What is the Jurisdictional Significance of Extraterritoriality? Three Irreconcilable Federal Court Decisions
Article Contributed by: Shorge Sato, Jenner and Block LLP
Imagine the following hypothetical: your client, a foreign company, is being sued in
an American federal court for a violation of an American federal law for its entirely
foreign conduct. You research the federal statute and, as you suspected, it does not
apply to such foreign conduct unless such conduct caused a direct and substantial
effect inside the United States. Although the complaint alleges such an effect, its
language is vague and forward-looking, clearly worded to manufacture such a
jurisdictional predicate where (you are pretty sure) none, in fact, exists.
Should you move to have a federal court dismiss the complaint for lack of subjectmatter jurisdiction? Will the court allow you to engage in expedited jurisdictional
discovery in support of a preliminary evidentiary hearing on the threshold question of
its subject-matter jurisdiction to overcome the thin allegations in the pleading? Who
decides, and under what standard?
The disparate conclusions reached in three recent federal Courts of Appeals decisions
shows that federal courts lack a principled framework for determining the scope of
their own authority when addressing the question of extraterritorial application of
domestic laws.
Three Cases
In United Phosphorus, Ltd. v. Angus Chemical Companies, 322 F.3d 942 (7th Cir.
2003) (en banc), the Seventh Circuit affirmed the dismissal of an antitrust action
based on predominantly foreign conduct, holding that the question of whether the
Sherman Act applied to such a case was a prima facie matter of federal subjectmatter jurisdiction. The Court upheld the district court's findings as not clearly
erroneous, based on the district court's review of “thousands of pages of evidentiary
materials” at a preliminary evidentiary hearing. The Seventh Circuit held that the
district court was “allowed on this motion to weigh the facts,” which it did in finding a
lack of subject-matter jurisdiction.
However, in Litecubes, LLC v. Northern Light Products, Inc., 523 F.3d 1353 (Fed. Cir.
2008), the Federal Circuit held that facts tending to show that allegedly infringing
conduct did not occur in the United States were effectively irrelevant to a federal
court's determination of its own subject matter jurisdiction over an otherwise wellpleaded Patent Act complaint. Accordingly, there was no need for a preliminary
hearing on subject-matter jurisdiction, unless the facts would show that a
jurisdictional allegation was “wholly insubstantial and frivolous.” Because the
question of extraterritoriality was simply an element of the patent infringement
claim, and not a prima facie matter of subject-matter jurisdiction, resolution of the
question would be a “decision on the merits” for the trier of facts.
© 2009 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P in the Vol. 3,
No. 37 edition of the Bloomberg Law Reports – Federal Practice. Reprinted with permission. The views expressed
herein are those of the authors and do not represent those of Bloomberg Finance L.P. Bloomberg Law Reports® is
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In Morrison v. National Australia Bank Ltd., 547 F.3d 167 (2d Cir. 2008), the Second
Circuit held that the district court properly dismissed a Securities Exchange Act suit
for lack of subject-matter jurisdiction where the action was brought by foreign
plaintiffs against a foreign issuer of securities based on securities transactions in a
foreign country. The Second Circuit stated that “[d]etermining the existence of
subject matter jurisdiction is a threshold inquiry” and that a claim is properly
dismissed for lack of subject matter jurisdiction “when the district court lacks the
statutory or constitutional power to adjudicate it.” The Court further stated that “[a]
plaintiff asserting subject matter jurisdiction has the burden of proving by a
preponderance of the evidence that it exists,” and that the district court may
“consider evidence outside the pleadings.”
Although the Second Circuit in Morrison appeared to follow the approach of the
Seventh Circuit in United Phosphorus, there is one notable distinction between the
Sherman Act and the Securities Exchange Act: whereas the express language of the
Sherman Act contains a limitation that the act “shall not apply” to certain
extraterritorial conduct unless a direct and substantial effect on American consumers
is shown,1 the Securities Exchange Act is “silent as to its extraterritorial application.”2
Federal courts rely upon a common law “presumption against extraterritoriality” in
construing the Securities Exchange Act, and engage in a “binary inquiry” which asks
“(1) whether the wrongful conduct occurred in the United States, and (2) whether
the wrongful conduct had a substantial effect in the United States or upon United
States citizens.”3 This distinction is important when compared to the express
language of the Patent Act, which applies to anyone who, without authority, “makes,
uses, offers to sell, or sells any patented invention within the United States. . . .”4
The Federal Circuit in Litecubes found this express language to be an insufficient
expression of Congress' intent to limit the subject matter jurisdiction of federal
courts over allegedly extraterritorial infringement.
