The Effects Test: Extraterritoriality's Fifth Business

Summary

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American laws increasingly regulate the conduct of foreigners abroad. The growth in extraterritorial laws, in no small part, can be traced to the effects test-a doctrine that instructs courts to presume that Congress intended to regulate extraterritorially when foreign conduct is found to have a substantial effect within the United States. For many scholars and lawyers, the effects test is the doctrinal linchpin for determining the geographic reach of domestic laws. Territorial limits on legislative jurisdiction, on the other hand, are seen as anachronistic; a remnant of a pre-modern, pre-globalized world. This Article takes a more skeptical view of the effects test. The Article argues that many scholars have failed to appreciate the effects test's shortcomings, and the problems that extraterritorial laws create. Rather than place meaningful limits on legislative jurisdiction, the effects test has created confusion and inconsistency, while dramatically increasing the number of laws applied extraterritorially. Contrary to conventional wisdom, courts would be wise to reembrace territorial limits to legislative jurisdiction. Domestic laws that regulate extraterritorially undermine international harmony, are inherently undemocratic, and threaten long-term American interests. In a globalized world, where territorial borders play a less important role, territorial limits have become ever more important as a necessary constraint to legislative action and a way to protect American interests. The Article concludes that the effects test is best understood as a narrow limit on Congressional power, not as a doctrinal command that reverses the presumption against extraterritoriality.

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The Effects Test: Extraterritoriality's Fifth Business

INTRODUCTION

The world has recently seen a tremendous expansion in countries using extraterritorial laws1-laws that regulate the activities of foreigners outside a country's borders.2 In the United States, domestic laws now commonly regulate extraterritorial conduct and transnational litigation has blossomed.3 No longer limited to the antitrust and commercial contexts,4 courts apply all sorts of public and private laws to activity occurring abroad.5 Academics have encouraged the trend, finding the notion that law should be tied to territory to be an archaic remnant of a preglobalized world.6 In an age of globalization, the argument goes, law should find national and political borders of little significance.7 The enactment and application of extraterritorial laws have become unexceptional.

A doctrinal culprit has sustained this growth in extraterritoriality. At the heart of most extraterritoriality cases lies the effects test.8 Developed at a time when legal realism captivated legal academia,9 the effects test permits a U.S. court to exercise prescriptive jurisdiction-and Congress is assumed to have intended to regulate-when an activity has direct or substantial effects within the United States.10 Academics have embraced the effects test (albeit in slightly different forms) as a panacea to all extraterritorial jurisdictional dilemmas.11 And although once condemned abroad,12 other countries have started to follow suit, permitting jurisdiction over activities that have effects within their territory.13 In short, under current doctrine, the effects test is the linchpin to understanding the geographic reach of domestic laws.

But here's the rub. Although the effects test has become central to what many scholars perceive to be a correct modern analysis for legislative jurisdiction,14 courts rarely apply it appropriately.15 This is problematic. Properly determining the geographic scope of U.S. law is important. Because of globalization of trade and commerce and the proliferation of electronic methods of communication, transnational disputes have become commonplace16 and the intensity of these disputes has escalated.17 To solve these disputes, plaintiffs increasingly seek to apply U.S. laws to foreign conduct.18 Yet as U.S. courts apply domestic laws extraterritorially, other countries have not only periodically retaliated,19 but have also begun to accept extraterritoriality and use it for their own ends.20 Indeed, as extraterritorial laws are more frequently applied worldwide, the very purpose of legislative jurisdiction-to avoid conflict between countries and the harms that conflicts inevitably cause-is threatened. State...

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