Sanchez v. Crocs, Inc.: The Tenth Circuit Addresses Extraterritoriality

In Sanchez v. Crocs, Inc., 2016 U.S. App. LEXIS 13285 (10th Cir. 2016), the Tenth Circuit addressed whether, after Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), a plaintiff has standing, under § 10(b) of the Securities and Exchange Act (“Exchange Act”), to pursue claims in a United States federal court for its losses on investments in foreign contracts for difference (“CFDs”). (For a fuller discussion of Morrison v. National Australia Bank Ltd., see the discussion of subject matter jurisdiction in our e-book, International Practice: Topics and Trends.)

Sanchez arises from the rapid expansion of Colorado-based shoe manufacturer Crocs, Inc. (“Crocs”) in the years after its founding.  According to the plaintiffs’ complaint, Crocs continued to use “archaic, error-prone Excel spreadsheets” to track inventory and forecast sales, despite the fact that the company’s massively expanding business was quickly outpacing the usefulness of its inefficient system.  The plaintiffs alleged that, due to its disorganized methods for tracking inventory, Crocs not only frequently bulk-ordered unsalable shoes but also consistently failed to meet the demand for its best-selling shoes.

As a result of its inventory and distribution difficulties, Crocs sustained a four-fold increase in its inventory from August to December 2006, followed by similar increases throughout 2007 and into 2008. Nevertheless, the company valued its inventory at cost on both the 2006 and 2007 Form 10-Ks that it filed with the Securities and Exchange Commission (“SEC”).  Furthermore, in both years, Crocs’ auditor, issued unqualified audit opinions approving both Crocs’ financials and its internal controls.  Eventually, Crocs began disclosing its issues with its inventory and distribution, and by November 2008, the company wrote down the value of its inventory by over seventy million dollars.

In November 2007, several plaintiffs brought securities fraud class action lawsuits against Crocs. The district court consolidated the cases and named the Sanchez Group as lead plaintiff. The plaintiffs alleged, inter alia, that Crocs, its management, and Crocs’ auditor had violated § 10(b) of the Exchange Act by fraudulently representing both the value of Crocs’ inventory and the competence of its internal controls with regards to financial reporting. According to the complaint, Crocs knew well before 2008 that the “bulk” of its inventory could not be sold at cost because it “consisted of unsalable or unsuitable shoes.” Thus, the complaint alleged that Crocs violated generally accepted accounting principles (“GAAP”) by valuing its inventory at cost on the 2006 and 2007 Form 10-Ks. The plaintiffs also alleged that Crocs’ auditor was complicit in the fraud.

The defendants moved to dismiss the complaint for failure to state a claim. The district court granted their motion. Several appeals and related motions followed. The plaintiffs appealed the dismissal of their complaint, and one of the plaintiffs—the National Roofing Industry Pension Plan (“National Roofing”)—moved to dismiss the plaintiffs’ appeal for lack of jurisdiction. National Roofing also appealed the district court’s initial selection of the Sanchez Group as the lead plaintiff.

Eventually, the plaintiffs and the Crocs defendants agreed to a proposed settlement, for which the district court issued its final approval in September 2014. The court subsequently dismissed the action against the Crocs defendants, and National Roofing then voluntarily agreed to dismiss its appeal with prejudice. Thus, only National Roofing’s motion to dismiss and the claims against Crocs’ auditor appeared before the Tenth Circuit. It is the motion to dismiss that is of interest to this international practice blog.

National Roofing’s motion argued that, under Morrison, the Sanchez Group lacked standing to pursue its appeal of the district court’s decision. In Morrison, the Supreme Court held that § 10(b) of the Exchange Act reaches only 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. See 561 U.S. at 273.  According to National Roofing, because the Sanchez Group’s CFDs were not listed on a domestic exchange and were purchased  abroad, the Sanchez Group lacked standing under Morrison to pursue § 10(b) claims in a United States Court.

The Tenth Circuit ultimately found that, even under Morrison, the court had proper subject matter jurisdiction.  To reach that conclusion, however, the Court of Appeals first had to navigate the sometimes less-than-clear waters of federal and international civil procedure. Although the Tenth Circuit ultimately addressed National Roofing’s Morrison-based argument as part of National Roofing’s motion to dismiss, the appellate court found the motion was moot because National Roofing had included the motion’s Morrison-based argument within its appeal that it subsequently voluntarily dismissed with prejudice.

