Morrison at Four: A Survey of Its Impact on Securities Litigation

My essay, Morrison at Four: A Survey of Its Impact on Securities Litigation, published by the U.S. Chamber of Commerce Institute for Legal Reform as part of a collection of essays on the shifting legal landscape governing federal claims involving foreign disputes, recounts the extraordinary impact of the Supreme Court’s landmark decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), in the realm of securities litigation.

The essay describes Morrison’s background and holding—how the lower federal courts’ development of expansive, indeterminate, and policy-driven standards for the extraterritorial application of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, put those courts on a collision course with the Supreme Court, whose decisions had increasingly cabined the territorial scope of federal law in diverse areas such as employment-discrimination law, antitrust law, and patent law. The product of the inevitable collision was Morrison, in which the Supreme Court reemphasized the presumption against extraterritoriality—the longstanding canon of construction teaching that, “when a statute gives no clear indication of an extraterritorial application, it has none”—and held that, at a minimum, a domestic securities transaction had to take place before Section 10(b) and Rule 10b-5 may apply.

The essay goes on to explain how the lower courts went on to apply Morrison to extinguish two species of securities class-action claims that had proliferated in the years preceding Morrison: “foreign-cubed” claims, in which foreign plaintiffs sued foreign issuers for losses on transactions on foreign exchanges, and “foreign-squared” claims, brought by domestic plaintiffs against foreign issuers for losses on transactions on foreign exchanges. In particular, the essay discusses the Second Circuit case law on what constitutes a domestic securities transaction under Morrison, and how that case law has foreclosed foreign-squared Section 10(b) litigation. The essay also surveys the case law rejecting the efforts of some foreign-cubed plaintiffs to assert Section 10(b) claims based on foreign purchases of securities that are cross-listed on domestic stock exchanges.

The essay also surveys the case law applying Morrison to other kinds of securities claims and other provisions of the securities laws. It describes the Second Circuit’s treatment of derivative securities transactions, an application that recognizes how, under Morrison, a domestic transaction is a necessary, but not necessarily sufficient, condition for a claim to fall within the territorial scope of Section 10(b). It also reviews how Morrison has been applied to the claims under the Securities Act of 1933, to whistleblower-retaliation claims under the Sarbanes-Oxley and Dodd-Frank Acts, and to criminal cases brought under Section 10(b). Finally, the essay discusses the ineptly and inaptly drafted “extraterritorial jurisdiction” provision of the Dodd-Frank Act, Section 929P(b), a provision arguably intended to overrule Morrison in criminal and SEC enforcement actions, and explains why it is increasingly unlikely that Section 929P(b) will have any practical effect at all.

This survey of the post-Morrison case law illustrates how the Supreme Court’s decision four years ago transformed the way the federal courts look at transnational securities litigation. Judges no longer disregard the presumption against extraterritoriality, or seek to extend the securities laws’ reach abroad on the basis of case-by-case judicial policy judgments. As a result, cases the lower courts once found difficult, such as the once-burgeoning foreign-cubed and foreign-squared claims that constituted the bulk of transnational securities cases before Morrison, have become easy.

As the post-Morrison case law develops, courts will increasingly face the harder cases, the marginal cases, cases in which the question whether the proposed application of law is extraterritorial is less clear, and that turn on thorny factual disputes about where particular events occurred. Those cases will pose interesting questions of line-drawing and fact-finding, but their difficulty should not call into question what the Supreme Court called “the wisdom of the presumption against extraterritoriality.” For the point of Morrison was not to adopt a bright-line for the sake of having a bright line, but rather to reestablish the traditional understanding that Congress ordinarily legislates with respect to domestic, not foreign, matters, and to fashion a standard that would avoid the interference with foreign regulation that the extraterritorial application of U.S. law would produce. That Morrison surely accomplished.