2014 International Law Update, Volume 20, Number 4 (October – November - December)

2014 International Law Update, Volume 20, Number 4 (October – November - December)

Legal Analyses published by Mike Meier, Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com.  

ALIEN TORT STATUTE

In action brought by Iraqi torture victims, Second Circuit ponders whether and under what circumstances the Alien Tort Statute provides a cause of action for violations of the Law of Nations occurring within the territory of a sovereign country other than the United States

Plaintiffs, Iraqi women who were victims of torture by agents of the Saddam Hussein Regime or whose husbands were the victims of such torture, filed the instant case seeking compensatory and punitive damages on their own behalf and as a putative class action on behalf of those similarly situated. They claimed that defendants, Chevron Corporation (“Chevron”) and Banque National de Paris Paribas (“BNP”) illicitly diverted money to the Saddam Hussein Regime in violation of customary international law. They alleged that the defendants aided and abetted the abuses of the Saddam Hussein Regime by paying the regime kickbacks and other unlawful payments, which enabled the regime to survive and perpetrate the abuses suffered by plaintiffs or their husbands. The allegations stem from the United Nations’ Oil for Food Programme (“OFP”) which “permitted the export of oil from Iraq in exchange for food, medicine, and other basic civilian necessities by allowing the purchase of Iraqi oil to proceed through an escrow account, into which purchasers submitted payments and from which providers of civilian necessities received payment.” Mastafa v. Chevron Corp., 759 F. Supp. 2d 297, 298-99 (S.D.N.Y. 2010). Plaintiffs alleged that the Saddam Hussein Regime misused the OFP in order to generate income outside the United Nations’ oversight and fund its regime and its campaign of human rights abuses against its people.

In regards to Chevron, the complaint alleged that the Iraqi regime imposed illegal “surcharges” of 10 to 30 cents per barrel on oil sold pursuant to the OFP. Chevron knowingly paid the illegal surcharges on 9,533,690 barrels of oil and acted as a financer to many oil contracts. That way, Chevron allegedly paid $20 million in illicit surcharge payments through third parties, and knew that the premiums it paid to the third parties were passed through to the Saddam Hussein Regime.

In regards to BNP, the complaint alleged that, pursuant to a Banking Agreement between BNP and United Nations, BNP was the sole escrow bank for the OFP and was responsible for policing financial transactions associated with it. Its role as escrow agent for the United Nations was to ensure that financial transactions were in compliance with the United Nations Security Council resolution that had created the program. Plaintiffs asserted that BNP knew that the true nature of the financial transactions included illicit payments to the Saddam Hussein Regime and failed to disclose or interrupt the payments; that some of the surcharges were paid by BNP through customer accounts; and that in at least one transaction, BMP hid the identity of oil financiers as participants in an oil transaction, in violation of the Banking Agreement.

The Plaintiffs did not allege that Chevron or BNP, or their employees, directly engaged in the human rights abuses allegedly committed by the Saddam Hussein Regime. They alleged that the surcharge payments financed the torture and other atrocities inflicted on them or their husbands, and that through the alleged exploitations of the OFP, Chevron and BNP aided and abetted the Saddam Hussein Regime’s abuses, which made their claims actionable under Alien Tort Statute of 1789 (“ATS”) (28 U.S.C. § 1350), and the Torture Victim Protection Act of 1991 (“TVPA”) (106 Stat. 73).

The U.S. District Court for the Southern District of New York dismissed plaintiffs’ complaint with prejudice. The District Court’s dismissal was based on the conclusions that (1) the ATS claims were barred by the Second Circuit’s opinion in Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111 (2d Cir. 2010), which held that the ATS does not confer jurisdiction for claims alleging violations of the “law of nations” (that is, customary international law) against corporate defendants; (2) plaintiffs had failed adequately to plead negligence under state law, and other state law claims were time-barred; and (3) there were various pleading deficiencies in their TVPA claim. The Plaintiffs appealed.

In a de novo review, the U.S. Court of Appeals for the Second Circuit affirms the District Court’s judgment.

The key issue here is whether and under what circumstances the Alien Tort Statute allows courts to recognize a cause of action for violations of the law of nations occurring within the territory of a sovereign country other than the United States.

The Court analyses separately the TVPA and the ATS claims. In affirming the dismissal of the TVPA claim, the Court looks at the provision of law that states: “The TVPA imposes liability on ‘[a]n individual who, under actual or apparent authority, or color of law, of any foreign nation’ subjects another individual to torture or extrajudicial killing. 28 U.S.C. § 1350 note § (2)(a) (emphasis supplied). […]” [Slip Op. 4]

As the term “individual” is at issue here, the Court accepts the definition of “individual” as defined by the Supreme Court in Mohamad v. Palestinian Authority, 132 S. Ct. at 1706. “[…] [T]he term ‘individual’ in the TVPA ‘authorizes suit against natural persons alone.’ Id. The Court also expressly stated that the statute does not provide for suits against corporate entities, noting that ‘it is the rare statute . . . in which Congress expressly defines `individual’ to include corporate entities,’ and that ‘[t]here are no such indications in the TVPA.’ Id. at 1707.”

“There is no dispute that the defendants in this action are corporations, and therefore we are required to hold that they are not subject to liability under the TVPA. […]” [Slip Op. 4-5]

The Court then analyses the ATS claims. “The ATS states, in full: ‘The 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.’ 28 U.S.C. § 1350. It is a ‘jurisdictional’ statute in the sense that it ‘address[es] the power of the courts to entertain cases concerned with a certain subject.’ Sosa v. Alvarez-Machain, 542 U.S. 692, 714 (2004). Although it reads as a ‘jurisdictional grant’ only, the Supreme Court has held that the ATS was ‘enacted on the understanding that the common law would provide a cause of action for the modest number of international law violations with a potential for personal liability at the time.’ Id. at 724. As Judge Friendly has explained, the ATS’s ‘reference to the law of nations must be narrowly read if the section is to be kept within the confines of Article III.’ IIT v. Vencap, Ltd., 519 F.2d 1001, 1015 (2d Cir. 1975) (Friendly, J.), abrogated on other grounds, Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010). Thus, although there are billions of people in the world residing under various forms of state-sponsored oppression, claims are only actionable under the ATS if they are ‘accepted by the civilized world and defined with a specificity comparable to the features of the 18th-century paradigms’ upon which the ATS was written in 1789. Sosa, 542 U.S. at 725.” [Slip Op. 5]

“Here, then, we begin by assessing whether the ATS grants us jurisdiction over plaintiffs’ action. In light of the singular character of the ATS as a jurisdictional statute that derives its substantive meaning from customary international law, there are numerous jurisdictional predicates, all of which must be met before a court may properly assume jurisdiction over an ATS claim. For a district court, these jurisdictional inquiries include, but may not be limited to, a determination that: (1) the complaint pleads a violation of the law of nations, see Sosa, 542 U.S. at 732; Kadic v. Karadzic, 70 F.3d 232, 238 (2d Cir. 1995); (2) the presumption against the extraterritorial application of the ATS, announced by the Supreme Court in Kiobel, 133 S. Ct. 1659, does not bar the claim; (3) customary international law recognizes liability for the defendant, see Kiobel, 621 F.3d at 145; and (4) the theory of liability alleged by plaintiffs (i.e., aiding and abetting, conspiracy) is recognized by customary international law, see Khulumani v. Barclay National Bank Ltd., 504 F.3d 254, 264 (2d Cir. 2007) (Katzmann, J., concurring). Although each of these requires an affirmative determination before a court properly has jurisdiction over an ATS claim, the order and manner in which a court undertakes these inquiries is a matter of discretion based upon the particular circumstances presented. Here, in the circumstances before us, we begin with an inquiry into whether plaintiffs pleaded a violation of the law of nations, we then examine the theory of liability asserted, and we finally address extraterritoriality. Because we conclude that the complaint is barred by the presumption against extraterritoriality, we need not conclusively address other jurisdictional predicates.” [Slip Op. 6]

The Court analyses different jurisdictional aspects. “The first jurisdictional inquiry that we undertake is determining whether plaintiffs have adequately pleaded a cause of action. The ATS only confers jurisdiction over torts based upon violations of United States treaties or of the law of nations. 28 U.S.C. § 1350. As Judge Jon O. Newman has explained, ‘[b]ecause the [ATS] requires that plaintiffs plead a violation of the law of nations at the jurisdictional threshold, this statute requires a more searching review of the merits to establish jurisdiction than is required under the more flexible `arising under’ formula of [28 U.S.C.] section 1331.’ Kadic, 70 F.3d at 238 (internal quotation marks omitted). ‘Thus, it is not a sufficient basis for jurisdiction to plead merely a colorable violation of the law of nations. There is no federal subject-matter jurisdiction under the [ATS] unless the complaint adequately pleads a violation of the law of nations (or treaty of the United States).’ Id.” [Slip Op. 6]

“Plaintiffs’ complaint asserts seven causes of action predicated upon the following alleged violations by the Saddam Hussein regime: (1) crimes against humanity; (2) war crimes; (3) genocide; (4) torture; (5) extrajudicial killings; (6) forced disappearances of persons; and (7) cruel, inhuman, and/or degrading treatment and/or punishment. See App’x 34-43. All of these claims, plaintiffs argue, are cognizable under the ATS as torts committed in violation of the law of nations or of United States treaties. See id. at 28-29 ¶ 158.”

“Violations of the law of nations, also known as customary international law,[6] are those ‘violations of . . . international law norm[s] with [as] definite content and acceptance among civilized nations [as] the historical paradigms familiar when [the ATS]was enacted [in 1789],’ Sosa, 542 U.S. at 732, or, in other words, are violations of ‘specific and universally accepted rules that the nations of the world treat as binding in their dealings with one another,’ Kiobel, 621 F.3d at 118. We do well to recall that customary international law, as Judge Friendly explained, addresses only those wrongs proscribed by ‘standards, rules or customs (a) affecting the relationship between states or between an individual and a foreign state, and (b) used by those states for their common good and/or in dealings inter se.’ IIT v. Vencap, Ltd., 519 F.2d at 1015; see also Flores, 414 F.3d at 249; n.23, post, and accompanying text. By way of example, Judge Friendly rejected the notion that ‘the Eighth Commandment `Thou shalt not steal’ is part of the law of nations,’ because, ‘[w]hile every civilized nation doubtless has this as a part of its legal system,’ that is insufficient to establish it as a norm of the law of nations; rather, it must affect the relationship between states or between an individual and a foreign state, and must relate to the practice of states in their relationships inter se. Vencap, 519 F.2d at 1015; see also Flores, 414 F.3d at 249 (‘[F]or example, murder of one private party by another, universally proscribed by the domestic law of all countries (subject to varying definitions), is not actionable under the AT[S] as a violation of customary international law because the nations of the world have not demonstrated that this wrong is of mutual, and not merely several, concern.’ (internal quotation marks omitted).”

“We conclude that plaintiffs have satisfied their burden of asserting some causes of action grounded in actions recognized as violations of customary international law. See, e.g., Presbyterian Church, 582 F.3d at 256 (acknowledging that genocide, war crimes, and crimes against humanity may be asserted as causes of action under the ATS).” [Slip Op. 6]

The Court begins its answer to the question of whether the presumption against the extraterritorial application of statues bars plaintiffs’ action by analyzing the Supreme Court’s opinion in Kiobel, 133 S.Ct. 1659.

“The Supreme Court concluded in Kiobel that ‘[t]he principles underlying the presumption against extraterritoriality . . . constrain courts exercising their power under the ATS.’ 133 S. Ct. at 1665. The Court reached this conclusion after examining the statutory text and historical setting of the ATS’s passage, seeking evidence of congressional intent that it apply extraterritorially, id. at 1665-69, but determining that ‘there is no clear indication of extraterritoriality here,’ id. (internal quotation marks and alteration omitted). Accordingly, the Court held that the ATS could not form the basis for jurisdiction of U.S. courts over acts occurring entirely beyond the territory of the United States. Id.’”

“At the end of its opinion, the Supreme Court held that, in the specific case before it, the ATS could not confer federal jurisdiction over plaintiff’s claims because ‘all the relevant conduct took place outside the United States.’ Id. at 1669. Then, in language that has become the subject of interest by scholars and lower courts, the Court appeared to leave open a window for ATS actions that are based in part on extraterritorial conduct. The Court added:”

“‘And even where the claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application. See Morrison, 561 U.S. [247], 130 S. Ct. [2869,] 2883-2888. Corporations are often present in many countries, and it would reach too far to say that mere corporate presence suffices. Id. at 1669.’” [Slip Op. 8]

In their complaint, the plaintiffs included some contacts between the alleged injuries and the territory of the United States, such as (1) the OFP was created, administered, and its contracts approved by the United Nations in New York City, where the United Nations headquarters is located; (2) Chevron is headquartered in the United States, which means that many decisions related to the alleged violations of the OFP were “necessarily made by the top stake holders at Chevron in the United States”; (3) Chevron engaged in transactions with other U.S. companies involving the OFP oil and illicit surcharges, and its “profits reaped from the transactions were recouped in the United States”; and (4) BNP entered into a Banking Agreement with the United Nations in New York pursuant to which it maintained an escrow account in New York City through which all OFP funds moved, including the illicit surcharge payments. However, the Court states that the presumption against extraterritorial application is not “self-evidently dispositive” in this case, as it was in Kiobel. The Court uses Morrison and other Supreme Court cases as a guidance for its “further analysis” to determine whether the claim sufficiently “touches and concerns” the United States as to displace the presumption against extraterritorial application in the context of ATS.

“Adopting the Supreme Court’s methodology in Morrison, the first step of our inquiry here involves an evaluation of the ‘territorial event[s]’ or ‘relationship[s]’ that were the ‘focus’ of the ATS. Morrison, 561 U.S. at 266. This inquiry again begins with the Supreme Court’s most comprehensive and recent examination of the ATS in Kiobel. There, plaintiffs were Nigerian nationals who accused Dutch, British, and Nigerian corporations of aiding and abetting violations of customary international law by Nigerian military and police forces. Kiobel, 133 S. Ct. at 1662. Plaintiffs claimed that the defendant multi-national corporations aided and abetted the abuses by ‘providing the Nigerian forces with food, transportation, and compensation, as well as by allowing the Nigerian military to use respondents’ property as a staging ground for attacks.’ Id. at 1662-63. The United States ties alleged were that defendants’ shares were traded on the New York Stock Exchange, and that they had a New York City office (owned by an affiliate) that ‘helps to explain their business to potential investors.’ Id. at 1677 (Breyer, J., concurring in the judgment).”

“Focusing on the fact that ‘all the relevant conduct took place outside the United States,’ the Supreme Court held that the ATS did not extend to plaintiffs’ claims. Id. at 1669. In Balintulo, we explained that the phrase ‘relevant conduct’ in Kiobel referred, at all times and ‘[i]n all cases,’ to the conduct constituting the alleged offenses under the law of nations. Balintulo, 727 F.3d at 189-90, 192.[10] Indeed, we undertook a careful examination of the Supreme Court’s choice of language in Kiobel, and underscored that, on at least eleven occasions, the Court ‘framed’ its analysis as one ‘focusing solely on the location of the relevant `conduct’ or `violation.’” Id. at 189 (quoting Kiobel, 133 S. Ct. at 1665-69). Accordingly, in conducting our extraterritoriality analysis, we looked solely to the site of the alleged violations of customary international law. Id. at 189-90.”

“We then applied this ATS ‘focus’ analysis—examining the conduct alleged to constitute violations of the law of nations, and the location of that conduct—to the facts of Balintulo itself. There, the conduct at issue was the sale, by subsidiaries of the defendant corporations, of cars and computers to the apartheid government of South Africa, which allegedly aided and abetted that regime’s violations of customary international law. Id. at 182-83. Of particular relevance to the instant case, the Balintulo plaintiffs predicated their claim on an assertion that defendants ‘took affirmative steps in this country to circumvent the sanctions regime’ against South Africa. Id. at 192.”

“We rejected the Balintulo plaintiffs’ arguments, holding that their allegations were insufficient to displace the presumption. We reasoned that defendants’ alleged domestic conduct lacked a clear link to the human rights abuses occurring in South Africa that were at the heart of plaintiffs’ action. Id. (stating that none of plaintiffs’ allegations ‘ties the relevant human rights violations to actions taken within the United States’). We thus concluded that the alleged violations were ‘based solely on conduct occurring abroad,’ and hence were not cognizable in U.S. courts under the teachings of the Supreme Court in Kiobel. Id. at 182” [Slip Op. 9-10]

“Drawing upon the guidance provided by the Supreme Court in Morrison and Kiobel, and by this Court in Balintulo, a clear principle emerges for conducting the extraterritoriality-related jurisdictional analysis required by the ATS: that the ‘focus’ of the ATS is on conduct and on the location of that conduct. Thus, in determining whether the ATS confers on a federal court jurisdiction over a particular case, a district court must isolate the ‘relevant conduct’ in a complaint. That conduct is the conduct of the defendant which is alleged by plaintiff to be either a direct violation of the law of nations or, as we recognized in Presbyterian Church, 582 F.3d at 259, conduct that constitutes aiding and abetting another’s violation of the law of nations. In determining whether this conduct displaces the presumption, the district court must engage in a two-step jurisdictional analysis of this conduct.”

