where “executives go knocking on doors in Manhattan and convince an unsophisticated retiree on the basis of material misrepresentations to invest her life savings.”  Id. at 285.  Obviously, that describes a domestic transaction where irrevocable liability occurred in the United States.  While one might discount this as merely a statement in a concurrence, it is worth noting that the majority opinion in Morrison addressed many other issues raised in the concurrence, but not this one.  See id. at 265, 266 n.8, & 267 n.9.  Thus, one cannot say that Morrison adopted a bright line standard focusing solely on the nature of the transaction without regard to the foreign elements of the claim for determining the appropriate reach of Section 10(b).  The policy issues discussed in Morrison regarding the extraterritorial application of U.S. law should be able to override a determination of irrevocable liability in appropriate cases. One can well imagine how Justice Scalia, who took a dim view of both implied rights of action like Section 10(b), and the extraterritorial application of U.S. law, would have ruled in cases like Parkcentral and Toshiba.


It will be interesting to follow the progress of Toshiba in the Ninth Circuit, starting with whether the Ninth Circuit allows the interlocutory appeal, and if plaintiffs clear that hurdle, whether the Ninth Circuit will defer to the district court’s in-depth factual analysis as to where irrevocable liability was incurred.  Meanwhile, given the current circuit split, it is fair to say that the certainty and predictability the Supreme Court sought to achieve with its new test in Morrison has not been achieved, and this issue is ripe for further Supreme Court review.



About the Authors

Daniel J. Tyukody and Robert A. Horowitz are Co-Chairs of Greenberg Traurig, LLP’s Securities Litigation Practice, which focuses on the defense of underwriters, issuers, directors, and officers in securities class actions, shareholder derivative actions, M&A litigation, regulatory investigations, and enforcement actions. 



[1] Unsponsored ADRs are implemented by a depositary bank without the cooperation of the issuing foreign company.  See SEC, Office of Investor Educ. and Advocacy, “Investor Bulletin: American Depositary Receipts” at 1-2, available at https://www.sec.gov/investor/alerts/adr-bulletin.pdf.

[2] Stoyas v. Toshiba Corp., 424 F. Supp. 3d 821 (C.D. Cal. 2020).

[3] The court denied class certification with prejudice as to claims raised under the U.S. Exchange Act, but without prejudice as to the claims raised under JFIEA, the Japanese securities statute, which it held were more appropriately addressed in a summary judgment motion.  Toshiba, 2022 U.S. Dist. LEXIS 3996. at *18.

[4] Oddly, the court in Cavello Bay characterized Morrison as “opt[ing] for a bright-line rule that limits § 10(b)’s reach” without acknowledging Parkcentral’s prior position that the opposite was true.  986 F.3d at 166.