Extraterritoriality Occupies Second Circuit in 2014: Part II, Causes of Action Other Than Section 10(b)

In Part I of this Article, extraterritoriality decisions arising from section 10(b) of the Securities and Exchange Act of 1934 emanating from the Second Circuit were examined in light of Morrison v. National Australia Bank, 561 U.S. 247(2010).

The logic of this approach was dictated by Morrison’s requirement that the extraterritoriality of any given statute turns strictly on statutory interpretation. “[W]hat conduct [section] 10(b) prohibits . . . is a merits question” which can be determined only by statutory analysis. The Supreme Court interpreted section 10(b) under the canon of construction that unless a contrary intent appears, a statute is meant to apply only within the territorial jurisdiction of the United States.

The issue was what jurisdiction Congress in fact thought about and conferred rather than divining what Congress would have wished if it had addressed the problem. As Justice Stevens noted in his concurrence, “[t]he text and history of §10(b) are famously opaque on the question of when, exactly, transnational securities frauds fall within the statute’s compass.” Because Congress had not indicated otherwise, Morrison required that section 10(b) extend only to transactions in securities listed on domestic exchanges and domestic transactions in other securities.

As noted in Part I of this article, it is not entirely clear that the Second Circuit, after Morrison, has cleaved to its holding and eliminated all inquiry into the particular facts of any given complaint. However, it has maintained a conservative approach in applying Morrison to various situations arising under section 10(b).
Meanwhile, both the Supreme Court and the Second Circuit have issued post-Morrison decisions regarding the extraterritorial application of statutes other than section 10(b).

On April 17, 2013, the Supreme Court issued Kiobel v. Royal Dutch Petroleum, No. 10–1491 (2013). The decision denied extraterritorial application of the Alien Tort Statute, 28 U.S.C. section 1350.

Section 1350 provides that “[t]he district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.”

Plaintiffs, Nigerian nationals residing in the US, sought to obtain section 1350 relief against foreign corporations for violations of the law of nations occurring within Nigeria, a sovereign other than the United States. The Supreme Court began by noting that “[t]he statute provides district courts with jurisdiction to hear certain claims, but does not expressly provide any causes of action.”

However, federal courts may recognize private claims [for such violations] under federal common law, at least for a “modest number of international law violations.” Such claims must state a violation in such specific, universal, and obligatory terms as to cause the court to have “authority to recognize a cause of action under U. S. law to enforce a norm of international law.”

The case is history-specific. Indeed, reference to the contemporary understanding as to whether three principal offenses against the law of nations identified by Blackstone, violation of safe conducts, infringement of the rights of ambassadors, and piracy, necessarily implied extraterritorial prosecution and whether a 1794 opinion of Attorney General William Bradford (“Breach of Neutrality,” 1 Op. Atty. Gen. 57) supported either party.

Relying on Sosa v. Alvarez-Machain, 542 U. S. 692 (2004), the Supreme Court reiterated: “Since many attempts by federal courts to craft remedies for the violation of new norms of international law would raise risks of adverse foreign policy consequences, they should be undertaken, if at all, with great caution.”

The presumption against extraterritorial application helps ensure that the Judiciary does not “erroneously adopt an interpretation of U. S. law that carries foreign policy consequences not clearly intended by the political branches.” Nothing in the relevant history of the statute “suggests that Congress also intended federal common law under [section 1350] to provide a cause of action for conduct occurring in the territory of another sovereign. Under Morrison, there being “no clear indication of an extraterritorial application, [a statute] has none.”

The Second Circuit, post-Kiobel, also extended the Morrison analysis to other fields of law. On August 14, 2014, Liu v. Siemens, No. 11-397-cv (2d Cir. 08/14/14) was issued. Liu, a citizen of Taiwan, continuously, publicly, and energetically announced that Siemens was engaged in corrupt practices related to its sales of medical equipment. The complaint shows that Liu was a non‐citizen employed abroad by a foreign company, and that all events allegedly giving rise to liability occurred outside the United States. His employment contract was not renewed. Liu claimed he was a protected whistleblower under the Dodd-Frank Act.