“The first step is to determine whether the ‘relevant’ conduct—conduct which constitutes a violation of the law of nations or aiding and abetting such a violation—sufficiently ‘touches and concerns’ the territory of the United States so as to displace the presumption against extraterritoriality. Kiobel, 133 S. Ct. at 1669.”

“The second step is to make a preliminary determination that the relevant conduct—which the court has determined sufficiently ‘touches and concerns’ the United States so as to displace the presumption—may in fact be relied upon in establishing jurisdiction. This is done through a preliminary determination that the complaint adequately states a claim that the defendant violated the law of nations or aided and abetted another’s violation of the law of nations. As with all allegations contained in a complaint, the pleaded conduct must be ‘plausibl[e],’ and allow the court ‘to infer more than the mere possibility of misconduct,’ Iqbal, 556 U.S. at 679, and must—at least upon an initial examination by the district judge—appear to satisfy the standard for alleging a violation of the law of nations or aiding and abetting such a violation. This initial ‘glimpse’ at what is ordinarily a merits determination is necessary due to the unique character of the ATS as a jurisdictional statute that derives substantive meaning from customary international law. Thus, jurisdiction can only properly be asserted over conduct that is in fact a violation of customary international law or aiding and abetting a violation. By ‘glimpsing’ at the merits at the jurisdictional stage, the district court ensures that the conduct alleged in a complaint may properly be relied upon by the court in conducting its extraterritoriality analysis.”

“Where a complaint alleges domestic conduct of the defendant (that, the court determines, displaces the presumption against extraterritoriality), but such conduct does not satisfy even a preliminary assessment of the merits, the court may not rely on that conduct for its extraterritoriality analysis. In such a circumstance, the complaint does not only fail on the merits, but must also fail as a jurisdictional matter, because where the conduct alleged does not state a claim under customary international law, it cannot form the basis of a court’s jurisdiction. See Kadic, 70 F.3d at 238 (‘Because the Alien Tort Act requires that plaintiffs plead `a violation of the law of nations’ at the jurisdictional threshold, this statute requires a more searching review of the merits to establish jurisdiction . . . . There is no federal subject-matter jurisdiction under the Alien Tort Act unless the complaint adequately pleads a violation of the law of nations.’) (citing Filartiga, 630 F.2d at 887-88). This second step of the extraterritoriality analysis ensures, as Justice Breyer stated in his Kiobel concurring opinion, that ‘the statute’s jurisdictional reach [will] match the statute’s underlying substantive grasp.’ Kiobel, 133 S. Ct. at 1673 (Breyer, J., concurring in the judgment).” [Slip Op. 10-11]

“[…] We note that although a district court might deny a motion to dismiss brought pursuant to Rule 12(b)(1) if it concludes that the complaint passes jurisdictional muster, that does not obviate the district court’s continuing obligation to ensure its own jurisdiction as the case proceeds to discovery. If subsequent materials in the record cast sufficient doubt upon the allegations in the complaint that formed the basis for the court’s subject-matter jurisdiction, the court must revisit the question of its jurisdiction sua sponte, or upon a party’s motion. See, e.g., Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567, 593 (2004) (‘[I]t is the obligation of both district court and counsel to be alert to jurisdictional requirements.’); Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., Div. of Ace Young Inc., 109 F.3d 105, 107 (2d Cir. 1997) (‘The failure of the parties to contest the district court’s authority to hear a case does not act to confer federal jurisdiction since a challenge to subject matter jurisdiction cannot be waived and may be raised either by motion or sua sponte at any time.’) (internal quotation marks, ellipses, and brackets omitted).” [Slip Op. 11-12]

“In evaluating the ‘relevant’ conduct, we are mindful of the Supreme Court’s emphasis on the potential foreign policy implications of the ATS. See Kiobel, 133 S. Ct. at 1664-65. In all cases applying the presumption against extraterritoriality to statutes, courts must be careful to recall the relevance of this canon—namely, ‘to protect against unintended clashes between our laws and those of other nations which could result in international discord.’ Equal Opportunity Emp’t Comm’n v. Arabian Am. Oil Co. (“ARAMCO”), 499 U.S. 244, 248 (1991); see also Parkcentral Global Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198, 216 (2d Cir. 2014). […]”

“Furthermore, in identifying the conduct which must form the basis of the violation and the jurisdictional analysis under the ATS, precedents make clear that neither the U.S. citizenship of defendants, nor their presence in the United States, is of relevance for jurisdictional purposes. First, in Kiobel the Court explicitly stated that ‘mere corporate presence’ in the United States would be insufficient to displace the presumption against extraterritoriality. 133 S. Ct. at 1669. And in Balintulo, we described a defendant’s citizenship as ‘an irrelevant factual distinction,’ and expressly rejected plaintiff’s contention that ‘corporate citizenship [of a defendant] in the United States is enough’ to displace the presumption. 727 F.3d at 189-90. And indeed, in another case in which the Supreme Court assessed the extraterritorial effect of a statute, the fact that the defendant corporations were American did not render defendant’s overseas activities sufficiently domestic. See ARAMCO, 499 U.S. at 247 (holding that Title VII of the Civil Rights Act of 1964 did not apply extraterritorially to a Delaware corporation’s treatment of its U.S. citizen employee in Saudi Arabia).” [Slip Op. 12]

“We [also] disagree with the contention that a defendant’s U.S. citizenship has any relevance to the jurisdictional analysis. The Supreme Court made clear in Kiobel that the full ‘focus’ of the ATS was on conduct. See Balintulo, 727 F.3d at 190-91 & n.24. Whether a complaint passes jurisdictional muster accordingly depends upon alleged conduct by anyone—U.S. citizen or not—that took place in the United States and aided and abetted a violation of the law of nations. A complaint cannot be ‘saved’ for jurisdictional purposes simply because a U.S. citizen happened to commit the alleged violation; similarly, our jurisdiction over actions taken within the United States is not less clear where they are actions of a foreign national rather than a U.S. citizen. Cf. Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012). […]” [Slip Op. 13]

The Court then turns to look at the complaint to see whether the complaint has pleaded a conduct by defendants that “touch[ed] and concern[ed]” the United States with sufficient force to displace the presumption against extraterritoriality, and that the same conduct states a claim for a violation of the law of nations or aiding and abetting another’s violation of the law of nations, and states:

“First, the fact that the United Nations is located in New York, and that the OFP’s inception and administration occurred in New York, is irrelevant. Such allegations, by themselves, are not facts related to defendants at all, let alone alleged conduct taken by defendants to aid and abet violations of the law of nations.”

“Second, where Chevron is headquartered is also immaterial, because, as just discussed, the relevant inquiry is on conduct constituting a violation of customary international law or of aiding and abetting such violations, not on where defendants are present. A defendant’s nationality or citizenship is pertinent only insofar as it relates to its alleged U.S. conduct.”

“Third, our jurisdictional analysis need not take into account allegations that, on their face, do not satisfy basic pleading requirements. Allegations must be more than ‘[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements.’ Iqbal, 556 U.S. at 678. Plaintiffs’ assertion that, because Chevron was headquartered in the United States, ‘much of the decisionmaking to participate in the [OFP] scheme’ was necessarily made in the United States, is just such a conclusory assumption. Appellants’ Ltr. Br. 4.” [Slip Op. 14]

“This particular combination of conduct in the United States— on the part of Chevron, multiple domestic purchases and financing transactions; on the part of BNP, numerous New York-based payments and ‘financing arrangements’ conducted exclusively through a New York bank account—is both specific and domestic. These allegations assert non-conclusory conduct that appears to ‘touch[ ] and concern[ ]’ the United States with sufficient force to displace the presumption against extraterritoriality and establish our jurisdiction under the ATS, if such conduct also meets the second prong of our extraterritoriality analysis—i.e., if it satisfies a preliminary determination that such conduct aided and abetted a violation of the law of nations. To do this, we provide a brief overview of the elements necessary to state a claim for aiding and abetting a violation of the law of nations under the ATS.”

“Our decision in Presbyterian Church resolved earlier uncertainty about the elements of a claim of aiding and abetting liability under the ATS. There, plaintiffs were Sudanese citizens who brought suit under the ATS against a Canadian oil company, alleging that security arrangements for the company carried out by the Sudanese government led to persecution of citizens living near oil concession areas. 582 F.3d at 249-52. Evaluating whether it was sufficient to state a claim that the defendant company knew of the alleged abuses, we held that ‘the mens rea standard for aiding and abetting liability in ATS actions is purpose rather than knowledge alone.’ Id. 259 (emphasis supplied). We noted the lack of a sufficient international consensus ‘for imposing liability on individuals who knowingly (but not purposefully) aid and abet a violation of international law.’ Id. Assuming, without deciding, that conspiracy liability for completed offenses was a valid theory in an ATS action, we also concluded that any such claims would require the same mens rea element as claims for aiding and abetting. Id. at 260.”

“In establishing this standard as the law of the Circuit, the unanimous Presbyterian Church panel relied substantially and expressly on Judge Katzmann’s concurring opinion in an earlier case, Khulumani, 504 F.3d at 264. There, Judge Katzmann conducted a lengthy analysis of relevant sources of international law and concluded that ‘a defendant may be held liable under international law for aiding and abetting the violation of that law by another when the defendant (1) provides practical assistance to the principal which has a substantial effect on the perpetration of the crime, and (2) does so with the purpose of facilitating the commission of that crime.’ Id. at 277 (emphasis supplied). Accordingly, the defendant’s ‘complicity’ in the government’s abuses in Presbyterian Church, without more, was insufficient to establish a claim of aiding and abetting or conspiracy under the ATS. 582 F.3d at 263.” [Slip Op. 15]

“[…] In their supplemental brief, plaintiffs summarize their mens rea allegations as follows: ‘the complaint alleges that Chevron and BNP acted both with the express purpose of violating the rules governing the Oil for Food Programme’ and ‘knew full well that doing so promoted serious human rights abuses in Iraq.’ Appellants’ Ltr. Br. 6 (emphasis added). In other words, plaintiffs assert that defendants acted purposefully in violating the OFP, but merely knowingly in aiding and abetting the underlying violations of the law of nations.”

“Plaintiffs thus miss the mark and misconstrue our clear holding in Presbyterian Church. The relevant inquiry at all times is whether plaintiffs’ complaint ‘supports an inference that [defendants] acted with the `purpose’ to advance the Government’s human rights abuses,’ Presbyterian Church, 582 F.3d at 260, not whether defendants merely knew that those abuses were occurring and that defendants’ business was enabling such acts. Plaintiffs’ allegations that defendants intentionally flouted the sanctions regime for profit, or that they knew their actions were in violation of United Nations Security Council resolutions, or ‘international law,’ or U.S. policy are irrelevant to the mens rea inquiry; rather, our analysis necessarily focuses on allegations that defendants intended to aid and abet violations of customary international law carried out by the Saddam Hussein regime—a contention that is unsupported by the facts alleged in the complaint.”

“Where the complaint appears to allege something akin to purpose, it does so in conclusory terms and fails to establish even a baseline degree of plausibility of plaintiffs’ claims. For example, the complaint alleges in its introduction that ‘[d]efendants conspired with the Saddam Hussein regime to maintain control and power over Iraq in order to secure mutual financial benefits through the egregious affronts on the human rights of the [p]laintiffs.’ Compl. Introduction. Plaintiffs never elaborate upon this assertion in any way that establishes the plausibility of a large international corporation intending—and taking deliberate steps with the purpose of assisting—the Saddam Hussein regime’s torture and abuse of Iraqi persons. See Kiobel, 621 F.3d at 192 (Leval, J., concurring in the judgment). ([…] Such pleadings are merely a conclusory accusation of violation of a legal standard and do not withstand the test of Twombly and Iqbal.’). Other points at which the complaint seems to allege purposeful action are similarly conclusory, and also fail to directly link the allegedly intentional conduct with the human rights abuses at the heart of the complaint. They thus fall short of the pleading standards required by Iqbal and Twombly.”

“Because the complaint fails plausibly to plead that defendants’ conduct related to aiding and abetting the alleged violations of customary international law was intentional, that conduct cannot form the basis for our jurisdiction.” [Slip Op. 15-16]

The Court concludes that the District Court did not have subject-matter jurisdiction over the case and affirms the District Court judgment.

Citation: Mastafa v. Chevron Corporation, No. 10-5258-cv (Second Cir. 2014).

ANTITRUST

In dispute arising from the standards for USB connectors, Second Circuit reviews the extraterritorial reach of U.S. antitrust law

Lotes Co., Ltd. (“Lotes”), a Taiwanese corporation specializing in the design and manufacture of electronic components for notebook computers, including Universal Serial Bus (“USB”) connectors, alleged that the defendants, a group of five companies that compete with Lotes in making and selling USB connectors, have attempted to leverage their ownership of certain key patents to gain control of a new technological standard for USB connectors and to gain monopoly power over the entire USB connector industry.

Lotes manufactures USB connectors in factories located in China and sells them to other Taiwanese firms with facilities in China known as Original Design Manufacturers (“ODMs”). ODMs make and assemble computer products incorporating USB connectors for many well-known computer brands that sell them to consumers and businesses around the world, including the United States.

The dispute arises out of the development of the industry standard for USB connectors known as USB 3.0. Common technological standards like USB 3.0 carry pro-competitive benefits and anticompetitive risks because they enable different firms to produce products that are compatible with one another. Since they can interoperate with many other products, standard-compliant products can be more valuable and provide greater benefits to consumers, which in turn simulate increased investment from manufacturers. However, the process of developing standards requires extensive cooperation and coordination among competitors, which can be subverted to anticompetitive ends. To avoid these risks, the standard-setting organizations restrain the behavior of parties participating in the standard by contract. They typically secure agreements wherein parties who contribute proprietary technology to the standard promise to license that technology on reasonable and nondiscriminatory (“RAND”) terms. Absent such an agreement, the standard-setting organization will omit the technology in question from the standard.

The USB Implementers Forum, Inc. (“USB-IF”) is the standard-setting organization responsible for developing the standards for USB connectors. The parties contributing to the USB 3.0 standard are required by USB-IF to sign the USB 3.0 Contributors Agreement (the “Contributors Agreement”), which Lotes and the defendants have signed. Furthermore, Lotes and the defendants signed USB 3.0 Adopters Agreement with the required Adoption Period, which makes them both contributors to and adopters of the USB 3.0 standard.

Paragraph 3.4 of the Contributors Agreement “obligates ‘Contributor[s]’ to grant to any ‘Adopter’ a ‘non-exclusive world-wide license under any Necessary Claim of a patent or patent application ... on a royalty-free basis and under otherwise reasonable and nondiscriminatory (`RAND-Zero’) terms....’J.A. 79 (emphasis omitted)”. Therefore, the defendants were obliged to provide RAND-Zero licenses to Lotes for all patent claims needed to practice the USB 3.0 standard.

The Contributors Agreement also contains provisions designed to prevent the USB-IF from becoming a forum for antitrust violations, a New York choice-of-law clause and an exclusive choice-of forum clause providing that all disputes arising out of the Agreement shall be heard in the state and Federal courts of New York.

In its complaint, Lotes claims that the defendants have brazenly flouted their obligation to provide RAND-Zero licenses to adopters of the USB 3.0 standard. Lotes alleged that Hon Hai and Foxconn (two of the defendants) have contacted Lotes’ customers and distributors to allege that they had the sole patent rights on USB 3.0 connectors and would sue them if they did not buy from Foxconn. Foxconn reported in a Taiwanese trade press publication that it was the first to obtain patents related to USB 3.0 products which would enable it to enjoy a monopolistic position.

As Lotes attempted to secure a RAND-Zero license, on March 25, 2011, at Hon Hai’s request, it executed and returned a non-disclosure agreement to enable licensing negotiations to proceed. Although Hon Hai’s U.S. outside counsel informed Lotes that it was in the process of developing licensing agreements, Lotes never received a draft licensing agreement or any other further communication.

On February 10, 2012, in-house counsel for Foxconn Electronics sent a letter, on Hon Hai letterhead, to the USB-IF’s President and Chief Operating Officer, stating that Hon Hai and Foxconn were “pleased to be active contributors of the USB 3.0 project and early signers of the USB Contributors Agreement. The letter unequivocally affirmed Foxconn’s commitment to license patent claims necessary to practice the USB 3.0 standard on RAND-Zero terms required by the Contributors Agreement, and that Foxconn would provide RAND licenses for other intellectual property that is not strictly necessary to practice the USB 3.0 standard but that would be required to practice certain “optional features”.

On July 9, 2012, Foxconn Kunshan filed patent infringement suits in China against two Chinese subsidiaries of Lotes, requesting orders enjoining two key Lotes factories from making and selling certain USB 3.0 connectors; and orders for the destruction of all existing infringing inventory and specialized manufacturing equipment. According to Lotes, these patents fall within the defendants’ licensing obligations under the Contributors Agreement and must be licensed to Lotes on RAND-Zero terms.

Lotes alleged that defendants’ action endangered all of Lotes’ existing and prospective business relations and that curbing competition in China will have downstream effects worldwide, including in the United States.

On October 4, 2012, Lotes filed suit against the defendants, and on December 21, 2012, filed the operative First Amended Complaint. The defendants filed a motion to dismiss, which Lotes duly opposed. The District Court issued an Opinion and Order dismissing the First Amended Complaint for a lack of subject matter jurisdiction, holding that the FTAIA restrictions are jurisdictional. The clerk entered final judgement on May 20, 2013. Lotes appealed.

The United States Court of Appeals for the Second Circuit affirms the District Court’s decision.

