Harmony and dissonance in extraterritorial regulation.

Position:Proceedings of the One Hundred Fifth Annual Meeting of the American Society of International Law - Discussion

This panel was convened at 1:00 p.m., Friday, March 25, by its moderator, Kal Raustiala of the University of California at Los Angeles School of Law, who introduced the panelists: Hannah Buxbaum of Indiana University, Maurer School of Law; George T. Conway III of Wachtell, Lipton, Rosen & Katz; William S. Dodge of the University of California, Hastings College of Law; and Austen Parrish of Southwestern Law School.


For nearly seventy years the United States has been a leader, and some would say aggressor, in the use of extraterritorial regulation. Judge Learned Hand's landmark 1945 decision in Alcoa ushered in a new era of extraterritoriality, one that was in many respects quite distinct from the extraterritoriality of the 19th and early 20th centuries.

In that older period, extraterritoriality was a concept largely applied to so-called "uncivilized" states, such as China and Japan. Western powers would claim the right to apply their municipal law to their nationals living in these states. By the 1920s, however, this view was beginning to give way. Extraterritoriality was slowly dismantled, much as Western imperialism itself would soon be dismantled, as concepts of self-determination and sovereign equality took root.

Yet as one form of extraterritoriality fell, another rose in its place. By 1945, the year of Learned Hand's Alcoa decision, it was innovative, though not wholly unprecedented, to assert that a domestic statute could in fact reach out extraterritorially and affect actors in another sovereign's domain. Within a couple of decades this idea would be embedded in American law, much to the consternation of many of the nation's closest allies and trading partners. Of course, in some respects questions of territoriality and extraterritoriality in statutory interpretation go back much further than 1945. Eighteenth- and nineteenth-century high seas and piracy cases, for example, provided many opportunities to consider extraterritoriality.

Courts in this country, in short, have long grappled with how to think about the limits of prescriptive jurisdiction and how to understand and apply the "presumption against extraterritoriality." One would think that with all this experience, our federal courts would today have extraterritoriality down cold. But in fact they continue to reinterpret and recalibrate the geographic reach of U.S. statutes. And we outside the courts continue to parse these decisions in the hope that we can discern, or develop, some coherent underlying logic to guide us in the future.

On this panel we will focus on some recent efforts by the U.S. Supreme Court in this complicated and contested area, in particular the major decision last year in Morrison v. Nat'l Australia Bank, in order to understand the evolution of extraterritoriality in the United States.

Today, unlike in 1945, the U.S. is hardly the only state to deploy extraterritoriality as a regulatory tool in areas such as securities law and antitrust. Nonetheless, this country remains the world's largest economy and, despite much recent activity by the European Union, remains probably the world's preeminent user of extraterritoriality. And so the practice of the U.S. in this area has implications that go well beyond the particular regulatory or tort statutes our panelists might mention.

KAL RAUSTIALA, Professor, University of California at Los Angeles School of Law.


By George T. Conway III

Morrison v. National Australia Bank Ltd. (1) typified a species of securities litigation known as a "foreign-cubed" or "f-cubed" class action--litigation involving foreign investors suing a foreign company for losses on foreign exchanges. This sort of lawsuit, ironically, was the indirect product of the Supreme Court's formerly fickle approach to the presumption against extraterritoriality. The Justices had discarded the presumption in antitrust, replacing it with the effects test, (2) and the Second Circuit, in addressing the territorial reach of the securities laws, gave the presumption similarly short shrift. The court of appeals imported the effects test into the securities laws in the 1960s, (3) and in the 1970s went a major step further, adopting a second "test," the conduct test, a doctrine that was in essence the reverse of the effects test: conduct in the United States that caused harm outside its territory could violate the federal securities laws. (4)