It is difficult, however, to reconcile these three cases by simply comparing the
statutory language. Although, arguably, the Sherman Act's “shall not apply”
language appears to express a stronger Congressional intent to divest subjectmatter jurisdiction from federal courts as compared to the “within the United States”
language of the Patent Act, it would be incongruous to read a stronger Congressional
intent to divest subject matter jurisdiction in the Securities Exchange Act, which is
completely silent about the issue, than from the express language of the Patent Act.
Does Arbaugh v. Y&H Corporation Defeat the Presumption Against Extraterritoriality?
The divergent outcomes between Litecubes and United Phosphorous can be
reconciled somewhat when one reviews the rationale of the Litecubes decision. The
Federal Circuit extended the holding of a recent U.S. Supreme Court case, Arbaugh
v. Y & H Corporation, 546 U.S. 500 (2006), rendered after United Phosphorous,
which narrowly construed the concept of “subject-matter jurisdiction,” and applied
Arbaugh against the “presumption against extraterritoriality.”
Noting the “profligate” overuse of the term “jurisdiction” as the basis for a dismissal
of federal claims, the Supreme Court in Arbaugh created a “readily administrable
© 2009 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P in the Vol. 3,
No. 37 edition of the Bloomberg Law Reports – Federal Practice. Reprinted with permission. The views expressed
herein are those of the authors and do not represent those of Bloomberg Finance L.P. Bloomberg Law Reports® is
a registered trademark and service mark of Bloomberg Finance L.P.
bright line” to determine when the failure to meet a statutory element deprives a
court of subject-matter jurisdiction:
If the Legislature clearly states that a threshold limitation on a
statute's scope counts as jurisdictional, then courts and litigants
will be duly instructed and will not be left to wrestle with the issue.
But when Congress does not rank a statutory limitation on
coverage as jurisdictional, courts should treat the restriction as
nonjurisdictional in character.
However, Arbaugh was a Title VII case involving whether the defendant employed a
sufficient number of employees to trigger the act.5
The Litecubes decision took the step of applying the bright-line rule of Arbaugh to
the context of extraterritorial application of the Patent Act. The question then arises
whether this step should be taken in the context of all federal laws – the Litecubes
decision was expansive in its holding and not limited to the Patent Act. If the
reasoning of Litecubes was extended to the context of the Sherman Act, for
example, foreign parties would not be able to seek dismissal of antitrust claims
alleging a domestic effect on subject matter grounds, because the Sherman Act does
not expressly state that the limitation on extraterritorial application is “jurisdictional.”
There would be no separate phase of jurisdictional discovery in such cases, unless
the allegation of domestic effect is “wholly frivolous.” There is no way to easily
reconcile the outcome of Morrison with the reasoning of Litecubes, unless one
distinguishes the field of securities litigation as sui generis.
The history of the “presumption against extraterritoriality” is replete with instances
where courts have deferred to the “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.”6 The notion that the Supreme
Court intended its bright-line rule in Arbaugh to overturn nearly a century of
precedent supporting the default “presumption against extraterritoriality” is highly
questionable. There are strong policy reasons why questions of extraterritorial
application of American laws deserve threshold determinations.
In United Phosphorous, the Seventh Circuit acknowledged the “purity” of an
argument that under 28 U.S.C. § 1331 a federal court could assert subject matter
jurisdiction on the basis of a well-pleaded complaint, but concluded “nothing is quite
that simple.” The majority noted that other courts of appeals treated the as setting a
jurisdictional limit on the Sherman Act and that the .The majority noted the “good
policy reasons” that warranted treatment of the limitations under Foreign Trade
Antitrust Improvement Act of 1982 (which amended the Sherman Act to clarify its
extraterritorial reach) as a matter of subject matter jurisdiction. Similarly, in
Morrison, when the Second Circuit described the extraterritoriality test in the
securities context as allowing subject matter jurisdiction only “if the defendant's
conduct in the United States was more than merely preparatory to the fraud, and
particular acts or culpable failures to act within the United States directly caused
losses to foreign investors abroad.” The Court acknowledged the “presumption
against extraterritoriality,” stating “we are an American court, not the world's court,
© 2009 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P in the Vol. 3,
No. 37 edition of the Bloomberg Law Reports – Federal Practice. Reprinted with permission. The views expressed
herein are those of the authors and do not represent those of Bloomberg Finance L.P. Bloomberg Law Reports® is
a registered trademark and service mark of Bloomberg Finance L.P.