National Roofing initially intended for the Court to address its Morrison-based argument as part of its appeal of the district court’s selection of the Sanchez Group as the lead plaintiff. After the other parties opposed its suggestion for the Court to hear and decide that appeal first, however, National Roofing brought its motion to dismiss, as a way of ensuring that the Court would address the Morrison issue before the Sanchez Group could settle its claims with the defendants.

Eventually, the plaintiffs did in fact settle with most of the defendants, and National Roofing voluntarily agreed to dismiss its own appeal with prejudice. Thus, according to the Tenth Circuit, because “a stipulation of dismissal with prejudice…normally constitutes a final judgment on the merits” (quoting Astron Indus. Assocs., Inc. v. Chrysler Motors Corp., 405 F.2d 958, 960 (5th Cir. 1968), by voluntarily agreeing to dismiss its appeal (which raised the same Morrison-based argument as the motion to dismiss) with prejudice, National Roofing obtained “a complete adjudication on the merits” of its claim and removed itself from the litigation of the Morrison issue. Harrison v. Edison Bros. Apparel Stores, Inc., 924 F.2d 530, 534 (4th Cir. 1991).  Thus, the Tenth Circuit’s only course of action was to deny National Roofing’s motion to dismiss the appeal as it no longer had any “personal stake” in the dispute because its claim had already been fully adjudicated. Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523, 1530 (2013).

Despite its holding that National Roofing’s motion to dismiss was moot, the Tenth Circuit acknowledged that, even in a filing not properly before the Court, the Court has an independent obligation to determine whether subject-matter jurisdiction exists where a party raises a jurisdictional challenge. See United States v. Rubio, 231 F.3d, 709, 711 n.1 (10th Cir. 2000).  Thus, although the Tenth Circuit was not resolving the motion itself, it was required to assess whether Morrison did actually impact its jurisdiction over the case.

The Tenth Circuit held that Morrison did not impact its jurisdiction over the case.  The appellate court explained that, contrary to National Roofing’s argument, Morrison explicitly held that the territorial reach of § 10(b) is a merits issue—not a jurisdictional one. In addition, the Tenth Circuit referred to its own reaffirmation of Morrison in CGC Holding Co. v. Broad & Cassel, 773 F.3d 1076, 1096 (10th Cir. 2014), where it held that “the extent to which a statute applies extraterritorially proceeds exclusively as a merits issue, not a question of jurisdiction.”

In the end, the court denied as moot National Roofing’s motion to dismiss and, after addressing the merits of the plaintiffs’ appeal, affirmed the district court’s dismissal of the plaintiffs’ complaint.

Special thanks to Mark Sanchez*¥ for his assistance in creating this blog post.

*Not admitted to the practice of law
¥No relation to the Sanchez Group as mentioned above.

Another District Court Examines Extraterritoriality of the Alien Tort Statute

Ates v. Gülen, 2016 U.S. Dist. LEXIS 84685 (M.D. Penn. June 29, 2016),  is one of the recent cases to examine the Alien Tort Statute (ATS) since the Supreme Court’s decision in Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659 (2013). (For a more in-depth analysis of Kiobel and its implications, please see our posting, “Extraterritoriality Becomes Focus of Kiobel Supreme Court; Are We Headed for Morrison II?” Likewise, for a more in-depth analysis of the ATS in general, please see our e-book, International Practice: Topics and Trends.) In Gülen, the Middle District of Pennsylvania addressed the threshold for displacement of the ATS’s presumption against extraterritoriality.

In December 2015, the plaintiffs Bunyamin Ates, Turgut Yildirim, and Murat Ozturk, all Turkish nationals, filed a complaint against Muhammed Fethulla Gülen and Does 1-50. The plaintiffs alleged, pursuant to the ATS, that the defendants had persecuted members of their religious organization in addition to arresting and detaining the plaintiffs arbitrarily. The plaintiffs also asserted counts of false imprisonment and civil conspiracy pursuant to Pennsylvania state law. Gülen moved to dismiss the complaint. For the reasons described below, the District Court granted Gülen’s motion. Continue Reading

The Supreme Court Considers Extraterritoriality of RICO

RJR Nabisco, Inc. v. European Cmty, 136 S. Ct. 2090 (2016), is one of the rare cases by the Supreme Court that addresses an important issue of international practice. The case arises from a suit brought by the European Community and 26 of its member states against RJR Nabisco, Inc. alleging violation of the Racketeering Influenced and Corrupt Organizations Act (RICO). The complaint detailed a variety of alleged activities, all of which occurred extraterritorially.