Unlike its antitrust progenitor, the securities law effects test did not provoke global outcry. The conduct test did. Lower courts found themselves unable to delimit precisely and narrowly the amount and kind of domestic activity it took to satisfy the conduct test, which led to foreign-cubed cases that produced huge settlements and judgments, sometimes in the billions of dollars. Far from welcoming and reciprocating these suits, other nations vigorously objected to them as "threaten[ing] substantial--and unreasonable--interference with [their] sovereign interests, policies, and laws." (5)

In the U.S. Supreme Court in 2010, these sovereign amici could not have found a forum more receptive to their pleas. Over the past two decades, while the lower courts were losing their struggle to define the conduct test, the Supreme Court had rediscovered, and reinvigorated, the presumption against extraterritoriality and the presumption's forerunner, the Charming Betsy rule. (6) In the antitrust arena, for example, the Court in 2004--by a vote of 8-0--applied a variant of Charming Betsy dismiss a foreign-cubed antitrust case, one with foreign plaintiffs seeking treble damages from foreign companies for price-fixing in foreign companies. (7) It would be an "act of legal imperialism," the Court held, to allow such a case to proceed. (8) The equally lopsided result in Morrison was practically foreordained.

What was remarkable about the majority's opinion was not its explanation of the presumption against extraterritoriality. That was straightforward, as was its conclusion that Section 10(b) of the Securities Exchange Act of 1934 (9) contained no indication of extraterritorial applicability. The Court simply repeated what it had said in earlier cases applying the presumption, (10) and like the lower courts that had refused to apply the presumption, found nothing but silence in Section 10(b) on the issue of its territorial scope. (11) The striking part of the Court's opinion was its condemnatory history of the courts of appeals' tests of extraterritoriality. (12) The tone was harsh--perhaps unduly so, given the Court's own inconsistent approach to the presumption. The unmistakable moral of the Court's story was that abandonment of the presumption had led to doctrines that were unpredictable, incoherent, and completely unfounded in the statute being applied. And there was a surprise: the Court condemned not only the conduct test, but also the effects test (13)--even though that test was not even remotely involved in the case, and even though the Court had itself established that test under the Sherman Act. The Morrison Court's message to the lower courts is clear: do not do what you did with the securities laws--and what we did in antitrust--ever again.

The part of Morrison that will provide the most fertile ground for discussion--and litigation--addressed the petitioners' argument that the conduct at issue in the case was not really extraterritorial. The conduct at the foreign company's domestic subsidiary, petitioners argued, justified application of American law. The Court's answer, in effect, was that accepting this argument would nullify the presumption against extraterritoriality. This response came in the opinion's money quote: "[I]t is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States," for the presumption "would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case." (14) To say that "some domestic activity" was not enough, however, still left open whether the domestic activity in Morrison actually sufficed. To answer that question, Justice Scalia examined the Exchange Act's text and structure to find the law's "focus." That "focus," he concluded, was "not upon the place where the deception originated, but upon purchases and sales in the United States," and because the plaintiffs didn't purchase shares in the United States, they were out of court.

How such an examination of the domestic "focus" of a statute will work with other statutes and in other contexts will determine how great, and how lasting, Morrison's effect will be. One question, raised by Professor Dodge, is whether the "focus" analysis effectively embodies the effects test--because domestic transactions are domestic effects. (15) A related question, raised by Professor Parrish, is whether the "focus" analysis will undermine the presumption against extraterritoriality by permitting the regulation of all manner of extraterritorial activity whenever a particular sliver of domesticity happens to coincide with what a court deems to be the "focus" of congressional concern. (16) The answer to both questions is no. Justice Scalia's opinion does not embody an "effects test," and the "focus" analysis will not undermine the presumption. Here's why.

First, the Court, as I have noted, went out of its way--way out of its way--to criticize the effects test. The effects test had nothing to do with the Australian plaintiffs' claims, but Justice Scalia knew--in fact, he cites the relevant cases, just as he cited them in his dissent in Hartford Fire (17)--that it was the effects test that had obliterated the presumption against extraterritoriality in antitrust. The Court was trying to make sure that what happened there was not going to happen again.

Second, the specific holding reached by the Court--that the...

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