The question presented in this case is the extraterritorial reach of U.S. antitrust law. To answer this question, the Court considers whether plaintiff’s allegation suffice to state a viable claim under the Sherman Act, 15 U.S.C. §§ 1, 2, including: whether the restrictions Congress has imposed on antitrust claims based on foreign conduct under the Foreign Trade Antitrust Improvements Act (“FTAIA”), 15 U.S.C. § 6a, are jurisdictional in nature; whether the defendants have waived the requirements of the FTAIA by contract; whether the defendants’ alleged anticompetitive conduct has a “direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import commerce under the FTAIA; and whether any such effect “gives rise to” the plaintiff’s claims.

“As codified in section 6a of the Sherman Act, the FTAIA provides:”

“‘*404 Sections 1 to 7 of this title shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless —

 (1) such conduct has a direct, substantial, and reasonably foreseeable effect —

(A) on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations; or

(B) on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States; and

(2) such effect gives rise to a claim under the provisions of sections 1 to 7 of this title, other than this section.’”

“If sections 1 to 7 of this title apply to such conduct only because of the operation of paragraph (1)(B), then sections 1 to 7 of this title shall apply to such conduct only for injury to export business in the United States. 15 U.S.C. § 6a.” [753 F. 3d at 404]

The Court cites the Supreme Court’s explanations of this provision in F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 162, 124 S.Ct. 2359, 159 L.Ed.2d 226 (2004) (quoting 15 U.S.C. § 6a(1), (2)), which states:

“‘This technical language initially lays down a general rule placing all (nonimport) activity involving foreign commerce outside the Sherman Act’s reach. It then brings such conduct back within the Sherman Act’s reach provided that the conduct both (1) sufficiently affects American commerce, i.e., it has a “direct, substantial, and reasonably foreseeable effect” on American domestic, import, or (certain) export commerce, and (2) has an effect of a kind that antitrust law considers harmful, i.e., the “effect” must “giv[e] rise to a [Sherman Act] claim.’”

“Congress enacted this statute with two principal purposes in mind. First, the statute seeks to boost American exports by ‘mak[ing] clear to American exporters (and to firms doing business abroad) that the Sherman Act does not prevent them from entering into business arrangements (say, joint-selling arrangements), however anticompetitive, as long as those arrangements adversely affect only foreign markets.’ Empagran, 542 U.S. at 161, 124 S.Ct. 2359 (citing H.R.Rep. No. 97-686, at 1-3, 9-10 (1982), 1982 U.S.C.C.AN. 2487). Second, Congress sought to clarify the legal standard determining when American antitrust law governs foreign conduct, which different courts had articulated in somewhat different ways. See H.R.Rep. No. 97-686, at 5-6 (1982), 1982 U.S.C.C.A.N. 2487. Congress thus ‘designed the FTAIA to clarify, perhaps to limit, but not to expand in any significant way, the Sherman Act’s scope as applied to foreign commerce.’ Empagran, 542 U.S. at 169, 124 S.Ct. 2359 (emphasis omitted).” [753 F. 3d at 404]

The Court accepts Lotes’ argument that the district court’s ruling that the FTAIA’s requirements are jurisdictional was erroneous. Lotes argued that Filetech is no longer good law in light of the Supreme Court’s decisions in Arbaugh and its progeny.

“In Arbaugh, the Supreme Court confronted the question of whether a particular requirement in Title VII of the Civil Rights Act of 1964 affects federal courts’ subject matter jurisdiction or is instead a substantive element of a claim on the merits. See 546 U.S. at 503, 126 S.Ct. 1235. In particular, Title VII prohibits any ‘employer’ from discriminating on protected grounds, 42 U.S.C. § 2000e-2(a)(1), and defines ‘employer’ to include only those having ‘fifteen or more employees,’ id. § 2000e(b). Reversing the lower courts, the Supreme Court held that this employee-numerosity requirement goes to the merits of a claim rather than the jurisdiction of the court. See Arbaugh, 546 U.S. at 504, 126 S.Ct. 1235. In so holding, the Court announced a ‘readily administrable bright line’ for when statutory requirements are jurisdictional:”

“‘If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.’”

“Id. at 515-16, 126 S.Ct. 1235 (footnote and internal citation omitted). In just eight years since Arbaugh, the Supreme Court has repeatedly applied this clear-statement rule to find statutory requirements substantive rather than jurisdictional. See, e.g., Auburn Reg’l, 133 S.Ct. at 824-26 (time limit for filing an appeal to the Provider Reimbursement Review Board under the Medicare statute); Morrison v. Nat’l Austrl. Bank Ltd., 561 U.S. 247, 254, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) (extraterritorial reach of § 10(b) of the Securities and Exchange Act of 1934); Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154, 160-66, 130 S.Ct. 1237, 176 L.Ed.2d 18 (2010) (registration requirement under the Copyright Act).” [753 F. 3d at 405]

“Applying the teaching of the Arbaugh line of cases, we have little difficulty concluding that the requirements of the FTAIA go to the merits of an antitrust claim rather than to subject matter jurisdiction. Nothing in the statute ‘speak[s] in jurisdictional terms or refer[s] in any way to the jurisdiction of the district courts.’ Arbaugh, 546 U.S. at 515, 126 S.Ct. 1235 (quoting Zipes v. Trans World Airlines, Inc., 455 U.S. 385, 394, 102 S.Ct. 1127, 71 L.Ed.2d 234 (1982)). To the contrary, the statutory text refers to the ‘conduct’ to which the Sherman Act ‘appl[ies].’ As the Seventh Circuit has noted, ‘[t]his is the language of elements, not jurisdiction.’ Minn-Chem, 683 F.3d at 852. Moreover, both courts of appeals to have addressed this issue after Arbaugh have reached the same conclusion and have overruled their respective contrary pre-Arbaugh precedents. See id. at 851-52; Animal Sci. Prods., Inc. v. China Minmetals Corp., 654 F.3d 462, 467-68 (3d Cir.2011). To the extent it holds that the FTAIA’s requirements are jurisdictional, Filetech is no longer good law.” [753 F. 3d at 405-406]

The defendants argued that FTAIA imposes a unique, separately codified threshold requirement on antitrust claims involving foreign conduct. They noted that unlike claims involving purely domestic conduct, the FTAIA bars claims based on foreign conduct from proceeding unless the foreign conduct has a cognizable effect on the United States; and concluded that only if that prerequisite is satisfied may the plaintiff pursue a claim “under the provisions of section 1 to 7 of [the Sherman Act], other than [the FTAIA] 15 U.S.C. § 6a(2).”

“But it is hardly uncommon for Congress to impose threshold requirements or to codify those requirements in separate provisions. In the Copyright Act, for example, the threshold requirement for a plaintiff to register his or her copyright before filing an infringement action is codified at 17 U.S.C. § 411(a), separately from the general provisions governing infringement claims at 17 U.S.C. §§ 501-505. But that statutory structure did not prevent the Supreme Court in Reed from finding the registration requirement nonjurisdictional. See Reed, 559 U.S. at 160-66, 130 S.Ct. 1237. Here, the FTAIA unmistakably imposes unique threshold requirements on antitrust claims involving foreign conduct, but nothing in the statute even suggests—much less ‘clearly states,’ Arbaugh, 546 U.S. at 515, 126 S.Ct. 1235—that those requirements are jurisdictional.”

“The defendants’ reliance on the FTAIA’s legislative history fares no better. The statutory text plainly uses ‘the language of elements, not jurisdiction,’ Minn-Chem, 683 F.3d at 852, and courts ‘do not resort to legislative history to cloud a statutory text that is clear.’ Ratzlaf v. United States, 510 U.S. 135, 147-48, 114 S.Ct. 655, 126 L.Ed.2d 615 (1994). Moreover, when the Supreme Court has instructed that jurisdictional requirements must be ‘clearly state[d],’ Arbaugh, 546 U.S. at 515, 126 S.Ct. 1235, looking beyond an unambiguously substantive statutory text is doubly unwarranted.”

“Furthermore, while the defendants point out that portions of the legislative history employ jurisdictional language, other portions speak in merits terms. And even to the extent the legislative history mentions jurisdiction, ‘[j]urisdiction ... is a word of many, too many meanings.’ Arbaugh, 546 U.S. at 510, 126 S.Ct. 1235 (quoting Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 90, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998)). Indeed, ’the legal lexicon knows no word more chameleon-like than `jurisdiction,’” United States v. Yousef, 750 F.3d 254, 259, 2014 WL 1673281, at *3 (2d Cir. Apr. 29, 2014) (quoting United States v. Sabella, 272 F.2d 206, 209 (2d Cir.1959)), and the Supreme Court, ‘no less than other courts, has sometimes been profligate in its use of the term,’ Arbaugh, 546 U.S. at 510, 126 S.Ct. 1235. None of the jurisdictional references the defendants rely upon uses the term unambiguously to describe the adjudicative authority of U.S. courts rather than, somewhat less precisely, the prescriptive scope of U.S. law. See, e.g., H.R.Rep. No. 97-686, at 13 (1982), 1982 U.S.C.C.A.N. 2487, 2498 (explaining that the statute addresses ‘the subject matter jurisdiction of United States antitrust law’ (emphasis added)). Given that the judiciary often conflated these concepts until the Supreme Court began in recent years ‘to bring some discipline to the use of this term,’ Henderson ex rel. Henderson v. Shinseki, ___ U.S. ___, 131 S.Ct. 1197, 1202, 179 L.Ed.2d 159 (2011), Congress’s loose language is hardly surprising.” [753 F. 3d at 406-407]

The Court also does not accept defendants’ invocation of the cannon of statutory interpretation whereby court “ordinarily construe[] ambiguous statutes to avoid unreasonable interference with the sovereign authority of other nations.” Empagran, 542 U.S. at 164, 124 S.Ct. 2359. The Court states: “even assuming that construing the FTAIA to be jurisdictional would serve the interests of international comity, the statute is not ambiguous. And even if it were ambiguous, the Supreme Court has specifically instructed us to treat statutory limitations as nonjurisdictional unless Congress ‘clearly states’ otherwise. Arbaugh, 546 U.S. at 515, 126 S.Ct. 1235.” [753 F. 3d at 407]

“Finally, the defendants point to two arguably jurisdictional statements from the Supreme Court’s decision in Empagran. First, the Court quoted a statement from the FTAIA’s legislative history to the effect that ‘there should be no American antitrust jurisdiction absent a direct, substantial and reasonably foreseeable effect on domestic commerce or a domestic competitor.’ 542 U.S. at 163, 124 S.Ct. 2359 (quoting H.R.Rep. No. 97-686, at 9-10). And second, the Court approvingly quoted a statement from a Fifth Circuit decision, which reported finding ‘no case in which jurisdiction was found in a case like [Empagran].’ Id. at 170, 124 S.Ct. 2359 (quoting Den Norske Stats Oljeselskap As v. HeereMac Vof, 241 F.3d 420, 429 (5th Cir.2001)). We note that the Court also quoted a treatise arguing that Congress would not have intended the FTAIA to ‘provide worldwide subject matter jurisdiction to any foreign suitor wishing to sue its own local supplier’ for conduct that has independent effects on U.S. commerce. Id. at 166, 124 S.Ct. 2359 (quoting Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 273, at 51-52 (Supp. 2003)).”

“[…] Furthermore, the jurisdictional references in Empagran appear in quotations from other sources, and the opinion also contains language that describes the FTAIA in decidedly nonjurisdictional terms. As the Seventh Circuit has noted, the Court in Empagran ‘spoke, for example, of the FTAIA’s `removing from the Sherman Act’s reach’ certain types of conduct, and whether it was reasonable under the facts presented there `to apply this law to conduct that is significantly foreign.’” Minn-Chem, 683 F.3d at 852 (quoting Empagran, 542 U.S. at 161, 166, 124 S.Ct. 2359). The defendants’ reliance on Empagran is thus misplaced.” [753 F. 3d at 407-408]

Based on Arbaugh, the Court concludes that the requirements of the FTAIA are substantive and nonjurisdictional.

The Court then analyzes Lotes’ argument related to the five provisions of the Contributors Agreement that all establish that the defendants agreed to subject their conduct to the U.S. antitrust scrutiny. The Court finds two fundamental problems. First, Lotes did not raise this issue before the district court.

“Second, even if we were to exercise our discretion to consider this forfeited issue, see id., Lotes’s argument is meritless. Even assuming arguendo that the substantive requirements of the FTAIA are waivable, but see New York v. Hill, 528 U.S. 110, 116, 120 S.Ct. 659, 145 L.Ed.2d 560 (2000) (“[A] `right conferred on a private party, but affecting the public interest, may not be waived or released if such waiver or release contravenes the statutory policy.’” (emphasis omitted) (quoting Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 704, 65 S.Ct. 895, 89 L.Ed. 1296 (1945)) […]” [753 F. 3d at 408]

The Court agrees with Lotes’ statement that the district court erred by misinterpreting the FTAIA and applying the wrong legal standard when analyzing Lotes’ allegations that the defendants’ anticompetitive conduct has “direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import commerce under the FTAIA, and states:

“In dismissing Lotes’s antitrust claims for failure to satisfy the FTAIA’s domestic effects exception, the district court relied heavily on the Ninth Circuit’s decision in [United States v. LSL Biotechnologies, 379 F.3d 672 (9th Cir. 2004)], which construed the statutory requirement of a ‘direct ... effect.’ See LSL, 379 F.3d at 680. Borrowing from a Supreme Court case interpreting a similar term in the Foreign Sovereign Immunities Act (‘FSIA’), 28 U.S.C. §§ 1602 -1611, the Ninth Circuit held that ‘an effect is `direct’ if it follows as an immediate consequence of the defendant’s activity.’ LSL, 379 F.3d at 680 (citing Republic of Arg. v. Weltover, Inc., 504 U.S. 607, 618, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992)). […]”

“In applying the interpretation of ‘direct ... effect’ set forth in LSL, whereby an effect is ‘direct’ if it follows as an immediate consequence, the district court appears not to have considered the alternative approach advocated by the United States and the FTC and adopted by the Seventh Circuit in its en banc decision in Minn-Chem. Under that approach, “the term `direct’ means only `a reasonably proximate causal nexus.’” Minn-Chem, 683 F.3d at 857 (quoting Makan Delrahim, Drawing the Boundaries of the Sherman Act: Recent Developments in the Application of the Antitrust Laws to Foreign Conduct, 61 N.Y.U. Ann. Surv. Am. L. 41, 430 (2005)). […]”

“The court in LSL relied on two interpretive sources for its contrary holding. First, it quoted Webster’s Third New International Dictionary, which defines ‘direct’ as ‘proceeding from one point to another in time or space without deviation or interruption.’ LSL, 379 F.3d at 680 (quoting Webster’s Third New Int’l Dictionary 640 (1981)). But the same dictionary also defines ‘direct’ as ‘characterized by or giving evidence of a close especially logical, causal, or consequential relationship.’ Webster’s Third New Int’l Dictionary 640 (1981). Although this is an alternative definition, ‘the relative order of the common dictionary definitions of a single term does little to clarify that term’s meaning within a particular context. When a word has multiple definitions, usage determines its meaning.’ Trs. of Chic. Truck Drivers, Helpers & Warehouse Workers Union (Indep.) Pension Fund v. Leaseway Transp. Corp., 76 F.3d 824, 828 n. 4 (7th Cir.1996).”

“The court in LSL also relied upon the Supreme Court’s interpretation of a ‘nearly identical term’ in the FSIA in Weltover. LSL, 379 F.3d at 680. But the Supreme Court has cautioned that courts ‘must be careful not to apply rules applicable under one statute to a different statute without careful and critical examination.’ Gross v. FBL Fin. Servs., Inc., 557 U.S. 167, 174, 129 S.Ct. 2343, 174 L.Ed.2d 119 (2009) (quoting Fed. Express Corp. v. Holowecki, 552 U.S. 389, 393, 128 S.Ct. 1147, 170 L.Ed.2d 10 (2008)). Indeed, ‘[m]ost words have different shades of meaning and consequently may be variously construed, not only when they occur in different statutes, but when used more than once in the same statute or even the same section.’ Env. Def. v. Duke Energy Corp., 549 U.S. 561, 574, 127 S.Ct. 1423, 167 L.Ed.2d 295 (2007) (quoting Atl. Cleaners & Dyers, Inc. v. United States, 286 U.S. 427, 433, 52 S.Ct. 607, 76 L.Ed. 1204 (1932)).” [753 F. 3d at 409-410]

“This textual difference between the FSIA and FTAIA is critically important. As Minn-Chem succinctly explains,”

“‘No one needs to read the words ‘substantial’ and ‘foreseeable’ into the FTAIA. Congress put them there, and in so doing, it signaled that the word ‘direct’ used along with them had to be interpreted as part of an integrated phrase. Superimposing the idea of ‘immediate consequence’ on top of the full phrase results in a stricter test than the complete text of the statute can bear.’”

