Appellate, Constitutional &
Governmental Litigation Alert
July 1, 2010
Authors:
John P. Krill, Jr.
john.krill@klgates.com
+1717.231.4504
Amy O. Garrigues
amy.garrigues@klgates.com
+1.949.466.1275
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
Extraterritorial Reach of U.S. Laws After
Morrison v. National Australia Bank
The United States Supreme Court has held that key anti-fraud provisions of the
Securities Exchange Act of 1934 (“Exchange Act”) and regulations promulgated
under it do not apply outside the borders of the country. While this decision
immediately affects securities litigation, it seems likely also to have an impact in
other areas of law, to the extent it revitalizes the presumption against extraterritorial
application of laws enacted by Congress.
Morrison et al. v. National Australia Bank involves a complaint filed in U.S. District
Court in New York by three Australians who had bought shares of stock in National
Australia Bank (“National”) that were traded on the Australian Stock Exchange, but
not on any American exchange. Their suit alleged that National deceived them by
overstating the value of an American subsidiary, a mortgage servicer. The
shareholders sued National, its American subsidiary and their officers.
In its June 24, 2010, decision in Morrison, the Court held that Section 10(b) of the
Exchange Act does not apply outside the United States. Section 10(b) makes it
unlawful, “in connection with the purchase or sale of any security,” to use “any
means of interstate commerce or … any national securities exchange” for the
purpose of promoting “any manipulative or deceptive device or contrivance” that is
contrary to the regulations of the Securities and Exchange Commission.
Even though the plaintiffs alleged deceptive conduct within the United States, the
Court held that the law, which applied “in connection with the purchase or sale of
any security,” did not extend to transactions on a foreign stock exchange.1 Activities
allegedly related to the deception that took place in the United States were
insufficient to bring the conduct within the scope of the statute.
Because Section 10(b) does not state that it applies outside the U.S., the Court held
that the presumption against extraterritorial application controlled. The opinion of
the Court, authored by Justice Scalia, recites a history of how the Courts of Appeals
cut back and ultimately discarded the presumption in 10(b) cases. For example, in
Schoenbaum v. Firstbrook,2 the Second Circuit said that “neither the usual
presumption against extraterritorial application of legislation nor the specific
language . . . show Congressional intent to preclude application of the Exchange Act
to transactions regarding stocks . . . which are effected outside the United States.”3
In Schoenbaum, the Second Circuit effectively reversed the presumption by requiring
that there be evidence of legislative intent to restrict the territorial reach of a law.
1
Another plaintiff, Morrison, was an American who bought American Depositary Receipts (“ADRs”)
for shares of National. The ADRs were traded on the New York Stock Exchange. Morrison’s claims
were dismissed by the District Court and he did not appeal. The Supreme Court therefore did not
decide whether Section 10(b) would cover his claims.
2
405 F.2d 200 (2d Cir. 1968).
3
Shoenbaum, 405 F.2d at 206.
Appellate, Constitutional & Governmental Litigation Alert
The Supreme Court also criticized Leasco Data
Processing Equipment Corp. v. Maxwell,4 where the
Second Circuit said, in effect, that the presumption
only applies when Congress would not have
“prescriptive jurisdiction,” i.e. lawmaking authority,
over conduct within the United States. Leasco, in
other words, said that when Congress has no
authority within the United States, it cannot be
presumed to have it outside the country.5
Schoenbaum and Leasco essentially abrogated the
presumption against extraterritorial effect of laws
that are valid within the country. The Supreme
Court reinstated the presumption by simply noting
that the statute in question did not express the intent
of Congress for it to have extraterritorial effect.
Morrison may signal a return to basic principles of
jurisprudence in the territorial application of U.S.
law. If so, securities law is not the only area that
may be affected.
In federal environmental laws there are questions of
extraterritorial effect. For example, in Pakootas v.
Teck Cominco Metals, Ltd.,6 the Ninth Circuit gave
extraterritorial application to the federal
Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”).
Pakootas held that a Canadian smelter could be held
liable to U.S. plaintiffs for the discharge of waste
into a river that flows across the border. The Ninth
Circuit in Pakootas applied CERCLA to a foreign
entity, based on the domestic effects of the waste on
U.S. soil without using the presumption against
extraterritoriality. CERCLA, like Section 10(b) of
the Securities Exchange Act, does not identify its
territorial limits.7
Similarly, courts have found the National
Environmental Policy Act (“NEPA”) to apply
extraterritorially, although NEPA does not explicitly
grant extraterritorial jurisdiction. For example, in
Environmental Defense Fund v. Massey,8 the Court
of Appeals for the District of Columbia held that
NEPA’s Environmental Impact Statement
4
468 F.2d 1326 (2d Cir. 1972).
Id. at 1333-1334.
6
452 F.3d 1066 (9th Cir. 2006).
7
Id. at 1077-1079.
8
986 F.2d 528 (D.C. Cir. 1993).
5
requirement applied to the waste incineration plan
of a U.S. base in Antarctica even though the
environmental impact would not affect the
American environment, or that of any other
sovereign.9
The questions of extraterritorial effect also extend to
health care laws. For example, Section 111 of the
Medicare and Medicaid SCHIP Extension Act of
2007 imposes reporting requirements on insurers
that make payments to Medicare beneficiaries for
medical treatment of personal injuries or that have
the effect of releasing such medical claims. The
statute does not state any territorial limits on where
the insurer is located or where the treatment or
payment occurs. The United States Department of
Health and Human Services, through its Centers for
Medicare and Medicaid Services (“CMS”), has
indicated that it considers the reporting requirement
to apply to foreign insurers. CMS expects both
domestic and foreign insurers to register and to
commence reporting in the near future. In light of
Morrison, perhaps the government will reevaluate
its position.
Morrison does not say that Congress cannot make a
law applicable to conduct outside the United States.
If a statute expressly extends its reach outside the
country, the presumption against extraterritoriality
does not apply. In such instances, there will still be
a question of whether Congress has the legislative
jurisdiction to regulate foreign conduct, but that
would be decided under other principles of
jurisprudence.
Morrison’s reassertion of the presumption against
extraterritoriality will be well received by many
who seek to promote international commerce. The
amici in support of the successful respondent
included both private trade organizations and
governments, such as France and the United
Kingdom. Morrison is a step in the direction of the
International Chamber of Commerce’s 2006 policy
statement, calling upon courts, as well as
legislatures, to recognize the negative impact on
world trade that the extraterritorial application of
national laws can have.
9
Id. at 536-537.
July 1, 2010
2
Appellate, Constitutional & Governmental Litigation Alert
Anchorage Austin Beijing Berlin Boston Charlotte Chicago Dallas Dubai Fort Worth Frankfurt Harrisburg Hong Kong London
Los Angeles Miami Moscow Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park
San Diego San Francisco Seattle Shanghai Singapore Spokane/Coeur d’Alene Taipei Tokyo Warsaw
Washington, D.C.
K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous
GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market
participants and public sector entities. For more information, visit www.klgates.com.
K&L Gates is comprised of multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and
maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in
Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named
K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an
office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L
Gates Jamka sp. k.) maintaining an office in Warsaw; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in
Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each
entity is available for inspection at any K&L Gates office.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2010 K&L Gates LLP. All Rights Reserved.
July 1, 2010
3