The European Community and its member states brought suit in the United States District Court for the Eastern District of New York, which dismissed the RICO claims as impermissibly extraterritorial.  On appeal, the Second Circuit reinstated the RICO claims, holding that Congress had intended RICO’s substantive prohibitions to apply extraterritorially.

The Supreme Court granted certiorari on whether RICO can be applied extraterritorially. The Second Circuit’s judgment was reversed in a 4-3 judgment. The majority opinion was authored by Justice Alito. Justice Ginsburg and Justice Breyer filed two opinions concurring in part, dissenting in part, and dissenting from the judgment.

The Court divided this question into two issues: whether RICO’s substantive prohibitions apply to conduct that occurs in non-U.S. countries and whether RICO’s private right of action applies to injuries suffered in countries other than the United States. As to the first issue, the Court held in the affirmative. As to the second, however, the Court held in the negative. Both Justice Ginsburg and Justice Breyer concurred in part and dissented in part, with both Justices’ dissents addressing only the second issue. Continue Reading

District Court Confirms an International Arbitration Award Granted Under the New York Convention

Belize Bank Ltd. v. Gov’t of Belize, No. 14-cv-659 (D.D.C., 2016), is one of several recent cases in which the District Court for the District of Columbia ordered the Government of Belize (“Belize”) to pay an arbitration award. In this case, the Court addressed questions of when federal courts can enforce arbitration awards granted outside the U.S. For a fuller discussion of where arbitral awards can be enforced, see the discussion of “Enforcement and Recognition of Arbitral Awards” in our e-book, International Practice: Topics and Trends.

In 2007, The Belize Bank Limited (“Bank”) initiated arbitration proceedings at the London Court of International Arbitration (“LCIA”) against Belize, who failed to pay the Bank debts originating from a loan payment guarantee signed by then Belizean Prime Minister Said Musa. Because Belize did not initially participate in the proceeding, the LCIA appointed an arbitrator, Zachary Douglas, on behalf of Belize. In 2013, the LCIA ordered Belize to pay the Bank BZ$36,895,509.46 plus interest. In 2014, the Bank filed a petition to enforce the 2013 award in the District of Columbia. Belize moved to dismiss the petition.

Continue Reading

District Court Allows the Commodity Futures Exchange Commission to Bring a Lawsuit Involving Non-U.S. Investors and Non-U.S. Electronic Trading Platforms

United States Commodity Futures Exch. Comm’n v. Vision Fin. Partners, LLC, No. 16-60297 (S.D. Fla. 2016), addresses the international practice question of whether federal courts have subject matter jurisdiction to hear lawsuits brought by the Commodity Futures Exchange Commission (the Commission) on behalf of non-U.S. investors trading through non-U.S. electronic platforms.

In this case, the Commission sued Vision Financial Partners and its principal for violating the Commodity Exchange Act. Defendants allegedly misappropriated funds deposited by non-U.S. investors who invested in “binary options” through trading platforms located in Israel, Cyprus, and the United Kingdom.

In moving to dismiss based on Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), Defendants argued that the Commission lacked authority to bring the suit, mainly because “the Commodity Exchange Act does not apply to the binary options purchased by foreign investors and exchanged on foreign trading platforms.” Defendants’ argument was based on Morrison v. National Australia Bank Ltd., No. 08-1191 (June 24, 2010), in which non-U.S. plaintiffs relied on the Securities Exchange Act of 1934 to sue a non-U.S. issuer based on securities transactions outside of the United States. In Morrison, the Supreme Court held that a private plaintiff can bring a securities lawsuit only if “the purchase or sale [of the subject security] is made in the United States, or involves a security listed on a domestic exchange.” (For a fuller discussion of Morrison v. National Australia Bank Ltd., see the discussion of subject matter jurisdiction in our e-book, International Practice: Topics and Trends.) Courts have applied Morrison to suits brought by private parties under the Commodity Exchange Act. However, in this case, the Court did not apply Morrison, because the Court believed that “the extra-territorial reach of a private right of action under the Commodity Exchange Act is a ‘different, and somewhat more complicated question’ than that of a suit brought by the Commission.” The Commodity Exchange Act affirmatively indicates that “it applies to extraterritorial transactions, at least concerning suits brought by the Commission itself.”