and we cannot and should not expend our resources resolving cases that do not
affect Americans or involve fraud emanating from America.”7
Squaring the Circle: How to Reconcile the Different Approaches to Extraterritoriality
It is possible that each federal law should be reviewed on its own terms as to
whether limitations on its extraterritorial reach constitute “jurisdictional” limitations
or are merely elements of a claim. This would create considerable uncertainty,
however, for foreign entities with some connection to the United States market. If a
foreign defendant were sued for violations of the Patent Act and the Sherman Act
arising out of the same conduct, for instance, a federal court might face a dilemma
as to how to resolve a threshold challenge to its power to adjudicate the dispute.
There must be some default rule, or consistent process for ascertaining the default
rule.
One could argue that Litecubes should be limited to the Patent Act. The territorial
limitation in Litecubes only applies to actions for direct patent infringement under 35
U.S.C. § 271(a). However, there is nothing in the scheme of the Patent Act that
limits its application to only domestic conduct or effects.8 It is also possible that the
Litecubes decision is wrong. The Federal Circuit relied upon a distinction contained in
Section 401 of the Restatement (Third) of Foreign Relations Law of the United States
between a legislature's “jurisdiction to prescribe” and a court's “jurisdiction to
adjudicate.” and equated the true question of “subject-matter jurisdiction” with the
“international law concept of territorial limitations on the jurisdiction to prescribe.”
However, Section 401 of the Restatement expressly disclaims any equivalence
between the concept of “jurisdiction to prescribe” and “subject-matter jurisdiction.”
In fact, the Restatement also disclaims any distinction between the concept of
“subject-matter jurisdiction” and a court's “jurisdiction to adjudicate.” To equate a
court's power to adjudicate a matter, or its “subject matter jurisdiction,” with
Congress's power to legislate over the matter, turns the notion that Article III courts
are courts of limited jurisdiction on its head.9
Legal commentators have suggested that the very dichotomy between
“jurisdictional” and “non-jurisdictional” rules is false, and a more nuanced approach
is appropriate. Even if the “presumption against extraterritoriality” were technically a
non-jurisdictional rule, federal courts would still retain the authority to enforce the
“presumption against extraterritoriality” as a quasi-jurisdictional threshold matter,
similar to their treatment of certain non-jurisdictional, yet mandatory, claimsprocessing rules. The problem with this approach, however, is that Federal Rule of
Civil Procedure 12(b) does not include a “motion to dismiss on quasi-jurisdictional
grounds” as a defense that may be presented by a motion. While filing a motion to
dismiss on the alternative ground of improper venue may provide legal cover for a
sympathetic district court, such venue objections can be difficult to maintain,
especially for global corporate defendants who do business everywhere.
If your foreign client is willing to be aggressive, move to dismiss for lack of subject
matter jurisdiction under Rule 12(b)(1) and, if the facts allow, for improper venue
under Rule 12(b)(3), and seek preliminary discovery and a hearing under Rule 12(i).
© 2009 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P in the Vol. 3,
No. 37 edition of the Bloomberg Law Reports – Federal Practice. Reprinted with permission. The views expressed
herein are those of the authors and do not represent those of Bloomberg Finance L.P. Bloomberg Law Reports® is
a registered trademark and service mark of Bloomberg Finance L.P.
Even if the motion fails for technical reasons, you have made your point to the court,
and the groundwork is hopefully laid for a Rule 56 motion for summary judgment.
Conclusion
The evolution of federal subject matter jurisdiction has created a conundrum in
federal courts of appeals: as the Supreme Court narrows the concept of federal
subject-matter jurisdiction, what remains of the traditional “presumption against
extraterritoriality”? This is an academic question for which there is no easy answer.