“683 F.3d at 857. Indeed, LSL’s reading of the FTAIA would violate the ‘cardinal principle of statutory construction’ that statutes must be construed, if reasonably possible, so that ‘no clause, sentence, or word shall be superfluous, void, or insignificant.’ TRW Inc. v. Andrews, 534 U.S. 19, 31, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001) (quoting Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001)). Reading ‘direct’ as ‘immediate’ would rob the separate ‘reasonabl[e] foreseeab[ility]’ requirement of any meaningful function, since we are hard pressed to imagine any domestic effect that would be both ‘immediate’ and ‘substantial’ but not ‘reasonably foreseeable.’ Furthermore, we must remember that ‘[i]mport trade and commerce are excluded at the outset from the coverage of the FTAIA in the same way that domestic interstate commerce is excluded.’ Minn-Chem, 683 F.3d at 854; see also 15 U.S.C. § 6a (providing that, unless an exception applies, the Sherman Act ‘shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations’ (emphasis added)). To demand that any domestic effect must follow as an immediate consequence of a defendant’s foreign anticompetitive conduct would all but collapse the FTAIA’s domestic effects exception into its separate import exclusion.”

“Interpreting ‘direct’ to require only a reasonably proximate causal nexus, by contrast, avoids these problems while still addressing antitrust law’s classic aversion to remote injuries. Indeed, ‘directness’ is one of the traditional formulations courts have used to talk about the common-law concept of proximate causation. See, e.g., Holmes v. Sec. Investor Prot. Corp., 503 *412 U.S. 258, 268, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992) (describing common-law proximate causation as ‘a demand for some direct relation between the injury asserted and the injurious conduct alleged’). And courts have long applied notions of proximate causation, using the language of ‘directness,’ in determining what types of injuries the antitrust laws may properly redress. In the early twentieth century, for example, before the Supreme Court’s regime-changing Commerce Clause decision in Wickard v. Filburn, 317 U.S. 111, 63 S.Ct. 82, 87 L.Ed. 122 (1942), courts commonly held that anticompetitive schemes whose effects on interstate commerce were merely “`incidental,’ `indirect,’ or `remote,’” were, ‘under the prevailing climate, beyond Congress’ [s] power to regulate, and hence outside the scope of the Sherman Act.’ Mandeville Island Farms, Inc. v. Am. Crystal Sugar Co., 334 U.S. 219, 230, 68 S.Ct. 996, 92 L.Ed. 1328 (1948). And today, courts continue to analyze antitrust standing by considering, among other factors, the ‘directness or indirectness of the asserted injury,’ Assoc. Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 540, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983), using familiar principles of proximate causation, see Blue Shield of Va. v. McCready, 457 U.S. 465, 476-77 & n. 13, 102 S.Ct. 2540, 73 L.Ed.2d 149 (1982).”

“Of course, proximate causation is a notoriously slippery doctrine. ‘In a philosophical sense, the consequences of an act go forward to eternity, and the causes of an event go back to the dawn of human events, and beyond.’ CSX Transp., Inc. v. McBride, ___ U.S. ___, 131 S.Ct. 2630, 2642, 180 L.Ed.2d 637 (2011) (quoting W. Page Keeton et al., Prosser and Keeton on Torts § 42, at 264 (5th ed.1984)). Proximate causation is thus ‘shorthand for a concept: Injuries have countless causes, and not all should give rise to legal liability.’ Id. at 2637. The doctrine of proximate causation provides the legal vocabulary for drawing this line—courts ask, for example, ‘whether the injury that resulted was within the scope of the risk created by the defendant’s [wrongful] act; whether the injury was a natural or probable consequence of the [conduct]; whether there was a superseding or intervening cause; whether the [conduct] was anything more than an antecedent event without which the harm would not have occurred.” Id. at 2652 (Roberts, C.J., dissenting). ‘The proximate-cause inquiry is not easy to define, and over the years it has taken various forms; but courts have a great deal of experience applying it, and there is a wealth of precedent for them to draw upon in doing so.’ Lexmark Int’l, Inc. v. Static Control Components, Inc., ___ U.S. ___, 134 S.Ct. 1377, 1390, 188 L.Ed.2d 392 (2014).”

“While Minn-Chem’s ‘reasonably proximate causal nexus’ standard incorporates all of this useful judicial experience, LSL’s ‘immediate consequence’ standard focuses narrowly on a single factor—the spatial and temporal separation between the defendant’s conduct and the relevant effect. Herein lies the error of the decision below, which placed near-dispositive weight on the fact that USB 3.0 connectors are manufactured and assembled into finished computer products ‘in China’ before being sold in the United States. J.A. 264. This kind of complex manufacturing process is increasingly common in our modern global economy, and antitrust law has long recognized that anticompetitive injuries can be transmitted through multi-layered supply chains. Indeed, the Supreme Court has held that claims by indirect purchasers are ‘consistent with the broad purposes of the federal antitrust laws: deterring anticompetitive conduct and ensuring the compensation of victims of that *413 conduct.’ California v. ARC Am. Corp., 490 U.S. 93, 102, 109 S.Ct. 1661, 104 L.Ed.2d 86 (1989).”

“There is nothing inherent in the nature of outsourcing or international supply chains that necessarily prevents the transmission of anticompetitive harms or renders any and all domestic effects impermissibly remote and indirect. Indeed, given the important role that American firms and consumers play in the global economy, we expect that some perpetrators will design foreign anticompetitive schemes for the very purpose of causing harmful downstream effects in the United States. Whether the causal nexus between foreign conduct and a domestic effect is sufficiently ‘direct’ under the FTAIA in a particular case will depend on many factors, including the structure of the market and the nature of the commercial relationships at each link in the causal chain. Courts confronting claims under the FTAIA will have to consider all of the relevant facts, using all of the traditional tools courts have used to analyze questions of proximate causation.”

“In this case, however, we need not decide the rather difficult question of whether the defendants’ foreign anticompetitive conduct has a “direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import commerce, as that phrase is properly understood. That is because even assuming that Lotes has plausibly alleged a domestic effect, that effect did not ‘give[] rise to’ Lotes’s claims. 15 U.S.C. § 6a(2).” [753 F. 3d at 411-413]

The Court then explains why the domestic effect caused by the defendants’ foreign anticompetitive conduct did not “give[] rise to” Lotes’ claims.

“To review the statutory framework, the FTAIA generally excludes wholly foreign conduct from the reach of the Sherman Act, but brings such conduct back within the statute’s scope where two requirements are met: (1) the foreign conduct has a ‘direct, substantial, and reasonably foreseeable effect’ on U.S. domestic, import, or certain export commerce, id. § 6a(1); and (2) that effect ‘gives rise to a claim under’ the Sherman Act, id. § 6a(2). In Empagran, the Supreme Court held that the statutory phrase ‘gives rise to a claim’ means ‘gives rise to the plaintiff’s claim.’ See Empagran, 542 U.S. at 173, 124 S.Ct. 2359. After considering the legislative history and principles of international comity, the Court concluded that ‘Congress would not have intended the FTAIA’s exception to bring independently caused foreign injury within the Sherman Act’s reach.’ Id. The FTAIA thus includes two distinct causation inquiries, one asking whether the defendants’ foreign conduct caused a cognizable domestic effect, and the other asking whether that effect caused the plaintiff’s injury.”

“Under this second inquiry, in the wake of Empagran, three courts of appeals have considered what kind of causal connection is necessary for a domestic effect to ‘give[] rise to’ a plaintiff’s claim. Consistent with the comity canon and general antitrust principles, these courts have held that the domestic effect must proximately cause the plaintiff’s injury. See In re Dynamic Random Access Memory (DRAM) Antitrust Litig., 546 F.3d 981, 987 (9th Cir.2008) (‘Like the D.C. Circuit and the Eighth Circuit, we ... adopt a proximate causation standard.’); In re Monosodium Glutamate Antitrust Litig., 477 F.3d 535, 538 (8th Cir.2007) (‘[T]he statutory `gives rise to’ language requires a direct or proximate causal relationship....’); Empagran S.A. v. F. Hoffmann-LaRoche, Ltd., 417 F.3d 1267, 1271 (D.C.Cir.2005) (‘The statutory language—`gives rise to’—indicates a direct causal relationship, that is, proximate causation....’). Agreeing with our sister circuits, we adopt that standard here.”

“We thus must determine whether any domestic effect resulting from the defendants’ anticompetitive conduct proximately caused Lotes’s injury. We conclude that it did not. Lotes alleges that the defendants’ foreign conduct had the effect of driving up the prices of consumer electronics devices incorporating USB 3.0 connectors in the United States. But those higher prices did not cause Lotes’s injury of being excluded from the market for USB 3.0 connectors—that injury flowed directly from the defendant’s exclusionary foreign conduct. Lotes’s complaint thus seeks redress for precisely the type of ‘independently caused foreign injury’ that Empagran held falls outside of Congress’s intent. Empagran, 542 U.S. at 173, 124 S.Ct. 2359.”

“Indeed, to the extent there is any causal connection between Lotes’s injury and an effect on U.S. commerce, the direction of causation runs the wrong way. Lotes alleges that the defendants’ patent hold-up has excluded Lotes from the market, which reduces competition and raises prices, which are then passed on to U.S. consumers. Lotes’s injury thus precedes any domestic effect in the causal chain. And ‘[a]n effect never precedes its cause.’ Am. Home Prods. Corp. v. Liberty Mut. Ins. Co., 748 F.2d 760, 765 (2d Cir.1984).” [753 F. 3d at 413-414]

“Nor is this one of those rare cases in which an injurious event is ‘overdetermined’ by multiple sufficient causes. See Restatement (Third) of Torts: Phys. & Emot. Harm § 27 (2010) (‘If multiple acts occur, each of which ... alone would have been a factual cause of the physical harm at the same time in the absence of the other act(s), each act is regarded as a factual cause of the harm.’). Nothing in the complaint suggests that the defendants’ failure to license U.S. patents, standing alone, would have been sufficient to exclude Lotes from the market. Indeed, the U.S. patents are so incidental to the alleged scheme that the complaint does not even bother to mention them except as part of the background of the relevant Chinese patents. See J.A. at 51 (explaining that the Chinese patents ‘claim priority to’ the U.S. patents, and thus ‘the specifications of these U.S. patents must support all claims in the corresponding Chinese patents’); J.A. 54 (similarly discussing the U.S. patents as background). Read as a whole, the complaint makes perfectly clear that the true source of Lotes’s injury is the ‘[d]efendants’ willingness to bring suit against Lotes in contravention of the USB-IF RAND-Zero terms.’ J.A. 58.” [753 F. 3d at 415]

The Court affirms the District Court’s decision.

Citation: Lotes Co., Ltd. v. Hon Hai Precision Industry Co., 753 F. 3d 395 (2nd Cir. 2014).

ARBITRATION

Reviewing contract dispute originating in the Congo, District of Columbia Circuit ponders whether the Federal Arbitration Act preempts the D.C. Uniform Foreign-Country Money Judgments Recognition Act

Commissions Import Export S.A. (“the Company”) entered in the 1980s into contracts with Republic of the Congo (“the Congo”) to perform public works and supply materials. The contracts were financed by Caisse Congolaise d’Amortissement (“CCA”) through supplier credits that were formalized through promissory notes issued by CCA and guaranteed by the Congo. In 1992, the parties signed an agreement for the repayment of certain outstanding debts owed to the Company under the contracts. The repayment had to be done over ten years in equal, consecutive monthly payments. Furthermore, the agreement provided that any disputes arising from or relating to the agreement would be resolved by final binding arbitration under the Rules of the International Chamber of Commerce (“ICC”).

In 1998, when the Congo failed to pay the promised amounts as they came due, and did not respond to the Company’s formal demand, the Company filed a request for arbitration with the International Court of Arbitration of the ICC. On December 3, 2000, the arbitral tribunal in Paris issued a final award in favor of the Company (“the Award”). On December 12, 2000, the Award was summarily confirmed by the Tribunal de Grande Instance of Paris. After the Congo appealed to rescind the Award, on May 23, 2002, the Court of Appeals of Paris upheld the Award. To enforce the Award in France, the Company filed eleven judicial enforcement proceedings and 82 non-judicial bailiff actions.

Pursuant to the New York Convention, the Company obtained judicial recognition of the Award in Belgium and Sweden, but obtained no recovery on the amounts owed. On June 17, 2009, the Company initiated proceedings pursuant to the Convention in the Queen’s Bench Division of the high Court of Justice, Commercial Court in London. On July 10 2009, the High Court entered an order ruling that the Award was enforceable in the same manner as a judgment under section 101 of the 1996 Arbitration Act of England (“the English Judgment”). Under English law, the judgment became final, conclusive, and enforceable on March 2, 2010, and remains enforceable for six years from that date. On November 1, 2011, the High Court amended the judgment to account for the Company’s successful seizure of French Francs in partial satisfaction of the Award.

On September 2, 2011, the Company filed a complaint in the U.S. District Court for the Southern District of New York to recognize and enforce the English Judgment under the New York Uniform Foreign Country Money-Judgments Recognition Act, N.Y. C.P.L.R. Article 53. The federal court for the Southern District of New York transferred the case to the federal court in the District of Columbia. The Company amended and supplemented its complaint to recognize and enforce the English Judgment under the D.C. Uniform Foreign-Country Money Judgments Recognition Act (“D.C. Recognition Act”). The district court denied the Company’s motion for summary judgment and dismissed the complaint on the ground that the three-year period to confirm a foreign arbitral award under Chapter 2 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 207, preempted the longer period to enforce a foreign money judgment under the D.C. Recognition Act, D.C. Code § 15-369. The Company appealed.

The United States Court of Appeals for District of Columbia Circuit reverses the dismissal of the Company’s complaint and remands the case for further proceedings. The key issue here is whether the Federal Arbitration Act preempts the D.C. Uniform Foreign-Country Money Judgments Recognition Act.

In its appeal, the Company argued that FAA Chapter 2 and the D.C. Recognition Act are two entirely separate regimes. While one is a federal scheme for enforcing foreign arbitral awards, the other one is a state regime for enforcing foreign court judgments. The company also argued that the federal regime does not preempt the longer enforcement period in the D.C. regime because the later poses no obstacle to the accomplishment of the purposes of the former.

As Chapter 2 of the FAA is at stake here the Court addresses this issue and states:

“Chapter 2 of the FAA implements the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38, otherwise known as the ‘New York Convention.’ See 9 U.S.C. §§ 201-208; Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n. 15, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974); TermoRio S.A. E.S.P. Grp., LLC v. Electranta S.P., 487 F.3d 928, 933-34 (D.C.Cir.2007). The Convention is a multilateral treaty that, with exceptions, obligates participating countries to honor international commercial arbitration agreements and to recognize and enforce arbitral awards rendered pursuant to such agreements. See N.Y. Conv’n Arts. I, II, III; see also S. EXEC. REP. NO. 10, at 3-4 (1968) (testimony of Amb. Richard D. Kearney, Office of the Legal Adviser, Dep’t of State). […]”

“Chapter 2 provides in 9 U.S.C. § 201 that the Convention ‘shall be enforced in United States courts in accordance with this chapter,’ and in section 202 limits the application of the Convention to international commercial disputes. It establishes a federal forum for disputes concerning arbitrations falling under the Convention, see id. §§ 203-204, while providing an optional right of removal by defendants for Convention-related disputes pending in a state court, see id. § 205. It also provides for a court to compel arbitration and appoint arbitrators. See id. § 206. Of significance here, it imposes a time limit for seeking confirmation of an arbitral award. Section 207 provides:”

“‘Within three years after an arbitral award falling under the Convention is made, any party to the arbitration may apply to any court having jurisdiction under this chapter for an order confirming the award as against any other party to the arbitration. The court shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.’”

“Finally, Chapter 2 provides that Chapter 1, regarding non-Convention domestic arbitration, has residual application where there is no conflict with Chapter 2 or the New York Convention as ratified. See id. § 208.” [757 F. 3d at 324]

On the other hand, “the D.C. Recognition Act provides that ‘[a]n action to recognize a foreign-country judgment’ must be commenced before the judgment expires in the rendering country or within 15 years of the judgment’s becoming effective in foreign country, whichever is earlier. D.C. Code § 15-369. ‘[A] court of the District of Columbia,’ subject to limited exceptions, ‘shall recognize a foreign-country judgment’ that ‘[g]rants or denies recovery of a sum of money’ and is final, conclusive, and enforceable where rendered. Id. §§ 15-363(a)(1)-(2); 15-363(b); 15-364(a).” [757 F. 3d at 325]

The Court then analyzes the preemption of federal over state law.

“It is ‘[a] fundamental principle of the Constitution ... that Congress has the power to preempt state law.’ Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363, 372, 120 S.Ct. 2288, 147 L.Ed.2d 352 (2000); U.S. CONST., art. VI, cl. 2. In some cases, preemption occurs because Congress has provided for it expressly; in the face of an express preemption provision, ‘[t]here is no doubt’ that federal law prevails. Arizona v. United States, ___ U.S. ___, 132 S.Ct. 2492, 2500, 183 L.Ed.2d 351 (2012). But even without an express preemption provision, ‘[s]tate law must also give way to federal law in at least two other circumstances.’ Id. at 2501. First, ‘the States are precluded from regulating conduct in a field that Congress, acting within its proper authority, has determined must be regulated by its exclusive governance.’ Id. Second, ‘state laws are preempted when they conflict with federal law.’ Id.”

