June 29, 2010
Morrison v. NAB and the implied right of action under 10(b)
Posted by Hannah Buxbaum

In pre-decision speculation, I wondered whether the Supreme Court would foreclose not only f-cubed cases, but all cases involving foreign-market transactions -- even those affecting U.S. investors.  Well -- 5-3 on that point, the way I read Justice Breyer's brief concurrence.  I would never have expected, though, the way the Court got to that result.  Is the case really about the presumption against extraterritoriality?  I'm not so sure.

Justice Scalia begins by quoting Aramco on that presumption: "legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States."  The presumption can be overcome by a showing that the legislation in question was in fact meant to apply beyond U.S. territory.  But hasn't that showing been made, and accepted even by the majority?  The classic form of "extraterritoriality," after all, is effects-based regulation -- the application of U.S. law to conduct that occurs in another country on the basis of the harm that results within the United States.  The majority would permit this kind of extraterritoriality, since it would permit the application of U.S. law to fraudulent conduct abroad as long as that conduct occurred in connection with a U.S. transaction in securities.  In other words, in the Court's view, the issue is not that 10(b) can't apply to foreign fraud -- it's that 10(b) can't apply to any fraud at all (foreign or domestic) in connection with a foreign transaction.  (As Bill Dodge has pointed out, it's a little hard to see what the presumption against extraterritoriality has to do with that conclusion about the category of transactions to which the statute applies.) 

Now, recognizing that the presumption against extraterritoriality had been overcome would not necessarily have led to a different result in this case. In his fine dissenting opinion in the 1993 Hartford Fire antitrust case, Justice Scalia notes that "if the presumption against extraterritoriality has been overcome ..., a second canon of statutory construction becomes relevant: '[A]n act of congress ought never to be construed to violate the law of nations if any other possible construction remains.'"  On that basis, keeping in mind principles of international comity and the need to avoid unnecessary interference with the interests of other nations, the Court (following its approach in Empagran, another antitrust case) could have concluded (properly, as I have argued elsewhere) that it would be unreasonable to apply U.S. securities law in cases so closely connected with other jursidictions.   

So why did the Court engage in this convoluted and uncompelling application of the presumption against extraterritoriality rather than rely on traditional analysis of international-law limits on regulatory jurisdiction?  Apparently because it had other fish to fry.  Or perhaps the more apt expression would be, another goose to cook -- the goose, of course, being the implied right of action under 10(b) and Rule 10b-5.  The decision does not merely speak to the reasonableness of applying U.S. antifraud law in certain categories of cross-border cases.  Rather, the Court jettisons decades of precedent (admittedly, Second Circuit precedent, not its own) in narrowing the category of interests that, in its view, 10(b) serves.  In the end, it seems that the progenitors of this decision are not Alcoa, Hartford Fire, Empagran and other cases addressing international-law limits on the application of U.S. law in situations of jurisdictional conflict.  Instead, they are Central Bank of Denver, Dura, Tellabs, Stoneridge, and other cases cutting back the implied right of action.

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