However, the practitioner wonders, “what do I tell my foreign client?” Congress or
the federal courts must definitively resolve the issue. A single rule – any rule, really
– would be superior to the present situation, where different courts treat the same
question of extraterritoriality in different ways under different statutes.
Shorge K. Sato is an associate attorney at Jenner & Block LLP in Chicago. Mr. Sato
would like to acknowledge and express his appreciation for the assistance of Jeff
Koppy in preparing this article. The views expressed in this article are not to be
attributed to Jenner & Block or its clients.
1
See the Foreign Trade Antitrust Improvements Act, 15 U.S.C. § 6a (1982).
Morrison, 547 F.3d at 170. In a footnote, the Second Circuit urged that this
“significant omission receive the appropriate attention from Congress” and the SEC.
Id. at 170 n. 4.
3
Morrison, 547 F.3d at 171.
4
Patent Act, 35 U.S.C. § 271 (2008) (emphasis added).
5
The Supreme Court in Arbaugh provided three reasons why the designation of a
particular element or fact as pertaining to “subject-matter” jurisdiction matters: first,
federal courts have an “independent obligation to determine whether subject-matter
jurisdiction exists, even in the absence of a challenge from any party.” Thus, the
question of subject-matter jurisdiction “can never be forfeited or waived,” and in
fact, could be brought at any time including in a collateral proceeding. Second, “in
some instances, if subject-matter jurisdiction turns on contested facts, the trial judge
may be authorized to review the evidence and resolve the dispute on her own.” By
contrast, if the issue merely pertains to the “satisfaction of an essential element of a
claim . . . , the jury is the proper trier of contested facts.” Third, “when a federal
court concludes that it lacks subject-matter jurisdiction, the court must dismiss the
complaint in its entirety.” Conversely, if a dispute matter only pertains to an element
of a claim, “the court generally retains discretion to exercise supplemental
jurisdiction . . . over pendent state law claims.”
6
Smith v. United States, 507 U.S. 197, 204 (1993) (quoting EEOC v. Arabian
American Oil Company, 499 U.S. 244, 248 (1991) and Foley Brothers, Inc. v. Filardo,
336 U.S. 281, 285 (1949)). See also United States v. Aluminum Co. of America, 148
F.2d 416, 443 (2d Cir. 1945) (Hand, J.) (“We should not impute to Congress an
intent to punish all whom its courts can catch, for conduct that has no consequences
in the United States.”); American Banana Co. v. United Fruit Co., 213 U.S. 347, 356
(1909) (Holmes, J.) (describing an “almost universal rule” that the “character of an
act as lawful of unlawful must be determined wholly by the law of the country where
the act is done.”)
2
© 2009 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P in the Vol. 3,
No. 37 edition of the Bloomberg Law Reports – Federal Practice. Reprinted with permission. The views expressed
herein are those of the authors and do not represent those of Bloomberg Finance L.P. Bloomberg Law Reports® is
a registered trademark and service mark of Bloomberg Finance L.P.
7
A fair argument could also be made in the context of the Securities Act that the
bright-line rule of Arbaugh should not apply to certain extraterritorial securities
claims. However, this argument would be weakened by the fact that, unlike the
Sherman Act as amended, Congress has yet to provide any express limitation on the
extraterritorial reach of that statute.
8
or instance, under the doctrine of “indirect infringement,” the Patent Act could
potentially reach conduct which occurs abroad but has domestic effects. Thus,
viewing the Litecubes decision through the scheme of the Patent Act, its holding
could possibly be narrower than its broad language. Still, on its face, the Litecubes
decision is written broadly: the Federal Circuit “consider[ed] whether there is
something unique about a limitation that determines the extraterritorial scope of a
statute that converts what would otherwise be a factual element of the claim into a
restriction on the subject matter jurisdiction of the federal courts” and “conclud[ed]
that there is not.”
9
See, e.g., Friends of Earth v. EPA, 333 F.3d 184, 187 (D.C. Cir. 2003).
© 2009 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P in the Vol. 3,
No. 37 edition of the Bloomberg Law Reports – Federal Practice. Reprinted with permission. The views expressed
herein are those of the authors and do not represent those of Bloomberg Finance L.P. Bloomberg Law Reports® is
a registered trademark and service mark of Bloomberg Finance L.P.