“The Supreme Court has observed in the domestic arbitration context that ‘[t]he FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration.’ Volt Info. Sciences, Inc. v. Bd. of Trustees of the Leland Stanford Junior Univ., 489 U.S. 468, 477, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). Accordingly, as the parties agree, this case is governed by the conflict preemption doctrine set forth in Hines v. Davidowitz, 312 U.S. 52, 61 S.Ct. 399, 85 L.Ed. 581 (1941). Pursuant to Hines, federal law will preempt state law where ‘under the circumstances of [a] particular case, [the challenged state] law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’ 312 U.S. at 67, 61 S.Ct. 399. ‘What is a sufficient obstacle is a matter of judgment, to be informed by examining the federal statute as a whole and identifying its purpose and intended effects[.]’ Crosby, 530 U.S. at 373, 120 S.Ct. 2288; see also Wyeth v. Levine, 555 U.S. 555, 565, 129 S.Ct. 1187, 173 L.Ed.2d 51 (2009). Because what ‘must be implied is of no less force than that which is expressed,’ Crosby, 530 U.S. at 373, 120 S.Ct. 2288 (quotation marks and citation omitted), federal law may preempt state law even if the conflict between the two is not facially apparent—as when, for example, the federal and state laws govern different subject matters, see, e.g., Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971). Furthermore, federal law may preempt state law even if both pursue the same ends because ‘a conflict in technique can be fully as disruptive to the system Congress enacted as conflict in overt policy,’ Arizona, 132 S.Ct. at 2505 (quotation marks, alterations, and citation omitted); see Crosby, 530 U.S. at 379, 120 S.Ct. 2288. In accord with these general principles, Hines preemption analysis entails two steps: first, identifying the purposes of the federal statute; and second, determining what, if any, obstacles are posed by the challenged state law. Traditional preemption principles apply to District of Columbia laws. See, e.g., Wash. Serv. Contractors Coal. v. Dist. of Columbia, 54 F.3d 811, 813, 815 (D.C. Cir. 1995).”

“The basic purpose of FAA Chapter 2 was to implement the New York Convention. ‘The goal of the Convention, and the principal purpose underlying [the United States’] adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements *327 to arbitrate are observed and arbitral awards are enforced in the signatory countries.’ Scherk, 417 U.S. at 520 n. 15, 94 S.Ct. 2449; see TermoRio S.A. E.S.P. Grp., 487 F.3d at 933-34. […] But at the same time, Congress limited the scope of the Convention’s application. As the Seventh Circuit explained, ‘[t]he concern for an unintended effect on domestic laws, which had counseled against the participation of the United States in 1958, was addressed in the implementation.’ Certain Underwriters at Lloyd’s London v. Argonaut Ins. Co., 500 F.3d 571, 577 (7th Cir.2007). Section 202 limited disputes ‘falling under the Convention’ to commercial relationships involving a foreign party or having a reasonable relation with one or more foreign states.’ 9 U.S.C. § 202; see S.REP. NO. 91-702, at 6 (1970) (Kearney testimony). So, ‘although the Convention would displace certain domestic laws, it would do so only in the narrow context of truly international disputes.’ Certain Underwriters, 500 F.3d at 577.”

“Congress also set a three-year limit for seeking summary confirmation of ‘an arbitral award falling under the Convention.’ 9 U.S.C. § 207. To understand the purpose of section 207, ‘[c]ongressional intent is discerned primarily from the statutory text.’ CTS Corp. v. Waldburger, ___ U.S. ___, 134 S.Ct. 2175, 2185, 189 L.Ed.2d 62 (2014); see N.Y. State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995). The three year limit in section 207 applies specifically to the confirmation of “arbitral award[s] falling under the Convention,” and the court must ‘presume that [the] legislature says in a statute what it means and means in a statute what it says there.’ Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). Neither section 207 nor any other provision of Chapter 2 mentions foreign court judgments. Nor is there a reference to foreign court judgments in FAA Chapter 1, which has residual application.”

“Section 207 was modeled on a similar provision in FAA Chapter 1, which provides that ‘any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award[.]’ 9 U.S.C. § 9 (emphasis added); see H.R. REP. NO. 91-1181, at 4 (1970). The sole textual difference between section 9 and section 207 is that the latter gives prevailing parties two additional years in which to seek confirmation ‘to allow time for ... initial enforcement efforts outside the United States.’ S. REP. NO. 91-702, at 8 (1970) (Kearney testimony). The Congo does not dispute the well-established proposition that the permissively worded provision in section 9, which enables but does not require a party to seek award enforcement pursuant to the FAA, is tied exclusively to award enforcement procedures under Chapter 1 and does not preempt *328 longer enforcement periods available under state law. See Hall St. Assocs., LLC v. Mattel, Inc., 552 U.S. 576, 590, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008); see also Photopaint Techs., LLC v. Smartlens Corp., 335 F.3d 152, 159 (2d Cir.2003); Kentucky River Mills v. Jackson, 206 F.2d 111, 120 (6th Cir.1953). Although the context is different—Chapter 1 concerns domestic arbitration while Chapter 2 concerns international arbitration—the use of identical language in the two provisions suggests, absent contrary indication, that Congress intended them to operate in a similar manner. See Smith v. City of Jackson, Miss., 544 U.S. 228, 233, 125 S.Ct. 1536, 161 L.Ed.2d 410 (2005) (citing Northcross v. Bd. of Educ. of Memphis City Sch., 412 U.S. 427, 428, 93 S.Ct. 2201, 37 L.Ed.2d 48 (1973)). In other words, Chapter 2, like Chapter 1, preserves a prevailing party’s option to pursue other enforcement mechanisms if it so chooses.”

“The New York Convention does not limit the period for enforcement of arbitral awards and includes no restriction regarding foreign judgments. Under Article III of the Convention, signatory countries may apply their own statutory periods for the enforcement of arbitral awards, so long as such periods are not unduly short, or may choose, as many countries have, not to impose any time limit on enforcement. The Convention also expressly preserves, under Article VII, arbitral parties’ right to rely upon domestic laws that are more favorable to award enforcement than are the terms of the Convention: ‘The provisions of the present Convention shall not... deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law ... of the country where such award is sought to be relied upon.’ N.Y. Conv’n Art. VII. […] Article XI presumes that countries with a ‘federal or non-unitary” structure of government may implement the Convention in a manner that is internally non-uniform. Id. Art. XI. Thus, the Convention sets minimum protections for the enforcement of international commercial arbitration awards, but does not limit treaty members from affording more protections than the Convention requires. ‘The Convention ... sets a `floor,’ but not a `ceiling,’ for enforcement of arbitral awards.’ Amicus United States Br. 7. “

“Neither does the legislative history of the Foreign Arbitral Awards Convention Act indicate that Congress intended Chapter 2 of the FAA to govern not only arbitral awards but the recognition of judgments as well. As explained by the State Department’s Office of the Legal Adviser to the Senate Foreign Relations Committee, although the general subject of arbitration is within federal jurisdiction if it concerns foreign or interstate commerce, ‘our purpose in adhering to the [New York] Convention is for the beneficial effects it will produce for the foreign commerce of the United States and not to make any changes with respect to matters that are traditionally within the jurisdiction of the 50 States of the Union. Certain Underwriters, 500 F.3d at 577 n. 6 (quoting S.REP. NO. 91-702, at 6 (1970) (Kearney testimony) (emphasis added)).” [757 F. 3d at 326-328]

The Court concludes that “the text of the Foreign Arbitral Awards Convention Act and the circumstances of its enactment thus weigh in support of concluding that Congress did not intend to speak beyond the recognition and enforcement of arbitral awards. Permitting the Company to have recourse to the D.C. Recognition Act to enforce the English judgment, then, would appear to be consistent with FAA Chapter 2’s objectives and to pose no obstacle to the accomplishment of its purpose.” [757 F. 3d at 329]

The Court does not accept the Congo’s suggestion that various obstacles to the fulfillment of FAA Chapter 2’s purposes are created if the English Judgment is enforced under the D.C. Recognition Act. The Congo maintains that the three-year period in 9 U.S.C. § 207 embodies purposes of “uniformity” and “finality” that would be frustrated by allowing recourse to the D.C. Recognition Act after expiration of the three-year period and that U.S.C. § 207 embodies purposes of “uniformity” and “finality” that would be frustrated by allowing recourse to the D.C. Recognition Act after expiration of the three-year period.

“Even assuming 9 U.S.C. § 207 may ‘promote finality, repose, and the efficient and prompt administration of justice,’ Appellee’s Br. 33 (citation omitted); see Commissions Import Export S.A., 916 F.Supp.2d at 54, 55, such an assumption implies little about the intended scope of the provision. Because international arbitration is undoubtedly within the United States’ federal legislative power, the fact that Congress acted at the federal level to carry out its obligations under the New York Convention does not, as the Congo suggests, indicate a particular preference for national uniformity in this area. See N.Y. Conv’n Art. XI. Indeed, the fact that section 205 provides for permissive removal from state proceedings, 9 U.S.C. § 205, further bolsters the conclusion that uniformity was not Congress’s exclusive concern in enacting section 207.” [757 F. 3d at 329]

“The United States accordingly emphasizes:”

“‘It is essential to recognize that a foreign court judgment confirming an arbitral award is not governed by the New York Convention or the Foreign Arbitral Awards Convention Act. As a matter of U.S. law, the mechanism for obtaining recognition and enforcement of a foreign money judgment arising out of an arbitral award has been understood to be distinct from an action seeking recognition and enforcement of an arbitral award. See, e.g., Seetransport Wiking Trader Schiffahrtsgesellschaft MBH & Co., Kommanditgesellschaft v. Navimpex Centrala Navala, 989 F.2d 572, 582-583 (2d Cir.1993). Enforcement of a foreign court money judgment has traditionally been governed by state law. See Restatement (Third) of Foreign Relations Law of the United States § 481 comment a (1987); see also Nat’l Conf. of Commissioners on Uniform State Laws, Uniform Foreign Country Money Judgments Recognition Acts (1962 & 2005).’”

“Amicus United States Br. 14. The distinction between awards and judgments is amplified here by the fact that the English Judgment includes interest that the Company could not have collected had its prior efforts to collect on the Award under the Convention been successful.”

“As noted, the overriding purpose of FAA Chapter 2 is to facilitate international commercial arbitration by ensuring that valid arbitration agreements are honored and valid arbitral awards are enforced. See Scherk, 417 U.S. at 520 n. 15, 94 S.Ct. 2449. The ‘amendment of the Federal Arbitration Act’ to include Chapter 2 reflects a congressional judgment that the ‘emphatic federal policy in favor of arbitral dispute resolution ... applies with special force in the field of international commerce.’ Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985); see also BG Group, PLC v. Republic of Argentina, ___ U.S. ___, 134 S.Ct. 1198, 188 L.Ed.2d 220 (2014). That policy is not undermined—and frequently will be advanced—through recourse to parallel enforcement mechanisms that exist independently of the FAA. See Amicus United States Br. 16 (quoting RESTATEMENT (THIRD) OF U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION, § 4-3(d), Reporter’s Notes g, Tentative Draft No. 2 (Apr. 16, 2012)); cf. Hall St. Assocs., 552 U.S. at 590, 128 S.Ct. 1396. Of course, the Congo is correct that merely sharing the same ‘overarching objectives,’ Appellees’ Br. 51, as federal law will not necessarily save a state law from preemption if its methods of achieving those objectives conflict with federal law. […]To the extent the Congo relies on Volt Information Sciences, 489 U.S. at 478-79, 109 S.Ct. 1248, involving a domestic arbitration agreement, to support its contention that application of the D.C. Recognition Act is contrary to the parties’ agreement French law would apply to their arbitration, the choice of French law has no bearing on subsequent proceedings to enforce an arbitral award under the New York Convention.”

“The Congo emphasizes that England is a ‘secondary jurisdiction’ with respect to the French arbitral award, and that ‘court proceedings in another secondary jurisdiction have `no preclusive effect’ in recognition proceedings in the United States.’ Id. at 36 (quoting Belize Soc. Dev. Ltd., 668 F.3d at 730); see also Karaha Bodas Co., LLC v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, 308-10 (5th Cir.2004). The Company acknowledges, however, that its cause of action under the D.C. Recognition Act ‘does not call for the [d]istrict [c]ourt automatically to accord preclusive effect to the English Court’s determinations on the Award under the Convention, but rather to assess the English Judgment under the separate (and clearly distinct) factors for judgment recognition under District of Columbia law.’ Reply Br. 21-22. The Congo’s contentions regarding the ‘limited territorial effect’ of the English Judgment and U.S. courts’ historical reluctance to recognize ‘judgments on judgments,’ Appellees’ Br. 36-37, 46, seem to present public policy arguments better suited, at best, see Amicus U.S. Brief at 17 (citing Nat’l Conf. of Comm’rs on Uniform State Laws, Uniform Foreign Country Money Judgments Recognitions Act, § 4 cmt. (2005)), as arguments to a court applying the D.C. Recognition Act than as arguments for preemption.”

“As the Supreme Court recently reemphasized, it is a ‘well-established principle that it is incumbent upon the federal courts to be certain of Congress’ intent before finding that federal law overrides the usual constitutional balance of federal and state powers.’ Bond v. United States, ___ U.S. ___, 134 S.Ct. 2077, 2089, 189 L.Ed.2d 1 (2014) (quoting Gregory v. Ashcroft, 501 U.S. 452, 460, 111 S.Ct. 2395, 115 L.Ed.2d 410 (1991)). Against the historical backdrop of state law on the enforcement of foreign judgments, it is unlikely that Congress would have intended its implementation of the New York Convention to cover both arbitral awards and judgments without mentioning the latter in FAA Chapter 2. Congress’s ‘silence on the issue [of preemption], coupled with its certain awareness of the prevalence of state [foreign money judgment enforcement statutes], is powerful evidence that Congress did not intend [FAA Chapter 2] to be the exclusive means of ensuring’ arbitration agreements and arbitral awards are enforced. Wyeth, 555 U.S. at 575, 129 S.Ct. 1187 (citing Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 166-67, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989)). An alternative conclusion could frustrate the collection of debts determined pursuant to the parties’ voluntary arbitration agreement, and it seems unlikely this was Congress’s intent. The Company pursued the enforcement remedy available under the Convention, yet the debt remains unsatisfied. Its use of a lawful parallel enforcement scheme does not present an obstacle to the summary process Congress adopted in implementing the Convention. Cf. POM Wonderful LLC v. Coca-Cola Co., ___ U.S. ___, 134 S.Ct. 2228, 2238, 189 L.Ed.2d 141 (2014).”

“Our conclusion that FAA Chapter 2 does not preempt enforcement of the English Judgment accords with the longstanding position of the Second Circuit Court of Appeals, the only other federal appeals court to have addressed the relationship between 9 U.S.C. § 207 and state judgment recognition laws. Shortly after the Foreign Arbitral Award Convention Act was enacted, in Island Territory of Curacao v. Solitron Devices, Inc., 489 F.2d 1313 (2d Cir. 1973), the Second Circuit held that both the New York Convention and FAA Chapter 2 ‘go only to the enforcement of a foreign arbitral award and not to the enforcement of foreign judgments confirming foreign arbitral awards,’ id. at 1319. Subsequently, in Seetransport Wiking Trader Schiffahrtsgesellschaft MBH & Co., Kommanditgesellschaft v. Navimpex Centrala Navala, 29 F.3d 79 (2d Cir.1994) (‘Seetransport II’), the Second Circuit permitted the enforcement under the New York Uniform Foreign Money-Judgments Recognition Act of a judgment of the Paris Court of Appeals awarding the sums in an arbitral award where, as here, the period for seeking confirmation of the award under the FAA Chapter 2 had passed. The court had explained: ‘[U]nlike the recognition of arbitral awards, which is governed by federal law, the recognition of foreign judgments is governed by state law.’ Seetransport Wiking Trader Schiffahrtsgesellschaft MBH & Co., Kommanditgesellschaft v. Navimpex Centrala Navala, 989 F.2d 572, 582 (2d Cir.1993) (“Seetransport I”) (citing REST. (THIRD) OF FOREIGN RELATIONS LAW OF THE *333 UNITED STATES § 481 cmt. a (1987)). The Congo’s attempts to distinguish these cases are unpersuasive.”

“Our conclusion is also consistent with the presumption against preemption, which demands that ‘in all pre-emption cases, and particularly those in which Congress has legislated in a field which the States have traditionally occupied’ without enacting an express preemption provision, the court must assume ‘the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.’ Wyeth, 555 U.S. at 565, 129 S.Ct. 1187 (alterations and quotation marks omitted); cf. Bond, 134 S.Ct. at 2089. As discussed, ‘the enforcement of foreign judgments was, and remains, presumptively and primarily under the control of the states.’ Reply Br. 24; see RESTATEMENT (THIRD) OF FOREIGN RELATIONS § 481 cmt. a (1987); see also Aetna Life Ins. Co. v. Tremblay, 223 U.S. 185, 190, 32 S.Ct. 309, 56 L.Ed. 398 (1912); Johnston v. Compagnie Generale Transatlantique, 242 N.Y. 381, 152 N.E. 121, 123 (1926). Because “Congress does not cavalierly pre-empt state-law causes of action,’ Medtronic, Inc. v. Lohr, 518 U.S. 470, 485, 116 S.Ct. 2240, 135 L.Ed.2d 700 (1996), the absence of a ‘clear and manifest’ preemptive purpose in FAA Chapter 2 reinforces the conclusion that preemption is not warranted here.”

“Accordingly, we hold that the limitations period in FAA Chapter 2, 9 U.S.C. § 207, does not preempt the longer limitations period in the D.C. Recognition Act for enforcing a foreign court judgment, D.C. Code § 15-369.” [757 F. 3d at 330-333]

The Court reverses the dismissal of the Company’s complaint and remands the case for the District Court to determine whether the English Judgment is enforceable under the D.C. Recognition Act.