The district court denied the motion to dismiss, holding that “the Commission may sue Defendants for violation of the Commodity Exchange Act, even if the violations concerned transactions between non-U.S. residents and non-U.S. electronic platforms.” The Court found that since Defendants committed their misconduct in Florida, the Commodity Exchange Act permitted the Commission to bring this lawsuit. The Court stated:

7 U.S.C. § 6(b)(2) permits the Commission to “adopt rules and regulations proscribing fraud,” and other rules, even if they concern instruments or transactions “made on or to be made subject to the rules of a board of trade, exchange or market located outside the United States,” so long as that fraud or other regulated behavior is committed by “any person located in the United States.” And, of course, 7 U.S.C. § 13a-1 permits the Commission to sue over “any practice constituting a violation of any provision of [the Commodity Exchange Act] or any rule, regulation, or order thereunder.

In short, the Court was not willing to extend the narrowing teaching of Morrison to this lawsuit brought by the Commission.


Special thanks to Yujia Feng* for her assistance in creating this blog post and in re-establishing this blog.

*Not admitted to the practice of law



Norex Decision, Long in Federal Court, Now Dismissed By State Court Using Borrowing Statute To Shorten Applicable Limitations Period

We have posted on the meanderings of the Norex case in federal court (e.g., here).  After dismissal from federal court, Norex sued in state court.  Norex Petroleum Ltd. v. Leonard Blavatnik, et al., Index No. 650591/11 (Sup. Ct. N.Y. County 2012).

In a decision that addresses several international litigation issues, the trial court dismissed at least one major action between the parties.  The Court relied on the statute of limitations as imposed by virtue of New York’s Borrowing Statute.  A brief reminder of the power of that statute is warranted.  See the general discussion of borrowing statutes in our e-book, International Practice:  Topics and Trends.

In the Norex case, Norex, though a Cyprus entity, has in principal place of business in Calgary, Alberta, Canada.  The gravamen of the complaint related to alleged misappropriation of Norex’s majority interest in oil fields in Russia that are owned by Yugraneft, a non-party to the suit.  The defendant in the case, BP, allegedly took control (through a joint venture) of the oil assets that Norex claims were taken from it.

In moving to dismiss on statute of limitations grounds, Defendants relied on CPLR Section 202, which provides as follows:

CPLR § 202 Cause of action accruing without the state

An action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply.

Because Norex was not a New York resident, the Court needed to determine where the cause of action accrued.  Finding that the cause of action accrued in Canada, “where the[] damages were felt”, the Court applied the Alberta two-year statute of limitations in tort cases.  On this analysis the action in state court was time-barred.

The tricky part of the analysis, however, was whether the statute of limitations had been tolled.  The federal action brought by Norex was, it claimed, timely filed even under a two-year statute.  And Norex relied on CPLR 205(a), which provides in pertinent part:

New action by plaintiff. If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff, or, if the plaintiff dies, and the cause of action survives, his or her executor or administrator, may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action and that service upon defendant is effected within such six-month period.

The state action was commenced within six months of the dismissal of the Norex federal action.  However, the Court found that there was no similar tolling provision in the Canadian statutory scheme.  The Court ruled that the fact that the Alberta law was “substantive” and not “procedural” didn’t matter; the Borrowing Statute required reliance on that non-New York law in any case.

Finally, the Court considered (arguendo) and rejected Norex’s reliance on 28 U.S.C. Sec 1367(d), a federal statute that provides:

d) The period of limitations for any claim asserted under subsection (a), and for any other claim in the same action that is voluntarily dismissed at the same time as or after the dismissal of the claim under subsection (a), shall be tolled while the claim is pending and for a period of 30 days after it is dismissed unless State law provides for a longer tolling period.

The Court determined that this federal statute was binding on it.  The Court however also found that New York’s six-month tolling provision, being longer than the federal 30-day, meant that the federal statute didn’t apply.  And “State law”, the Court found based on a definition in Section 1367(e), meant only states of the U.S., not a non-U.S. jurisdiction.



