The Supreme Court’s presumption against extraterritoriality stems from the conservative majority’s strict adherence to the principle that “legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.” Morrison v Nat’l Australia Bank Ltd., 561 US 247, 255 (2010). Accordingly, “unless there is the affirmative intention of the Congress clearly expressed to give a statute extraterritorial effect,” the Court will “presume it is primarily concerned with domestic conditions.” If a statute has no clear, affirmative indication that it applies extraterritorially, the Court will then examine the statute’s “focus” to determine whether the application of the statute in the case at hand involves a domestic application of the statute in question. RJR Nabisco, Inc. v European Cmty., 136 S. Ct. 2090, 2101 (2016).
The Supreme Court has stated that the presumption “serves to avoid the international discord that can result when US law is applied to conduct in foreign countries” and “also reflects the more prosaic commonsense notion that Congress generally legislates with domestic concerns in mind.” Therefore courts must apply “the presumption across the board, regardless of whether there is a risk of conflict between the American statute and a foreign law.”
The Securities Exchange Act
Although global practitioners may be aware of the Supreme Court’s 2010 groundbreaking opinion in Morrison v National Australia Bank Ltd. holding that Section 10(b) of the Securities Exchange Act (and Rule 10b-5 promulgated thereunder) does not apply extraterritorially, it is helpful to review as it is an important bellwether1.
Section 10(b) is used to challenge material misstatements and omissions made in connection with the purchase or sale of securities. In Morrison, the Court first held that the statutory text of these anti-fraud provisions does not apply extraterritorially. The Court next examined whether the activity at issue – the purchase of securities of a foreign issuer by foreign persons on a foreign exchange – fell within the “focus” of Section 10(b). Plaintiffs argued that because the misstatements at issue arose from the activities of the defendant issuer’s Florida subsidiary and public statements made in Florida, they were seeking a domestic application of the statute that fell within the statute’s focus. The Court disagreed and held that “the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.” Accordingly, Section 10(b) would only apply to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies.” As the late Justice Scalia stated for the Court: “For it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.”
The Racketeer Influenced and Corrupt Organizations Act (RICO)
In 2016, the Supreme Court extended Morrison’s reasoning to RICO in RJR Nabisco, Inc. v European Cmty., 136 S. Ct. 2090 (2016). RICO is a major federal statute that encompasses dozens of separate state or federal offenses committed in a pattern of racketeering activity. The acts are termed “predicate acts” and include crimes such as mail and wire fraud, money laundering, bribery, and embezzlement. A private right of action exists for persons injured in their business or property to sue for treble damages, costs and attorneys’ fees. In RJR, the Court first asked, does the statute giving rise to the predicate act in question give a clear, affirmative indication that it applies extraterritorially? This answer might not be straightforward. For example, federal courts are presently split as to whether the federal wire fraud statute applies extraterritorially.
Second, if the predicate act statute does not apply extraterritorially, does the case involve a domestic application of the statute? This question is answered by looking to the statute’s “focus.” According to the Court, “[i]f the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in US territory.”
Finally, a private plaintiff in a civil RICO action must allege and prove injury in the US to business or property and cannot recover for non-US injuries. The Court held that the statute providing a private right of action did not provide for extraterritorial application, and allowing recovery for non-US injuries in a civil RICO action – including treble damages – presents a danger of international friction.
The Bankruptcy Code
The trend against extraterritoriality has extended into the bankruptcy context as well. In a high-profile decision from the Southern District of New York, the court barred the clawback of subsequent transfers made from offshore feeder funds of Madoff Securities to non-US investors. See Sec. Inv’r Prot. Corp. v Bernard L. Madoff Inv. Sec. LLC, 513 B.R. 222 (S.D.N.Y. 2014). The court determined that the avoidance and recovery statute at issue did not apply extraterritorially and that the “focus” of the statute was on the transfers themselves – which here occurred outside the US The court also recognised that mere passage through a New York bank account did not make a transfer sufficiently domestic to fall within the statute’s reach. In the court’s words, “[i]t cannot be that any connection to a domestic debtor, no matter how remote, automatically transforms every use of the various provisions of the Bankruptcy Code in a [Securities Investor Protection Act] bankruptcy into purely domestic applications of those provisions.”
Notably, the court held that even if the statute applied extraterritorially, it would rule that international comity concerns would preclude its application in this instance. It recognised that many of the foreign feeder funds were currently involved in their own liquidation proceedings in foreign countries, and concluded that “[t]he Trustee is seeking to use SIPA to reach around such foreign liquidations in order to make claims to assets on behalf of the SIPA customer-property estate – a specialised estate created solely by a US statute, with which the defendants here have no direct relationship … [T]hese foreign jurisdictions have a greater interest in applying their own laws than does the United States.”
The Foreign Trade Antitrust Improvements Act (FTAIA)
In the antitrust realm, by statute the FTAIA limits the extraterritorial application of the Sherman Antitrust Act. As interpreted by the US Supreme Court, the FTAIA “initially lays down a general rule placing all (non-import) activity involving foreign commerce outside the Sherman Act’s reach.” F. Hoffmann-LaRoche Ltd. v Empagran S.A., 542 US 155, 162 (2004). The FTAIA then “brings such conduct back within the Sherman Act’s reach provided that the conduct both (i) sufficiently affects American commerce, i.e., it has a direct, substantial, and reasonably foreseeable effect on American domestic, import, or (certain) export commerce, and (ii) has an effect of a kind that antitrust law considers harmful, i.e., the effect must ‘giv[e] rise to a [Sherman Act] claim’.”
One notable application of the FTAIA occurred in the recent Foreign Exchange Benchmark Rates Antitrust Litigation in the Southern District of New York. See In re Foreign Exchange Benchmark Rates Litigation, 74 F. Supp. 3d 581 (S.D.N.Y. 2015); No. 13 Civ. 7789 (LGS), 2016 WL 5108131 (S.D.N.Y. Sept. 20, 2016). In this series of cases, plaintiffs claimed that over a dozen large banks conspired to “fix the Fix,” which they alleged to be the most widely used bid-ask spread for currency trading globally. The court held that Sherman Act claims could proceed where a US entity operating in the US trades foreign exchange with a foreign desk of a defendant because such claims fall squarely within the FTAIA’s import commerce exclusion. However, the FTAIA barred Sherman Act claims for transactions where a US-domiciled plaintiff transacted in FX instruments on a foreign exchange, or where a US-domiciled plaintiff operating abroad transacted in FX instruments directly with a foreign desk of a defendant. The import commerce exception did not apply because the transactions occurred exclusively abroad. Plaintiffs argued that there was a “single” global FX market and that supra-competitive prices in the US directly impacted the prices paid in foreign FX transactions, meaning that without US domestic effects, there would be no foreign injury. The court rejected this argument and held it failed to show the foreign prices paid were proximately caused by any domestic effects.