Citation: Commissions Import Export v. Republic of the Congo, 757 F. 3d 321 (D.C. Cir. 2014)

JUDICIAL ASSISTANCE

In case of first impression related to criminal investigation into Bernard Madoff’s investments scheme, Second Circuit reviews whether 28 U.S.C. § 1782 permits discovery for use in a foreign criminal investigation conducted by a foreign investigating magistrate

Frank Berlamont (“Berlamont”), the President and CEO of Geneva Partners, seek from Optimal Investment Services, S.A. (“OIS”) and Hunton & Williams LLP (“H & W”) the production of documents relating to the examination of Rajiv Jaitly (“Jaitly Documents”) to provide to a Swiss investigating magistrate overseeing a criminal inquiry related to a Bernard Madoff (“Madoff”) “feeder fund” in Switzerland.

Geneva Partners is an investment firm in Switzerland that invested in a fund managed by OIS, which, in turn, had invested significant funds with Madoff. OIS is a subsidiary of Banco Santander. H & W is OIS’s counsel in United States.

In 2009, Berlamont commenced a criminal proceeding in Switzerland against OIS and its former Director General, Manuel Echeverria (“Echeverria”). He accused OIS and Mr. Echeverria of making misrepresentations concerning its investments with Madoff. A Swiss investigating magistrate opened a criminal investigation against Mr. Echeverria on the suspicion of “unlawful management”.

In support of the criminal proceeding in Switzerland, Berlamont sought the production of Jaitly Documents. Rajiv Jaitly (“Jaitly”), former Chief Risk Officer of OIS, was examined during the discovery in case formerly pending before the United States District Court for the Southern District of New York, Rembaum v. Banco Santander, S.A. No. 10 Civ. 4095 (S.D.N.Y.). The parties in Rembaum case, a group of OIS’s investors, sought to examine Jaitly regarding OIS’s conduct with respect to its Madoff investments. On May 3, 2012, the Rembaum Court issued a Letter Rogatory to the English High Court of Justice requesting that Jaitly’s examination be ordered and conducted in London. The English High Court granted the application and ordered the examination. Jaitly was examined in London and a transcript was produced.

On June 20, 2014, Berlamont’s ex parte § 1782 application seeking the Jaitly transcript and accompanying exhibits was granted. The District Court ordered discovery pursuant to 28 U.S.C. § 1782, which permits federal courts to order document production “for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation,” which granted Berlamont leave to subpoena the documents from H & W.

After Berlamont’s ex parte § 1782 application was granted, OIS and H & W moved to vacate the order and quash the subpoena or, in the alternative, for a protective order. Berlamont submitted to the District Court a letter addressed to him from the Swiss magistrate stating that the Jaitly Documents would be “of great usefulness” to the Swiss proceeding. The District Court denied appellants’ motions, holding that Berlamont’s application satisfied the requirements of § 1782. The court held that “[a] complaining witness’s presentation of evidence to an investigating magistrate satisfies the ‘for use’ prong of § 1782.” In re Application of Franck Berlamont for an Order Pursuant to 28 U.S.C. § 1782 to Conduct Discovery for Use in Foreign Proceedings, No. 14 Misc. 190, 2014 WL 3893953, at *1 (S.D.N.Y. Aug. 4, 2014). OIS and H & W appealed.

In their appeal, the appellants contended that Berlamont’s claim did not meet the requirements of § 1782 because a Swiss investigating magistrate is not a “foreign or international tribunal” within the meaning of § 1782, and that the District court should have denied Berlamont’s application pursuant to the Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, July 27, 1970, 23 U.S.T. 2555, 847 U.N.T.S. 231, international comity, and Swiss attorney-client privilege.

The United States Court of Appeals for the Second Circuit holds that § 1782 applies to a foreign criminal investigation involving magistrate seeking documents in the United States, and affirms the District Court order.

The issue is whether 28 U.S.C. § 1782, which authorizes federal courts to order document production for use in certain foreign proceedings, permits discovery for use in a foreign criminal investigation conducted by a foreign investigating magistrate.

“A district court is authorized to grant a § 1782 request where: (1) the person from whom discovery is sought resides (or is found) in the district of the district court to which the application is made, (2) the discovery is for use in a proceeding before a foreign or international tribunal, and (3) the application is made by a foreign or international tribunal or any interested person. See Schmitz v. Bernstein Liebhard & Lifshitz LLP, 376 F.3d 79, 83 (2d Cir.2004). ‘Once the statutory requirements are met, a district court is free to grant discovery in its discretion.’ Id. at 83-84 (alterations and internal quotation marks omitted).”

“The plain language and legislative history of § 1782 contradict appellants› argument. Section 1782 of Title 28 reads, in pertinent part, as follows:”

“‘The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation.’”

“28 U.S.C. § 1782(a) (emphasis supplied).”

“The statute is the product of Congress›s efforts, over the past 160 years, to provide judicial assistance in gathering evidence for use in foreign tribunals. See Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 247, 124 S.Ct. 2466, 159 L.Ed.2d 355 (2004). The goals of the law are to provide ‘equitable and efficacious’ discovery procedures in American courts ‘for the benefit of tribunals and litigants involved in litigation with international aspects’ while ‘encourag[ing] foreign countries by example to provide similar means of assistance to our courts.’ Lancaster Factoring Co. v. Mangone, 90 F.3d 38, 41 (2d Cir.1996) (internal quotation marks omitted).”

“The statute’s precise scope—as well as its text—has evolved over time. Earlier versions of the statute authorized district courts to allow discovery in a ‘suit for the recovery of money or property depending in any court in any foreign country,’ then ‘in any civil action pending in any court in a foreign country,’ and later ‘in any judicial proceeding pending in any court in a foreign country.’ In re Letters Rogatory, 385 F.2d at 1018 (Friendly, J.) (internal quotation marks omitted) (chronicling the changes made to the foreign discovery statute in 1863, 1948, and 1949, respectively).”

“In 1964, Congress modified the law’s scope once more by replacing the words ‘in any judicial proceeding pending in any court in a foreign country’ with the phrase ‘in a proceeding in a foreign or international tribunal.’ Intel Corp., 542 U.S. at 248-49, 124 S.Ct. 2466. The accompanying Senate Report makes clear that Congress used the word ‘tribunal’ to expand the reach of the law beyond just providing assistance to ‘proceedings before conventional courts,’ but also to allow district courts to aid foreign ‘administrative and quasi-judicial proceedings.’ Id. (quoting S.Rep. No. 88-1580, at 7 (1964), 1964 U.S.C.C.A.N. 3782). The Report specifically highlighted Congress›s intention to *461 allow federal courts to ‘have discretion to grant assistance when proceedings are pending before investigating magistrates in foreign countries.’ S.Rep. No. 88-1580, at 7 (1964), 1964 U.S.C.C.A.N. 3782, 3788.”

“Congress’s most recent textual change, in 1996, cemented the statute›s applicability to foreign criminal investigations. The amended statute explicitly covered ‘criminal investigations conducted before formal accusation.’ National Defense Authorization Act for Fiscal Year 1996, Pub.L. No. 104-106, § 1342(b), 110 Stat. 186. Commenting on the added language, the Supreme Court in Intel noted that ‘[n]othing suggests that this amendment was an endeavor to rein in, rather than to confirm, by way of example, the broad range of discovery authorized in 1964.’ Intel Corp., 542 U.S. at 259, 124 S.Ct. 2466 (citing S.Rep. No. 88-1580, at 7 (1964), 1964 U.S.C.C.A.N. 3782). The Intel Court then made clear, ‘[w]hen Congress acts to amend a statute, we presume it intends its amendment to have real and substantial effect.’ Id. at 258-59, 124 S.Ct. 2466 (internal quotation marks omitted).” [773 F. 3d 460-461]

The Court holds that “the Swiss criminal investigation in the instant case is exactly the type of proceeding that the 1996 amendments to the statute were intended to reach. The criminal inquiry is a ‘proceeding’ and an ‘investigation’ being conducted by a Swiss magistrate. The defendant, Mr. Echeverría, has already been charged. And the investigating magistrate has explicitly stated that the Jaitly Documents would be ‘of great usefulness to [his] inquiry.’ Thus, the District Court did not err in finding that the Jaitly Documents are ‘for use in a proceeding in a foreign or international tribunal’ as required by § 1782.” [773 F. 3d at 461]

The Court affirms the order of the District Court denying appellants’ motion to vacate the discovery order and quash the subpoena.

Citation: In Re App. for an Order Pursuant to 28 USC, 773 F. 3d 456 (2nd Cir. 2014).

MARITIME LAW

Where cargo operator is seeking to enforce English court’s judgment on a forward freight agreement, Second Circuit reviews whether under § 1333 United States courts have jurisdiction to enforce a judgment of a foreign non-admiralty court if the claim underlying that judgment would be deemed maritime under the standards of U.S. law

D’Amico Dry Limited (“D’Amico”) brought this suit in the United States District Court for the Southern District of New York to enforce an English court’s judgment on a forward freight agreement (“FFA”) with Primera Maritime (Hellas) Limited (“Primera”).

D’Amico operates Panamax dry bulk cargo vessels in the business of carriage of goods by sea. Its major business risk is that a slowdown in worldwide commercial activity will lead to diminution in shipments of cargo, causing vessels to make expensive voyages partially empty or to lay idle. During such slowdowns, the rates carriers charge for carriage of goods fall too. D’Amico’s cost of maintaining one of Panamax dry bulk cargo vessels in an unemployed, idle state is roughly $12,000 per day on average. As a way to offsetting these losses D’Amico enters into futures contracts on international shipping rates called “forward freight agreements”. FFAs specify a base rate (the “contract rate”) for a hypothetical shipment of specified goods over specified routes and future dates for comparison of the contract rate with the market rates on such future dates. The responsibility of contracting parties are as follow: if on a specified future date the market rate is above the contract rate, then the party that took the downside of the agreement must pay the other party the difference, and vice versa, if on the future date the market rate is below the contract rate the party that took upside of the contract must pay the other party the difference. In D’Amico’s case, profits realized from such contracts as rates fall will increase D’Amico’s revenue when demand is low, counteracting its losses from underemployment, while losses on such contracts will decrease net revenues when demand is high and rate rise.

In September 2008, Luciano Bonaso, D’Amico’s Chief Executive Officer, projected that for the first quarter of 2009, 280 vessel days remained unchartered. Bonaso decided that D’Amico should hedge against the underemployment by entering into an FFA. On September 2, 2008, D’Amico entered into an FFA with Primera, taking the downside of freight rates for forty-five Panamax vessel days over four “Baltic Exchange” charter routes. The FFA used a contract rate of $55,750 per day to be compared to market rates for the Baltic Panamax Index (“BPI”), as published by the Baltic Exchange, at specified dates during the first quarter of 2009.

Furthermore, the FFA provided that all disputes arising under it would be submitted to the English High Court of Justice. According to the FFA contract, Primera was obliged to pay D’Amico if the market freight rates, published in the BPI, for a specified shipping route on agreed future dates were lower than the price specified in the contract. By early 2009, the market rate had declined significantly and on January 30, 2009, D’Amico invoiced Primera for $795,963.20 under the terms of the FFA. Primera failed to pay.

D’Amico brought suit in England at the High Court of Justice to enforce the agreement. The case was heard by the Commercial Court of Queen’s Bench Division, not the Admiralty Court. The court entered a judgment in D’Amico’s favor in the amount of $1,766,278.54, including interest and other components. Primera did not pay the judgment.

D’Amico brought the suit in the United States District Court for the Southern District of New York to enforce the English judgment. D’Amico asserted federal subject matter jurisdiction under 28 U.S.C. § 1333. This statute gives the federal district court exclusive jurisdiction to hear “[a]ny civil case of admiralty or maritime jurisdiction.” Primera moved to dismiss for lack of subject matter jurisdiction. The District Court granted Primera’s motion to dismiss. The district court concluded that it lacked admiralty jurisdiction to enforce the English court’s judgment because the English judgment was not rendered by an admiralty court and the claim underlying the judgment was not deemed maritime in English law. D’Amico then moved for reconsideration. D’Amico argued that a suit to enforce a foreign judgment falls under federal admiralty jurisdiction if the underlying claim would be maritime under U.S. law, irrespective of whether the foreign court that entered the judgment was sitting in admiralty. The district court rejected this argument and denied D’Amico’s motion for reconsideration. D’Amico appealed both, the judgment of dismissal and the denial of the post-judgment motion.

The United States Court of Appeals for the Second Circuit vacates the District Court’s judgment and remands the case.

The key issue here is whether under § 1333, United States courts have jurisdiction to enforce a judgment of a foreign non-admiralty court if the claim underlying that judgment would be deemed maritime under the standards of U.S. law.

The Court answers this question starting with the provisions of Article III section 2 of the U.S. Constitution, which provides that “[t]he judicial Power shall extend ... to all Cases of admiralty and maritime Jurisdiction....”, and states:

“Congress first gave effect to this constitutional grant of jurisdiction in the Judiciary Act of 1789, which provided:”

“‘That the district courts shall have ... exclusive original cognizance of all civil causes of admiralty and maritime jurisdiction, including all seizures under laws of impost, navigation or trade of the United States, where the seizures are made, on waters which are navigable from sea by vessels of ten or more tons of burthen, within their respective districts as well as upon the high seas; saving to suitors, in all cases, the right of a common law remedy, where the common law is competent to give it ....’”

“Judiciary Act of 1789, § 9, Ch. 20, 1 Stat. 73, 76-77. The jurisdictional statute now provides that ‘[t]he district courts shall have original jurisdiction, exclusive of the courts of the States, of ... [a]ny civil case of admiralty or maritime jurisdiction, saving to suitors in all cases all other remedies to which they are otherwise entitled.’ 28 U.S.C. § 1333.”

“It is well established that the law governing federal jurisdiction under § 1333 to enforce admiralty judgments of foreign courts differs substantially from the law governing jurisdiction to enforce judgments rendered by federal courts exercising federal question jurisdiction under 28 U.S.C. § 1331. A suit to enforce a judgment rendered by a federal court exercising federal question jurisdiction may not be brought in federal court unless the enforcement suit has a basis of federal jurisdiction independent of the fact that the original suit was on a federal question. See Stiller v. Hardman, 324 F.2d 626, 628 (2d Cir.1963). […] In contrast, some judgments of foreign admiralty courts are enforceable in the admiralty or maritime jurisdiction of the United States courts. See Penhallow v. Doane’s Adm’rs, 3 U.S. (3 Dall.) 54, 97, 1 L.Ed. 507 (1795) (opinion of Iredell, J.); *156 Victrix S.S. Co. v. Salen Dry Cargo A.B., 825 F.2d 709, 713 (2d Cir.1987); Int’l Sea Food Ltd. v. M/V Campeche, 566 F.2d 482 (5th Cir.1978).”

“The rule providing federal admiralty jurisdiction for suits to enforce judgments of foreign admiralty courts has been recognized since the birth of the Nation. In Penhallow v. Doane’s Administrators, 3 U.S. (3 Dall.) 54, 1 L.Ed. 507 (1795), Supreme Court Justice Iredell declared that ‘a Court of Admiralty in one nation, can carry into effect the determination of the Court of Admiralty of another.’ Id. at 97. Justice Cushing wrote separately that it ‘seems to be settled law and usage’ that ‘courts of Admiralty can carry into execution decrees of foreign Admiralties.’ Id. at 118. This principle has been reaffirmed many times in the subsequent decades. See Hilton v. Guyot, 159 U.S. 113, 186, 16 S.Ct. 139, 40 L.Ed. 95 (1895) (‘The respect which is due to judgments, sentences, and decrees of courts in a foreign state, by the law of nations, seems to be the same which is due to those of our own courts. Hence the decree of an admiralty court abroad is equally conclusive with decrees of our admiralty courts. Indeed, both courts proceed by the same rule, are governed by the same law—the maritime law of nations, which is the universal law of nations, except where treaties alter it.’ (citation and internal quotation marks omitted)); Int’l Sea Food, 566 F.2d at 484 (affirming ‘the existence of a general principle that admiralty courts of this nation are empowered to carry into effect the maritime decrees of foreign admiralty courts’); Penn. R.R. Co. v. Gilhooley, 9 F. 618, 619 (E.D.Pa.1881) (stating, in the context of an action to enforce a judgment of another district court, that the court ‘had a general jurisdiction which would enable it in its discretion to enforce the decree of a foreign admiralty court’); Otis v. The Rio Grande, 18 F.Cas. 902, 903 (C.C.D. La. 1872) (No. 10,613) (‘This court is in duty bound to carry into effect the sentences and decrees, not only of other federal courts, but even of the admiralty courts of foreign countries....’), aff’d, 90 U.S. 458, 23 Wall. 458, 23 L.Ed. 158 (1874); The Jerusalem, 13 F. Cas. 559, 563 (C.C.D. Mass.1814) (Story, J.) (No. 7,293) (stating in dicta that an admiralty court ‘will enforce a foreign maritime judgment between foreigners, where either the property or the person is within its jurisdiction’).” [756 F. 3d at 155-156]

Once the Court determined its subject matter jurisdiction, it turns to analyze if admiralty jurisdiction extend to suits to enforce foreign judgments on maritime claims, even if those judgments were not rendered by specialized admiralty courts, and states:

“In addition to the narrowest conception of the Penhallow rule opening the federal admiralty jurisdiction to suits to enforce judgments of foreign admiralty courts, there is some recent, but scant, precedent supporting a related proposition that the federal admiralty jurisdiction provided by § 1333 should also accommodate suits to enforce foreign judgments based on claims of maritime character. In Victrix, we said in dictum that ‘an admiralty court has jurisdiction of a claim to enforce a foreign judgment that is itself based on a maritime claim.’ Victrix, 825 F.2d at 713. And in Vitol, S.A. v. Primerose Shipping Co., 708 F.3d 527 (4th Cir.2013), the Fourth Circuit approvingly construed the Victrix dictum as meaning that ‘the dispositive question is not whether the English Judgment issued from an `admiralty court,’ but rather, whether the claim itself is maritime in nature.’ Id. at 535; see also Harold K. Watson, Transnational Maritime Litigation: Selected Problems, 8 Mar. Law. 87, 104 n. 102 (1983) (arguing that whether there is jurisdiction to recognize *157 foreign judgments per International Sea Food should turn on the substantive nature of the foreign case, and not on whether the foreign court ‘was an `admiralty court’ in the sense of a specialized court’).”