The Dodd-Frank Act’s Anti-Retaliation Provision provides that:

“No employer may discharge, deemote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower … in making disclosures that are required or protected , , . ” (15 U.S.C. § 78u-6(h)(l)(a))

The language of the Dodd-Frank Anti-Retaliation Provision is silent regarding whether it applies extraterritorially and supports a strong presumption against extraterritoriality. Absent language that unequivocally shows a clear indication of intent for the protections to apply overseas, the provision does not apply extraterritorially.

Liu’s slender argument against this holding is that Siemens has securities listed on an American exchange. Because the complaint alleges no further meaningful relationship between the harm and those domestically listed securities, the Circuit found that a US listing does not create extraterritorial application of the whistleblower statute.

On August 20, 2014, in European Community v. RJB Nabisco, No. 11-4275-cv (2d Cir. 08/20/14), the Circuit denied rehearing of its April 23 opinion. In connection with the EU’s allegations that Russian gangsters had laundered their profits in part through manipulated sales of cigarettes, it held that because “RICOʹs remedial provisions are addressed to violations of RICO predicates,“ RICO applies extraterritorially if, and only if, liability or guilt could attach to extraterritorial conduct under the relevant RICO predicate.

The Second Circuit held that with respect to a number of offenses that constitute predicates for RICO liability and were alleged in the case, Congress has clearly manifested an intent that they apply extraterritorially. For example, the extraterritorial application of two statutes arises from the elements of the crime itself: killing, and attempting to kill, “a national of the United States, while such national is outside the United States” and “[e]ngaging in illicit sexual conduct in foreign places.”

The Second Circuit looks to the relevant predicate statute to determine whether the injury caused by a violation thereof must be domestic. “If an injury abroad was proximately caused by the violation of a statute which Congress intended should apply to injurious conduct performed abroad, we see no reason to import a[n additional] domestic injury requirement simply because the victim sought redress through the RICO statute.”

The Second Circuit will soon have another extraterritoriality case. In SIPC v. Bernard L. Madoff Investment Securities, No. 12-mc-115 (JSR) (SDNY 07/06/14), the District Court, in reviewing a decision of the Bankruptcy Court, held that the Madoff trustee may not use section 550(a) of the Bankruptcy Code to pursue recovery of purely foreign subsequent transfers.
Foreign investment funds had pooled their own customers’ assets for investment with Madoff Securities. 11 USC section 550(a), the bankruptcy provision in focus, allows a trustee to recover “the property transferred . . . to the extent that a transfer is avoided” under one of the Bankruptcy Code’s avoidance provisions. The Madoff trustee sought to recover the purely foreign “feeder funds” transactions that were made abroad between a foreign transferor and a foreign transferee.

The District Court concluded that the factual circumstances of the case required an extraterritorial application of section 550(a). Then, under Morrison, it focused on “whether Congress intended for the statute to apply extraterritorially.”

In doing so, it stated that nothing in the language of the relevant statutes “suggests that Congress intended for this section to apply to foreign transfers.” However, citing Morrison, the District Court stated that it was compelled to look to context, “including surrounding provisions of the Bankruptcy Code” to seek any Congressional intention that the relevant statutes were meant to apply extraterritorially, and it found no such intention.

The District Court countered a policy argument raised by the Madoff trustee. The Trustee argued that a US debtor could fraudulently transfer all of his assets offshore and then retransfer those assets to avoid the reach of U.S. bankruptcy law if there were no extraterritoriality. The District Court used a balancing test, weighing the danger of such a loophole “against the presumption against extraterritoriality . . . “ It found that the possibility of such abuse did not rebut the presumption of extraterritoriality.

The Madoff case brings to the fore the issue long thought to have been resolved in Morrison, the need to go beyond the language of section 10(b) to determine extraterritoriality. Indeed, the argument resembles both supposedly-abrogated Berger tests, the “effects test,” whether the wrongful conduct had a substantial effect in the United States or upon United States citizens,” and a “conduct test,” whether the wrongful conduct occurred in the United States.” In considering the policy argument, the trial court obviously considered both Berger tests in a slightly disguised form. (See discussion of Parkcentral v. Porsche, No. 11-397-cv (2d Cir. 08/15/14), Part I)

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