The US Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), resolved one major issue: Whether the Securities Exchange Act applies to non-US securities or to transactions outside of the US. The Court said no, but left open how to determine whether applying US securities laws to claims based on a domestic transaction is ever impermissibly extraterritorial. Since Morrison, district courts and courts of appeals have attempted to answer this question and have come to conflicting conclusions. In fact, the Ninth Circuit openly disagreed with the Second Circuit’s interpretation, creating a circuit split that the Supreme Court may need to resolve once and for all.
Some background on the circuit split will help illuminate where the Supreme Court may ultimately end up. The Second Circuit first expressed its post-Morrison position in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198 (2014). There, the U.S.-based plaintiffs had argued that German-based defendants were liable for the effect the defendants’ allegedly fraudulent actions in Europe had on the plaintiffs’ domestic securities. The parties agreed that the U.S. securities laws apply only to “domestic transactions”—i.e., ones through which the parties “incur irrevocable liability to carry out the transaction within the United States” or where title is “passed within the United States.” But they disputed whether the securities laws applied to the plaintiffs’ specific transactions, which the court characterized as “essentially transactions in foreign exchanges.”
The Second Circuit held that whether the U.S. securities laws apply to transactions could not hinge solely on whether the claims were based on a “domestic transaction.” Instead, the Second Circuit explained that some claims are so foreign in nature that applying the U.S. securities laws would violate the presumption against extraterritorial application of the law, even if the application was based on a so-called “domestic transaction.” In other words, while a domestic transaction is necessary, it is not sufficient to trigger application of the U.S. securities laws. The Second Circuit has since reaffirmed Parkcentral’s reasoning, in Prime International Trading, Ltd. v. BP P.L.C., 937 F.3d 94 (2d Cir. 2019), and district courts have dutifully applied it as well. See, e.g., In re London Silver Fixing, Ltd., Antitrust Litig., 332 F. Supp. 3d 885, 918 (S.D.N.Y. 2018) (applying Parkcentral and Morrison to claims under the Commodities Exchange Act); In re N. Sea Brent Crude Oil Futures Litig., 256 F. Supp. 3d 298, 310 (S.D.N.Y. 2017). But see In re Picard, Tr. for Liquidation of Bernard L. Madoff Inv. Sec. LLC, 917 F.3d 85 (2d Cir. 2019) (allowing bankruptcy trustee to claw back overseas transfers); In re del Valle Ruiz, 939 F.3d 520 (2d Cir. 2019) (allowing litigant to obtain overseas documents for foreign litigation proceedings).
But the Ninth Circuit came to a very different conclusion when confronted with a similar set of facts. In Stoyas v. Toshiba Corp., 896 F.3d 933 (9th Cir. 2018), U.S.-based plaintiffs purchased American depository receipts (ADRs), based on Toshiba’s value, from U.S.-based financial institutions. The plaintiffs sued Toshiba after it disclosed fraudulent accounting practices by its foreign entities, which caused the plaintiffs’ domestic ADRs to lose substantial value. The plaintiffs argued that Toshiba, a completely foreign entity, unlawfully damaged the plaintiffs’ domestically purchased securities. Citing Parkcentral, the defendants in Toshiba argued that applying the U.S. securities law to the plaintiffs’ specific transactions would be an impermissible extraterritorial application of the law.
The lower court accepted that argument and dismissed the case on extraterritoriality grounds. But the Ninth Circuit reversed. The appellate court concluded that the U.S. securities laws could apply to claims based on the effect that allegedly deceptive conduct had on a domestic transaction—the purchase of ADRs—even if the deceptive conduct occurred outside the United States. The court reasoned that the Supreme Court, in Morrison, held that extraterritoriality did not depend on the location of the deceptive conduct, but rather on the location of the transaction. Therefore, the Ninth Circuit explained, because the transaction at issue occurred in the U.S., the Toshiba plaintiffs could bring claims under U.S. securities laws.
In so holding, the panel explicitly rejected Parkcentral as “contrary to Section 10(b)” of the Exchange Act and criticized the Second Circuit for creating “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.” The panel also explained its view that “Parkcentral’s analysis relies heavily on the foreign location of the allegedly deceptive conduct, which Morrison held to be irrelevant to the Exchange Act’s applicability, given Section 10(b)’s exclusive focus on transactions.”
The defendants asked the Supreme Court to resolve the split, arguing that the Ninth Circuit should have followed the Second Circuit’s approach in Parkcentral. The plaintiffs argued that the split was illusory and that the Ninth Circuit’s application of Morrison was correct. The solicitor general agreed, after being asked by the Supreme Court to express the view of the United States. And the Supreme Court then denied review—without explaining its reasoning, as is customary. So, at least for now, the circuits arguably remain split on what types of transactions are impermissibly foreign under Morrison.
Given the current state of the law, plaintiffs seeking to bring suits based on transactions with a foreign flavor may therefore be more likely to file suit in the Ninth Circuit rather than the Second. And defendants in suits within the Ninth Circuit may have a relatively tougher time winning dismissal on extraterritoriality grounds if the claims are based on a “domestic transaction” even if fraud may have occurred abroad. Meanwhile, other circuits will have a chance to weigh in as the issue continues to percolate in cases across the country. Depending on how those cases come out, the Supreme Court may ultimately need to bring uniformity and certainty on a question of federal law that has national and international importance.
Copyright © 2020, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).