“Extending federal admiralty jurisdiction to suits to enforce foreign judgments adjudicating maritime claims undoubtedly serves the purposes intended by the Penhallow rule. That rule reflects numerous related policies that shape admiralty jurisdiction in the United States. First, the rule reflects a preference for specialized admiralty courts for the resolution of maritime disputes because of their expertise in the arcane rules, nomenclatures, and traditions of the sea. Second, it promotes a desirable uniformity in matters of international trade. Third, it promotes international comity by facilitating the recognition of foreign judgments. Fourth, it reflects a constitutionally endorsed distribution of power between state and federal courts, which offers a forum for international disputes, which is—at least theoretically—less likely to be influenced by local bias. See Wythe Holt, ‘To Establish Justice’: Politics, the Judiciary Act of 1789, and the Invention of Federal Courts, 1989 DUKE L.J. 1421, 1427-30 […]. In combination, these policies all tend to promote international maritime commerce by facilitating the enforcement of the law of the sea—simplifying the enforcement of judgments (including enforcement of in rem jurisdiction against vessels), and protecting vulnerable parties such as foreign litigants and seamen (who are considered the ‘wards of admiralty,’ entitled to special solicitude because of the daily hazards of their work, see Truehart v. Blandon, 672 F.Supp. 929, 937 (E.D.La.1987)).”

The Court concludes that these policies all relate far more to the maritime character of the underlying dispute than to the classification of the court that rendered the judgment. “We accordingly have no hesitation in reaffirming the proposition of the Victrix dictum that federal admiralty jurisdiction extends to suits to enforce the judgments of foreign courts deciding maritime claims, regardless of whether the judgments were rendered by specialized admiralty courts.” [756 F. 3d at 156-157]

The Court then analyzes if U.S. law appropriately determines whether a foreign judgment was rendered on an admiralty claim.

“The district court accepted the view that federal admiralty jurisdiction applies *158 to suits to enforce foreign judgments, not only when the judgment was rendered by an admiralty court, but also when the claim upon which the judgment was rendered was maritime. The district court construed our Victrix dictum as meaning that the maritime nature of the claim must be determined by reference to the law of the nation that rendered the judgment. See D’Amico Dry Ltd. v. Primera Maritime (Hellas) Ltd., No. 09 Civ. 7840, 2011 WL 1239861, at *3 (S.D.N.Y. Mar. 28, 2011). […] The district court assumed that, because the claim was not maritime under English law, it was not maritime for purposes of determining admiralty jurisdiction.”

“We respectfully disagree. As noted above, had the district court been speaking of federal question jurisdiction under 28 U.S.C. § 1331, the court would undoubtedly have been correct. See Stiller, 324 F.2d at 628. But Penhallow imported different considerations for determining whether a suit to enforce a foreign judgment may be brought within the admiralty jurisdiction of the federal courts. As these issues have arisen infrequently in cases where the foreign judgment was not rendered by specialized admiralty court, there is no governing authority on whether the maritime nature of the underlying claim is more appropriately determined under the standards of U.S. or foreign law. We believe there are compelling reasons to find federal admiralty jurisdiction if a claim is maritime under the standards of U.S. law. We first address the issue of existing authority on the question.”

“While the District Court read our dictum in Victrix to mean that the maritime or non-maritime nature of the claim must be determined under the standards of the laws of the nation that rendered the judgment, as we read Victrix, it did not address which nation’s law should be consulted to decide whether the claim underlying the foreign judgment of a non-admiralty court should be deemed maritime, and thus whether a suit to enforce that judgment lies within the federal admiralty jurisdiction. While arguments may be advanced on both sides as to the meaning of the opaque statement in Victrix that ‘an admiralty court has jurisdiction of a claim to enforce a foreign judgment that is itself based on a maritime claim,’ it certainly does not constitute precedential authority that the standards of U.S. law are not pertinent to the inquiry.” [756 F. 3d at 157-158]

The Court also distinguishes private settlement from final judgment stating that “The settlement extinguishes that claim through private contract without validating it. In contrast, where a court has rendered a final judgment on the claim, the claim has been validated. If that claim was of maritime nature, the maritime nature of the claim has been validated, furnishing good reason for the dispute over the enforceability of the judgment to be heard as a maritime matter in the admiralty jurisdiction of the federal court.”

“Further, the district court’s reasoning with respect to its analogy to settlement agreements is in conflict with the Penhallow rule. Penhallow posits that the question of the enforceability of the judgment of a foreign maritime court is itself a maritime matter to be heard in the admiralty jurisdiction of United States courts, like a suit on a maritime claim. The district court accepted that the Penhallow principle should extend not only to the judgments of foreign admiralty courts but also to the judgments of foreign courts enforcing claims deemed maritime under the law of that nation. We do not see how that principle is compatible with the district court’s reasoning that suits to enforce foreign judgments may not be brought in federal courts absent a separate source of federal jurisdiction. The question at issue is the proper scope of the Penhallow rule.”

“Accordingly we do not agree with the district court’s conclusion that existing precedent—although authorizing suits to enforce foreign judgments of non-admiralty courts if the underlying claim was maritime under the law of the nation that rendered the judgment—does not authorize extending admiralty jurisdiction to such suits when the claim was maritime according to U.S. law standards. We know no precedent for that proposition.”

“Finally, if the principle is to be extended, as we stated in Victrix, to open federal admiralty jurisdiction not only to suits to enforce the judgments of foreign admiralty courts, but also to suits to enforce the judgments of foreign non-admiralty courts when the underlying claim validated by the judgment was maritime, we think that there are strong theoretical and practical reasons for assessing the maritime nature of the claim under U.S. admiralty standards. The reasons are numerous.”

“Of the theoretical reasons, the first is a principal enshrined in the Constitution that the jurisdiction of the federal courts should extend to maritime matters. Thus, Article III provides that ‘[t]he judicial Power shall extend ... to all Cases of admiralty and maritime Jurisdiction.’ U.S. Const. art. III, § 2. And the policy of the United States to place maritime matters in the federal courts is so strong that § 1333 makes federal court jurisdiction exclusive. Although, as a general proposition, there is widespread agreement throughout the world which kinds of matters are maritime and which are not, there is no assurance that some other nation might not define its own maritime jurisdiction more broadly, or more narrowly, than we do. It seems reasonable to assume that the Framers of the Constitution and Congress wanted to ensure that matters deemed maritime under our laws have access to our federal courts. There is no reason to suppose that the Founders or Congress would have wished to exclude from the admiralty jurisdiction matters that U.S. law deems maritime, merely because another nation does not consider them maritime. The fact that some nation, unlike ours, does not reserve a special jurisdiction for maritime matters, or classify *161 maritime matters as subject to a discrete body of laws, does not derogate from the policies of our law to provide for the adjudication of matters we regard as maritime in our federal courts.”

“Second, choice of law principles support using U.S. law’s characterization. The question whether a claim belongs in one or another court is jurisdictional and procedural. Under choice of law principles, the law of the forum state is used for such a question. See Restatement (Second) of Conflict of Laws § 123 (1971) (‘Each state determines which of its courts or systems of courts, if any, are competent to hear a particular case over which the state has judicial jurisdiction. So it is for each state to decide whether an action on a given claim shall be brought in a court of law, of equity, of probate or of admiralty.’).”

“Third, international comity favors allowing federal jurisdiction over suits to enforce foreign maritime judgments to the extent that we would wish for reciprocal enforcement of U.S. judgments in foreign courts. The concern for the enforceability of the foreign judgment is of far greater importance to international comity than whether the U.S. court agrees with the foreign nation as to the maritime nature of the claim. Foreign interests seeking to enforce a foreign judgment, who are denied access to federal court will not take comfort in (or believe that comity has been served by) the fact that the U.S. court followed their nation’s law to determine whether the claim was maritime.”

“Finally, some nations neither have specialized admiralty courts nor classify maritime matters as distinct from other areas of commerce. The fact that a foreign nation does not recognize in its laws a categorical distinction which U.S. law deems so important should not frustrate the policy of U.S. law to place maritime disputes in federal courts.” [756 F. 3d at 160-161]

The Court also enumerates the practical reasons that strongly favor using U.S. law to determine whether the claim underlying a foreign judgment was maritime, so that the suit to enforce the judgment should be allowed with the federal admiralty jurisdiction.

“First, questions of subject matter jurisdiction should be amenable to quick and relatively certain resolution. If the characterization of the claim under foreign law is controlling, the parties will be compelled in many cases to carry on an expensive, cumbersome litigation involving dueling experts on foreign law, merely to determine whether the suit belongs in federal or state court.”

“Federal courts have a duty to inquire into their subject matter jurisdiction sua sponte, even when the parties do not contest the issue. Especially as the foreign law may be in a foreign language, it is not clear how a federal court would go about determining whether it has jurisdiction. If federal subject matter jurisdiction is not raised until the appeal, it is unclear *162 how the court of appeals would deal with the question (foreign law being a question of fact) without remanding to the district court. Moreover, because subject matter jurisdiction cannot be waived, if a defect in the court’s subject matter jurisdiction becomes apparent only after the litigation, that defect will render the prior litigation useless. The need for certainty is all the greater here, as § 1333 vests admiralty jurisdiction exclusively in the federal courts. 28 U.S.C. § 1333. Thus, parties concerned about uncertain federal jurisdiction cannot, as is generally the case, avoid the problem by bringing suit in a state court of concurrent (and unquestionable) jurisdiction. Regardless whether the litigation is conducted in federal or state court, the losing party would be able to attack the judgment after the fact merely by offering expert evidence that the claim was or was not deemed maritime under the foreign law.”

“We therefore conclude that a suit to enforce a foreign judgment may be heard in the federal admiralty jurisdiction under § 1333 if the claim underlying the judgment would be deemed maritime under U.S. law. Accordingly, this suit to enforce an English judgment comes within the admiralty jurisdiction of § 1333 if the underlying claim on the FFA is deemed maritime under the standards of U.S. law.” [756 F. 3d at 161-162]

The Court vacates the judgment and remands the case to the district court.

Citation: D’Amico Dry Ltd. v. Primera Maritime (Hellas) Ltd., 756 F. 3d 151 (2nd Cir. 2014).

SECURITIES

Second Circuit reviews whether § 10(b) of the Securities Exchange Act of 1934 can be applied to a purchase or sale of a security listed on a foreign exchange or to a foreign purchase or sale of another security

From late 2005 through 2007, Porsche Automobile Holding SE (“Porsche”), a German automobile manufacturer and an active investor in various securities and derivatives, gradually increased its investment in Volkswagen AG (“VW”), another German automobile manufacturer, whose shares trade primarily on European stock exchanges. The German statute known as the “VW Law” limited the any one VW shareholder’s voting rights to twenty percent of the total voting rights, regardless of how many VW shares the shareholder actually owned. The controlling interest was defined by this law as eighty percent of the company’s outstanding shares, or seventy-five percent of the shares in the event that other stakeholders agree to vote in favor of a “domination agreement”. Porsche claimed publicly that its acquisition of VW shares was intended to prevent a hostile takeover of VW and disavowed any intention to obtain a controlling interest in VW. By the end of 2007, Porsche had become VW’s largest shareholder, owning thirty-one percent of the company.

The Plaintiffs in this case, more than thirty international hedge funds, convinced that VW stock would decline in value, employed securities-based swap agreements pegged to the price of VW shares. The positions they took through their swap agreements were that they would gain to the extent VW stock declined in value and would lose to the extent it rose.

The Plaintiffs alleged that as early as February 2008, Porsche had developed a secret plan to acquire the minimum seventy-five percent interest needed to gain control of VW. The problem that Porsche encountered was that VW’s stock was held in large part by parties who either did not want to, or could not sell it, and the amount of VW shares available to the public for trading was insufficient to allow Porsche to acquire a seventy-five percent stake outright. However, if those shareholders unwilling to sell could nevertheless be induced to lend their shares to third parties engaged in short sales of VW stock, the shares would temporarily enter the market, that way giving Porsche the opportunity to buy them.

To tap into the market for VW shares offered by short-sellers, Porsche purchased call options which gave it the right to buy VW shares at a specified future date and price. As per plaintiffs, Porsche bought a sufficiently small number of call options from each of many counterparties that bought and held the VW shares that short-sellers, such as Plaintiffs, had sold into the market. That way no one counterparty would acquire enough VW stock for hedging purposes as to trigger legal disclosure requirements, which made it possible for Porsche to conceal its acquisition of call rights.

Based on the publicly available information, the Plaintiffs’ investment managers – located in New York City and elsewhere in United States – concluded that Porsche was unable or unwilling to acquire control of VW.

Through the first three quarters of 2008, VW’s share price continued to rise. Porsche financed its purchase of call options by selling put options on VW stock. These options obligated Porsche to pay its counterparties the difference between a pre-set “strike” price and the actual price of VW stock if the actual price fell below the strike price. This strategy carried risks for Porsche. Because, in event the price of VW stock fell, the difference between the share price and the strike price would increase, exposing Porsche to potentially massive liability. This became evident when in October 2008, VW’s stock price began a sharp decline. By October 24, 2008, the price had fallen thirty-nine percent from its average closing price between October 1 and October 17, 2008. As a result, Porsche’s liability to its put option counterparties grew dramatically. On October 26, 2008, in a press release entitled “Porsche Heads for Domination Agreement,” Porsche revealed that it had acquired 74.1 percent of VW through a combination of direct holdings and call options. The release explained that Porsche hoped to increase its VW stakes to 75% in 2009, and that the disclosure of the actual extent of Porsche’s ownership of VW “should give so called short sellers … the opportunity to settle their relevant positions without rush and without facing major risks” Complaint ¶ 66, Viking Global Equities LP v. Porsche Automobil Holdings SE, 10 Civ. 8073 (S.D.N.Y. Oct. 22, 2010) (“Viking Compl.”).

However, with Porsche holding 74.1 percent of VW’s shares and the German State of Lower Saxony holding another twenty percent, just 5.9 % of the company’s outstanding shares remained available for purchase. Obligated to acquire and return nearly thirteen percent of VW’s outstanding shares to the parties from whom they had borrowed them, short-sellers found themselves facing a severe shortage. Moreover, a substantial proportion of the 5.9 percent in the float was held by the index funds that would not or could not sell some or all of their shares.

With the news of Porsche’s takeover plan, the price of VW stock began to skyrocket. The short-sellers scrambling to purchase the shares they needed to unwind their short sales and limit their losses caused the price of VW stock to rise even more rapidly. The effect of this effort further increased the short-sellers’ losses and their desperation to buy shares led the price of VW stock to nearly quintuple from its price during the preceding week. To satisfy some of this demand, Porsche agreed to release five percent of its holdings, obtaining a huge windfall as a result.

When the dust settled, parties with short positions in VW had lost an estimated total of $38.1 billion, and VW’s share price had fallen back to roughly 2007 levels. The transactions in which Plaintiffs incurred the losses were synthetic investments, known as securities-based swap agreements, economically equivalent to short sales referencing VW shares.

Beginning on January 25, 2010, the Plaintiffs brought complaints in the United States District Court for the Southern District of New York against Porsche and two of its corporate officers, Wendelin Wiedeking and Holger Harter, alleging violations of the federal securities laws and common law fraud. The Plaintiffs claimed that Porsche, Wiedeking and Harter (jointly “Defendants”) lied about Porsche’s intent to take over VW and hid the extent of Porsche’s control of VW from the market through manipulative options trades. Following the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010), the Defendants moved to dismiss the complaints because the Plaintiffs’ swap agreements referenced securities trading on foreign exchanges. The District Court granted the Defendants’ motion, concluding that the swaps were essentially transactions in securities on foreign exchanges. The Plaintiffs appealed.

The U.S. Court of Appeals for the Second Circuit affirms the District Court decision.

The issue is whether § 10(b) of the Securities Exchange Act of 1934 can be applied to a purchase or sale of a security listed on a foreign exchange, or to a foreign purchase or sale of another security.

