Thursday, June 24, 2010
Justice Scalia had no difficulty, in Morrison v. National Australia Bank LLC, in deciding that Section 10(b) of the Exchange Act did not provide a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges. To sum up his 24-page opinion, we need only recite the first sentence of the section that begins the substantive analysis (Part III.A): It is a "longstanding principle of American law 'that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.'" "When a statute gives no clear indication of an extraterritorial application, it has none."
Much of the opinion is devoted to explaining, without any tact, how many ways the Second Circuit was wrong in its approach to the issue (although it reached the right result). First, as a threshold error, the lower courts analyzed the issue of extraterritoriality, consistent with Second Circuit precedent established by Judge Friendly, as a question of subject-matter jurisdiction dismissable under Rule 12(b)(1). To the contrary, Judge Scalia says, it is a merits question dismissable under Rule 12(b)(6). However, since nothing in the analysis of the courts below turns on this distinction, it was unnecessary to remand.
Next, the fun really begins for Justice Scalia, who after announcing the presumption against extraterritoriality, describes the history of the Second Circuit in disregarding the presumption and producing a body of caselaw that purported to divine Congressional intent, a collection of tests ... complex in formulation and unpredictable in application." The flaw of the Second Circuit's effects and conduct tests, besides lack of textual support, was the difficulty in applying them because of their "vague formulations" and opportunities for "judicial-speculation-made-law" in divining what Congress would have wanted if it had thought of the situation before the court. Now the presumption against extraterritoriality is operative analytical tool, and Justice Scalia quickly reviews the Exchange Act sections and finds no "affirmative indication" that section 10(b) applies extraterritorially.
Justice Scalia moves to the next step of the analysis, which is to determine the relevant activity for determining the location of the violation. According to Scalia, "the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case." Accordingly, the focus of the Exchang Act, he pronounces, is not upon the place where the deception originated, but upon purchases and sales of securities in the United States. End of discussion.
Notwithstanding Scalia's assertions that he is picking up the statute and reading it (nothing more), he does assert two policy reasons for the holding. First, there is the probability of incompatibility with applicable laws of foreign countries, for which he cites the many amicus briefs filed by foreign governments and business groups complaining about interference with foreign securities regulation. Second, (and of course Scalia couldn't resist an opportunity to trash securities fraud class actions and the plaintiffs' bar), one should also be "repulsed" by the adverse consequences of a broader test:
"While there is no reason to believe that the United States has become the Barbary Coast for those perpetrating frauds on foreign securities markets, some fear that it has become the Shangri-La of class action litigation for lawyers representing those allegedly cheated in foreign securities markets."
Justice Breyer filed a one-paragraph concurring opinion. Justice Stevens (with Ginsberg joining) has a longer concurring opinion that essentially adheres to the effects and conduct tests applied by the Second Circuit. Stevens notes that the majority's approach transforms the presumption against extraterritoriality from a "flexible rule of thumb" into "something more like a clear statement rule." Second, Stevens challenges the suggestion that the presumption against extraterritoriality is fatal to the Second Circuit's test; the real question is how much, and what kinds of, domestic contacts are sufficient to trigger application of section 10(b). Answering this question is more complicated and nuanced than the majority's heavy-handed approach. While Stevens finds that this case has "Australia written all over it" and thus agrees with the result, he respectfully dissents, once again, "from the Court's continuing campaign to render the private cause of action under section 10(b) toothless."
Finally, it should be noted that, since this is purely a question of statutory meaning, Congress can overrule this opinion at any time. Indeed, a provision in the financial reform legislation would give the SEC (but not private plaintiffs) some extraterritorial power.