The Supreme Court and Extraterritoriality: Yesterday’s decision in Morrison v. National Australia Bank

The “Honest Services” fraud cases are getting all the attention.  But I think the relatively little-noticed decision in Morrison v. National Australia Bank, 08-1191, may be as significant (although I have my doubts, as set forth below, about its potential long-term impact).

 The case involved a claimed securities fraud scheme that mostly occurred in Australia (with some US-based conduct), and presented the question whether section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 thereunder) provides a cause of action for foreign plaintiffs to sue foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.  The Court answered that question with an emphatic “no.” 

Justice Scalia delivered the opinion of the Court, which was joined by the four more conservative Justices.  Justice Scalia loves bright lines, so unsurprisingly, the opinion began with a very muscular restatement of the traditional presumption that legislation enacted by Congress is meant to apply only within the territorial jurisdiction of the United States, unless a contrary intent appears.  He noted that for “many decades,” courts have applied a variety of tests for “divining what Congress would have wanted, complex in formulation and unpredictable in application.”  The Court criticized those tests in strong terms, saying they “disregard[ed] . . . the presumption against extraterritoriality.”  Courts around the country have been applying a bunch of such tests that look to domestic effects and contacts, among other things, and the opinion yesterday may clean out a lot of the doctrinal underbrush.

The Court found nothing in Section 10(b) to defeat the presumption against extraterritoriality, including “a general reference to foreign commerce in the definition of ‘interstate commerce,’” and a “fleeting reference” in the description of the Exchange Act’s purposes to the dissemination and quotation abroad of prices of domestically traded securities.  There is already Supreme Court precedent to similar effect, but nothing I can recall that postdates 1963, and there are certainly some contraindications in other cases.  For good measure, the Court also noted that “[t]he same focus on domestic transactions is evidence in the Securities Act of 1933.”  The Court held that the presence of some domestic activity in this case does not mean petitioners only seek domestic application of the Act; the Exchange Act’s focus is not on the place the deception originated, but on the purchases and sales of securities in the United States.  Applying that analysis here, the Court held that Section 10(b) applies “only [to] transactions in securities listed on domestic exchanges and domestic transactions in other securities.”  

I suspect the opinion will not have as broad effect as its language suggests, because it was for a narrow majority that relied on Justice Kennedy’s vote.  I suspect that in a sympathetic case, Kennedy could see wiggle room to allow US law to be applied to foreign conduct.  Maybe the presumption against extraterritoriality will function like the Lemon Test, as a zombie to be summoned when needed, but commanded to return to the tomb at will.

I would not be surprised if Congress is moved to act sooner or later to respond to stated concerns that the US is becoming a haven for illegal activity (although such conduct could probably be prosecuted or subject to suit under other laws). But that is as it should be; the Supreme Court applies the presumption against extraterritoriality, and Congress can legislate against a (relatively) bright line.

The Court’s opinion has implications for a petition that the Court considered at its private conference yesterday, British American Tobacco Co. v. United States, 09-980, involving whether civil RICO applies extraterritorially to a foreign defendant in DOJ’s long-running suit against the tobacco industry.  (Disclosure: I was among the small army of people who filed an amicus brief in the case.)  The decision whether to accept cert in that case will be announced Monday.  It may be that the Court simply decides to grant, vacate, and remand in light of today’s decision.

Some funny language from the decision after the jump. 

After the zombie crack above, I am probably estopped from saying this, but overwrought metaphors abounded in the Court’s opinions.  Those with weak stomachs should skip the paragraphs below. 

Justice Stevens’s concurrence referred to the Second Circuit as the “Mother Court of securities law” and to Judge Henry J. Friendly (who wrote one of the seminal opinions the Court criticized ) as the “master arborist” tending to “a judicial oak which has grown from little more than a legislative acorn.”  In fairness to JPS, the “oak” metaphor originated with then-Justice Rehnquist in Blue Chip Stamps.  Perhaps because of the metaphor’s lineage, Justice Scalia resisted the temptation to counter with a “spore and fungus” metaphor, and instead responded by saying that the lower courts had not been tending to “the same mighty oak,” but, by their varying interpretations of how to apply doctrine, “are in reality tending each its own botanically distinct tree.” 

Justice Scalia also stated that the presumption against extraterritoriality would be “a craven watchdog indeed if it retreated to its kennel whenever some domestic activity was involved in the case.” 

Scalia wrote that “[w]hile 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 litigators for lawyers representing those allegedly cheated in foreign securities markets.” 

Ugh.  I’m a pretty dull writer, but perhaps it is time for the Chief to impose a fee on metaphor use.  I’ll pay up if they will.