“In Morrison v. National Australia Bank Ltd., 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010), the Supreme Court established that, by virtue of the presumption against extraterritorial application of U.S. statutes, § 10(b) of the Securities Exchange Act of 1934, the basic antifraud provision of the U.S. securities laws, has no extraterritorial application, and no civil suit under that section may be brought unless predicated on a purchase or sale of a security listed on a domestic *201 exchange or on a domestic purchase or sale of another security. See id. at 267, 130 S.Ct. 2869 (‘And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies.’). In Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir.2012), this Court set forth the means to be used to determine when a transaction in securities is ‘domestic’ such that it may furnish the basis for a suit under that section. We concluded that in order for such a transaction to qualify as domestic, ‘the parties [must] incur irrevocable liability to carry out the transaction within the United States or ... title [to the securities must be] passed within the United States.’ Id. at 69.” [763 F.3d at 200-201]

“A securities-based swap agreement is a private contract between two parties in which they ‘agree to exchange cash flows that depend on the price of a reference security, here VW shares.’ Elliot Compl. ¶ 2 n. 2; see also Don M. Chance, Essays in Derivatives 43 (1998) (‘An equity swap is an agreement between two parties for each to make to the other a series of payments in which at least one party’s payments [are] based on the return on a stock or index.’). The U.S. securities laws in effect at the time of the events at issue defined such a swap as ‘a swap agreement... of which a material term is based on the price, yield, value, or volatility of any security or any group or index of securities, or any interest therein.’ SEC v. Rorech, 720 F.Supp.2d 367, 404 (S.D.N.Y. 2010) (quoting section 206B of the Gramm-Leach-Bliley Act, Pub.L. No. 106-102, 113 Stat. 1338 (1999), amended by Pub.L. No. 106-554, § 301(a),114 Stat. 2763, 2763A-451 (2000) (hereafter ‘Gramm-Leach-Bliley Act’)).”

“*206 A securities-based swap agreement is a separate and distinct financial instrument from the security it references. See Gramm-Leach-Bliley Act, § 206A. Securities-based swap agreements are designed to roughly replicate the economic effect of owning the referenced share of stock for one counterparty, and shorting the referenced share of stock for the other counterparty, without either party taking an actual ownership interest in the reference security. The plaintiffs allege that because they took the ‘short’ side of these synthetic investments, ‘the swap agreement[s] [would] generate[] gains as the price of VW shares declined and [would] generate[] losses as the price of VW shares rose, achieving an economic result similar to a short sale.’ Elliot Compl.¶ 2 n.2.”

“Because securities-based swap agreements do not involve the actual ownership, purchase, or sale of the reference security, the securities laws describe swaps as transactions in which the counterparties agree to make certain transfers ‘without also conveying a current or future direct or indirect ownership interest.’ Gramm-Leach-Bliley Act § 206A. Instead, the parties agree to exchange payments calculated by applying the change in price of the reference security—in this case, VW shares—to a pre-determined ‘notional amount’ set by the parties. The parties are free to select any notional amount they choose, regardless of the number of shares actually trading in the reference security. Thus, as bilateral agreements to pay money on the occurrence or nonoccurrence of wholly independent events, securities-based swap agreements are essentially wagers on changes in the price of the reference securities.”

“Although securities-based swap agreements are, in the ways just discussed, different from transactions in many other, less exotic securities, which involve actual transfer of shares, they also share some features with other types of securities. For example, a cash-settled option, like these swap agreements, gives the right to payments based on future change in the value of the stock it references, rather than any right or obligation to delivery of the stock itself. See Caiola v. Citibank, N.A.,N.Y., 295 F.3d 312, 324-27 (2d Cir. 2002) (discussing cash settled options).” [763 F.3d at 205-207]

In order to apply the US securities law to claims involving foreign elements, the Court takes into consideration certain key events, entities and instruments essential for its analysis.

As each of the Plaintiffs alleged that their cases were tied to New York, they did not allege that Porsche was a party to any securities-based swap agreements referencing VW stock, or that it participated in the market for such swaps in any way. As the Court concluded, the VW shares they referenced appeared to trade only on foreign exchanges. The Plaintiffs did not allege that they were traded on any United States exchange. Furthermore, although the Plaintiffs allege that some of Porsche’s statements denying any intention to acquire control of VW were made into the United States or were available here, Porsche’s allegedly deceptive conduct occurred primarily in Germany.

In reviewing the district court’s dismissal of the complaints, the Court starts by citing the antifraud provision of the Exchange Act:

“Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), makes it unlawful ‘[t]o use or employ, in connection with the purchase or sale of any security... or any securities-based swap agreement[,] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.’ 15 U.S.C. § 78j(b) (footnote omitted; emphasis added). Rule 10b-5, promulgated by the Commission pursuant to § 10(b), provides:”

“‘It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a)   To employ any device, scheme, or artifice to defraud,

(a)

(b)  To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(b)

(c)   To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

(c)

in connection with the purchase or sale of any security.’”

“17 C.F.R. § 240.10b-5. ‘The underlying purpose of Section 10(b) is to remedy deceptive and manipulative conduct with the potential to harm the public interest or the interests of investors.’ Morrison v. Nat’l Australia Bank Ltd., 547 F.3d 167, 170 (2d Cir.2008) (‘Morrison Ct.App.’) (internal quotation marks omitted), abrogated in part on other grounds, aff’d on other grounds, 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) (‘Morrison’).” [763 F.3d at 209]

The Court bases its opinion on Morrison and Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir.2012) (“Absolute Activist”).

“The Supreme Court began by asserting the ‘longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’ Morrison, 561 U.S. at 255, 130 S.Ct. 2869 (internal quotation marks omitted) (quoting EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248, 111 S.Ct. 1227, 113 L.Ed.2d 274 (1991) (‘Aramco’)). This ‘canon of [statutory] construction,’ which the Court had previously labeled ‘the presumption against extraterritoriality,’ see Aramco, 499 U.S. at 248, 111 S.Ct. 1227, is based on the assumption that ‘Congress ordinarily legislates with respect to domestic, not foreign matters.’ Morrison, 561 U.S. at 255, 130 S.Ct. 2869. Under this presumption, ‘[w]hen a statute gives no clear indication of an extraterritorial application, it has none.’ Id. Applying the presumption to § 10(b), the Court observed that ‘[o]n its face, § 10(b) contains nothing to suggest it applies abroad.’ Id. at 262, 130 S.Ct. 2869. Nor did the statute’s ‘general reference to foreign commerce in the definition of `interstate commerce’... defeat the presumption against extraterritoriality.’ Id. at 263, 130 S.Ct. 2869. Thus finding ‘no affirmative indication in the Exchange Act that § 10(b) applies extraterritorially,’ the Court ‘conclude[d] that it does not.’ Id. at 265, 130 S.Ct. 2869.”

“[…] The Court went on to consider what it referred to as the “`focus’ of congressional concern” expressed by the statute. Id. (quoting Aramco, 499 U.S. at 255, 111 S.Ct. 1227).”

“‘[T]he 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. Section 10(b) does not punish deceptive conduct, but only deceptive conduct “in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.” 15 U.S.C. § 78j(b). Those purchase-and-sale transactions are the objects of the statute’s solicitude.... [I]t is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies.’”

“Morrison, 561 U.S. at 266-67, 130 S.Ct. 2869 (citation omitted; emphasis added). *211 ‘With regard to securities not registered on domestic exchanges,’ the Court concluded, the statute’s ‘exclusive focus [is] on domestic purchases and sales.’ Id. at 268, 130 S.Ct. 2869 (emphases in original). ‘Not deception alone, but deception with respect to certain purchases or sales is necessary for a violation of the statute.’ Id. at 272, 130 S.Ct. 2869.”

“The Court also ‘reject[ed] the notion that the Exchange Act reaches conduct in this country affecting exchanges or transactions abroad’ because ‘[t]he probability of incompatibility with the applicable laws of other countries is so obvious that if Congress intended such foreign application `it would have addressed the subject of conflicts with foreign laws and procedures.’” Id. at 269, 130 S.Ct. 2869 (quoting Aramco, 499 U.S. at 256, 111 S.Ct. 1227). The Court observed that securities ‘regulation[s] of other countries often differ[] from ours as to what constitutes fraud, what disclosures must be made, what damages are recoverable, ... and many other matters.’ Id. And it predicted that ‘[t]he transactional test we have adopted—whether the purchase or sale is made in the United States, or involves a security listed on a domestic exchange’—would avoid ‘the interference with foreign securities regulation that application of § 10(b) abroad would produce.’ Id. at 269-70, 111 S.Ct. 1227.” [763 F.3d at 210-211]

The Court concluded that under Morrison “[s]ection 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Id. at 273, 130 S.Ct. 2869.

The Court then turns to Absolute Activist to determine under what circumstances the purchase or sale of a security that is not listed on a domestic exchange should be considered `domestic’ within the meaning of Morrison.

“[…] ‘A securities transaction is domestic when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States.’ Id. at 69. Therefore,”

“‘in order to adequately allege the existence of a domestic transaction [under Morrison], it is sufficient for a plaintiff to allege facts leading to the plausible inference that the parties incurred irrevocable liability within the United States: that is, that the purchaser incurred irrevocable liability within the United States to take and pay for a security, or that the seller incurred irrevocable liability within the United States to deliver a security.’”

“Id. at 68. Alternatively, we held that ‘it is sufficient for the plaintiff to allege that title to the shares was transferred within the United States.’ Id. (citing and quoting Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307, 1310-11 (11th Cir.2011)).” [763 F.3d at 212]

“We are of course bound by Morrison and Absolute Activist in determining whether § 10(b), and Rule 10b-5 promulgated by the Securities and Exchange Commission pursuant thereto, applies to the defendants’ alleged conduct. We must proceed cautiously in applying teachings the Morrison Court developed in a 19 case involving conventional purchases and sales of stock to derivative securities, like securities-based swap agreements, that vest parties with rights to payments based on changes in the value of a stock.”

“A question of potentially determinative importance for this case is whether, under Morrison, a domestic transaction in a security (or a transaction in a domestically listed security)—in addition to being a necessary element of a domestic § 10(b) claim—is also sufficient to make a particular invocation of § 10(b) appropriately domestic. If a domestic transaction in a security is not only necessary but also sufficient to justify the application of § 10(b) to otherwise foreign facts, and the plaintiffs’ securities-based swap agreements (which we assume for these purposes were executed and performed in the United States) are deemed domestic transactions under Absolute Activist, then all other questions would drop away. The mere fact that the plaintiffs based their suit on a domestic transaction would make § 10(b) applicable to allegedly fraudulent conduct anywhere in the world. In such a case, these complaints would properly invoke a domestic application of § 10(b).”

“Morrison established two important rules about the applicability of § 10(b). First, Morrison held that, because Congress did not indicate an intention that § 10(b) should apply extraterritorially, the presumption against extraterritoriality dictates *215 that § 10(b) has no extraterritorial application. Morrison, 561 U.S. at 265, 130 S.Ct. 2869. Second, Morrison ruled that § 10(b) does not apply unless the suit is predicated on either a domestic securities transaction or a transaction in a domestically listed security. Id. at 267, 130 S.Ct. 2869. Because neither was present in the case before it, the Court held that the invocation of § 10(b) was impermissibly extraterritorial, and the complaint failed to state a valid claim.”

“On careful consideration of Morrison’s words and arguments as applied to the facts of this case, we conclude that, while that case unmistakably made a domestic securities transaction (or transaction in a domestically listed security) necessary to a properly domestic invocation of § 10(b), such a transaction is not alone sufficient to state a properly domestic claim under the statute. We reach this conclusion for several reasons.”

“First, and most important, the Court did not say that such a transaction was sufficient to make the statute applicable. The language the Court used was consistent with the description of necessary elements rather than sufficient conditions. See id. at 267 (‘And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies.’ …. The Court never said that an application of § 10(b) will be deemed domestic whenever such a transaction is present.”

“Second, a rule making the statute applicable whenever the plaintiff’s suit is predicated on a domestic transaction, regardless of the foreignness of the facts constituting the defendant’s alleged violation, would seriously undermine Morrison’s insistence that §10(b) has no extraterritorial application. It would require courts to apply the statute to wholly foreign activity clearly subject to regulation by foreign authorities solely because a plaintiff in the United States made a domestic transaction, even if the foreign defendants were completely unaware of it. Such a rule would inevitably place § 10(b) in conflict with the regulatory laws of other nations.”

“The principal reason that the Court ‘reject[ed] the notion that the Exchange Act reaches conduct in this country affecting exchanges or transactions abroad,” id. at 269, 130 S.Ct. 2869, was not that Congress lacked the power to do so. Indeed, the Court implied the contrary. See id. at 255, 130 S.Ct. 2869 (explaining that the presumption is not a ‘limit upon Congress’s power to legislate’). But ‘[t]he probability of incompatibility with the applicable laws of other countries [in the case of transfers of shares of common stock] is so obvious that if Congress intended such foreign application it would have addressed the subject of conflicts with foreign laws and procedures’ in the statute. Id. at 269, 130 S.Ct. 2869 (citation and internal quotation marks omitted). The Court apparently thought that, if an extraterritorial application of federal law would likely be incompatible with foreign law, and that application was intended by Congress, Congress would have addressed the conflict. The corollary of that proposition is that if an application of the law would obviously be incompatible with foreign regulation, and Congress has not addressed that conflict, the application is one which Congress did not intend.”

“Applying that axiom to this case illustrates the problem with treating the location of a transaction as the definitive factor in the extraterritoriality inquiry. If the domestic execution of the plaintiffs’ agreements could alone suffice to invoke § 10(b) liability with respect to the defendants’ alleged conduct in this case, then it would subject to U.S. securities laws conduct that *216 occurred in a foreign country, concerning securities in a foreign company, traded entirely on foreign exchanges, in the absence of any congressional provision addressing the incompatibility of U.S. and foreign law nearly certain to arise. That is a result Morrison plainly did not contemplate and that the Court’s reasoning does not, we think, permit.” [763 F.3d at 214-216]

The Court concluded that “while a domestic transaction or listing is necessary to state a claim under § 10(b), a finding that these transactions were domestic would not suffice to compel the conclusion that the plaintiffs’ invocation of § 10(b) was appropriately domestic.” [763 F.3d at 216]

“Because, in the case of securities not listed on domestic exchanges, a domestic transaction is necessary but not necessarily sufficient to make § 10(b) applicable, we need not decide whether the plaintiffs’ transactions satisfy the standards of Absolute Activist for domestic transactions, because we think it clear that the claims in this case are so predominantly foreign as to be impermissibly extraterritorial. […] The complaints concern statements made primarily in Germany with respect to stock in a German company traded only on exchanges in Europe. Were this suit allowed to proceed as pleaded, it would permit the plaintiffs, by virtue of an agreement independent from the reference securities, to hale the European participants in the market for German stocks into U.S. courts and subject them to U.S. securities laws. The potential for regulatory and legal overlap and conflict would have been obvious to any legislator who considered the possibility that the statute would result in such an application. Indeed, the fraudulent acts alleged in the complaint have been the subject of investigation by PC German regulatory authorities and adjudication in German courts. Although we recognize that the plaintiffs allege that the false statements may have been intended to deceive investors worldwide, we think that the relevant actions in this case are so predominantly German as to compel the conclusion that the complaints fail to invoke § 10(b) in a manner consistent with the presumption against extraterritoriality. Morrison, 561 U.S. at 266, 130 S.Ct. 2869. The complaints thus fail to state a claim upon which relief may be granted.”

“The conclusion we have reached on these facts cannot, of course, be perfunctorily applied to other cases based on the perceived similarity of a few facts. In a world of easy and rapid transnational communication and financial innovation, transactions in novel financial instruments—which market participants can freely invent to serve the market’s needs of the moment—can come in innumerable forms of which we are unaware and which we cannot possibly foresee. We do not purport to proffer a test that will reliably determine when a particular invocation of § 10(b) will be deemed appropriately domestic or impermissibly extraterritorial. We believe courts must carefully make their way with careful attention to the facts of each case and to combinations of facts that have proved determinative in prior cases, so as eventually to develop a reasonable and consistent governing body of law on this elusive question. We have neither the expertise nor the evidence to allow us to lay down, in the context of the single case before us, a rule that will properly apply the principles of Morrison to every future § 10(b) action involving the regulation of securities-based swap agreements in particular or of more conventional securities generally. Neither do we see anything in Morrison that requires us to adopt a ‘bright-line’ test of extraterritoriality when deciding every § 10(b) case. While over time a series of judicial opinions may collectively result in one or more such standards, we do not think it appropriate in this case of first impression to attempt to set forth a comprehensive rule or set of rules that will govern all future cases to come before this Court, Perhaps, in the final analysis, Congress and the Securities and Exchange Commission might be in a better position to craft broader rules in this area in light of their access to hearings, including the testimony of experts, their competence to make policy decisions, and their constitutionally and statutorily ordained roles as makers of law and rules. It is enough to say that we think our decision in this case is compelled by the text of the Exchange Act and the principles underlying the Supreme Court’s *218 decision in Morrison, as applied to our facts.” [763 F.3d at 216-218]

The Court affirms the dismissal of the complaints and remands the case to the District Court for further proceedings.

Circuit Judge Leval submitted a concurring opinion discussing the Morrison opinion. For various reasons, especially “the Supreme Court’s own words and reasoning in Morrison, and in Kiobel when it undertook to apply the rule of Morrison, I do not read Morrison as prohibiting the use of a flexible, multi-factor test to ensure that § 10(b) not be applied extraterritorially.” .” [763 F.3d at 221]

Citation: Parkcentral Global HUB v. Porsche Auto. Holdings, 763 F.3d 198 (2d Cir. 2014).