The substantial amount of press and commentary generated by the second holding of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, discussed in our post of 7/16/10, has overshadowed the potential importance of the first holding of that decision, which has attracted little attention. In fact, we have only one commentator on the first holding: Professor Howard Wasserman’s June 24, 2010 Newstex posting. [http://prawfsblawg.blogs.com/prawfsblawg/page/2/]
In the first holding, the Supreme Court said that the issue being discussed in the case, whether the Securities Exchange Act of 1934 reached conduct that was “foreign cubed” – that is, a foreign plaintiff suing a foreign defendant for misconduct in connection with securities traded on a foreign exchange – was not a question of subject matter jurisdiction but rather was one going to the “merits” of whether the Act applied to the conduct at issue. Said Justice Scalia, “to ask what conduct § 10(b) reaches is to ask what conduct § 10(b) prohibits, which is a merits question.” The Supreme Court held that the federal court had jurisdiction under 15 U.S.C. § 78aa because of an express grant of exclusive jurisdiction over all claims to enforce the Securities and Exchange Act. This gave the court the power to adjudicate the question of whether § 10(b) applied to the conduct at issue.
This first holding is of key and even greater importance to those interested in international litigation issues than the second holding. The single other posting on this topic (supra) applauds the Supreme Court’s first holding as “finally putting forth a clear explanation for the jurisdiction/merits divide as to federal statutes”. But as with the Court’s second holding discussed in our earlier posting, we aren’t so sure whether and how much defendants vs. plaintiffs are helped by this ruling or whether the ruling helps or hurts the development of international notions of comity.
The Supreme Court was right that over the decades the prior cases had invoked subject matter jurisdictional concerns to analyze the “reach” question. In part these cases did so in recognition of the fact that a challenge to subject matter jurisdiction in a U.S. court is a “stop the presses” strategy that has the capacity of halting the juggernaut of U.S. federal court litigation before it begins – that is, before costly and protracted discovery into the “merits” of the claims.
In rejecting that approach, and in insisting that the “reach” analysis is a “merits” based inquiry, the question arises if lower courts faced with such motions can or will, as a practical matter, be as willing to take a hard look at the case to determine if its international scope renders it inappropriate for U.S. federal court determination. Put another way, will a district court be as solicitous of their limited power at the commencement of litigation if they are faced, not with a “subject matter jurisdiction” challenge, but with a “merits” challenge? Will a district court be as willing to consider interests and facts outside the complaint on a Rule 12(b)(6) motion as on a jurisdictional motion, where considering matters outside the complaint is routine? Can the district court consider such facts on 12(b)(6) motion, given the rule and decisional reluctance to do so? See Fed. R. Civ. P. 12(d) (requiring conversion of the motion to one for summary judgment if matters outside the pleadings are presented and not excluded by the court). Will appellate court review be as direct or speedy in the case of an error by the district court in opening the floodgates of a U.S. litigation when the district court’s determination is a “merits” based one rather than one based on a challenge to “subject matter jurisdiction”?
Finally, the thrust of the lower courts’ decisions in Morrison related to international comity. Is it so clear that, even if Congress decided that the statute reached foreign-cubed conduct, a U.S. court would be without power to invoke notions of prudential “comity” and withhold its hand from opening the U.S. court house door? Historically, exercises of “ international comity” have been thought to be jurisdictionally-based determinations, not merits-based – i.e., they occur before the court reaches the “merits” of the case and represent a conscious decision to decline exercising jurisdiction even where subject matter jurisdiction exists. E.g., United States v. Lee, 106 U.S. 196, 237 (1882); accord Sarei v. Rio Tinto, PLC, 456 F.3d 1069, 1086 (9th Cir. 2006) (“Under the international comity doctrine, courts sometimes defer to the laws or interests of a foreign country and decline to exercise jurisdiction that is otherwise properly asserted”). Reading Morrison as precluding an international comity analysis would seem unjustified, whether the “reach” issue is denominated “merits” or “subject matter jurisdiction” based.
- Louis M. Solomon