Court Denies Non-U.S. Company’s Attempt To Avoid Default, Citing Agency Relationship Between Parent and Sub Justifying Earlier Exercise of Jurisdiction Over Non-U.S. Parent

The drywall litigation, arising from the installation into U.S. homes of allegedly defective drywall from China, has included a great many noteworthy international practice issues.  Many companies have settled.  Others have continued to litigate.  In Lennar Homes, LLC, et al. v. Knauf Gips, et al.,, Case no. 09-07901 CA 42 (Cir. Ct. 11th Jud. Dist. 2012), the Court addressed the situation of a defaulting defendant trying to undue the consequences of default. 

The company involved is Taishan Gypsum Co.  Taishan argued that it lacked the minimum contacts necessary to be hailed into a U.S. court.  The plaintiffs argued that Taishan had the requisite contacts through an agency relationship with an allegedly controlled and dominated wholly owned subsidiary.

We have discussed on this blog the many different ways for securing jurisdiction over a non-U.S. parent or subsidiary.  In this decision, the Court determines that the relationship between parent and subsidiary was so close and dominating that the U.S. entity was in fact the agent of the absent non-U.S. parent.  Such an agency relationship would be sufficient for jurisdiction under any or almost any U.S. law. 

In this case, the analysis was made under Florida state law, which requires a “high level of control” to trigger the agency determination.  Here, the Court further found that the subsidiary’s “separate corporate status was a formality” and that the subsidiary “was merely a vehicle through which [the parent] exported its products to the United States”.  The Court credited evidence that the only reason the subsidiary was established was to enable customers to take advantage of VAT tax offsets, and the Court found that the Company ignored the formalities and acted without any apparent need to request or provide corporate authorizations.

After finding the parent subject to U.S. law, it reviewed the parent’s arguments for why the default judgment should be lifted.  The Court rejected all of these arguments and maintained the default.

Eleventh Circuit Finds Moot a Post-Judgment Challenge to a Confirmed Arbitral Award, Even When the Challenge Is Made in a Primary Jurisdiction Under the New York Convention

Ingaseosas International Co. v. Aconcagua Investing Ltd., No. 11-10914 (11th Cir. 2012) (unpublished),  involves an interesting application of the primary vs secondary jurisdiction doctrine under the New York Convention as well as the mootness doctrine. 

IIC participated in an arbitration in Miami, Florida, under New York law.  IIC lost, the award requiring it to pay $11 million to AIL.  When IIC didn’t pay, AIL brought an enforcement proceeding in the British Virgin Islands.  As the Eleventh Circuit noted, under the New York Convention, AIL could have filed an enforcement action in any of the over 140 contracting states within the New York other than an state where the award was rendered or where the award is “considered as domestic”.  (For a fuller discussion of where arbitral awards can be enforced/opposed, see the discussion of international arbitrations and the New York Convention in our e-book, International Practice:  Topics and Trends.)  In response to the AIL proceeding in the BVI court, IIC filed a motion to vacate in the district court in Florida.

In the BVI court, the court was willing to stay the matter until the determination of the motion to vacate in federal district court if IIC provided security of $7 million.  IIC declined to do so, the BVI court ultimately entered a judgment enforcing the award, and IIC in fact paid the judgment while still pursuing it’s motion to vacate in the federal district court.

The Eleventh Circuit held that IIC could not “idly stand by and allow an arbitration award to be confirmed and then seek to vacate same”.  In support, the Court of Appeals relied on The Hartbridge, 57 F.2d 672 (2d Cir. 1932), a decision by three of the legal giants of that generation (Learned Hand, Augustus Hand, and Thomas Walter Swann), which held:

As we understand the statute a motion to confirm puts the other party to his objections. He cannot idly stand by, allow the award to be confirmed and judgment thereon entered, and then move to vacate the award just as though no judgment existed. . . . After judgment we think the award can be vacated only if the judgment can be, and to vacate the judgment an adequate excuse must be shown for not having presented objections to the award when the motion to confirm was heard.

The Court of Appeals did not analyze whether this law should apply under the organization of rules adopted by the New York Convention, which was not adopted until 1958. Under the New York Convention, as the Court of Appeals acknowledged,  jurisdictions are divided into primary and secondary, with the court where the award was rendered being among the primary jurisdictions, and the court (in this case in BVI) where enforcement is sought being among the secondary jurisdictions.  The New York Convention “envisions multiple proceedings that address the same substantive challenge to an arbitral award” — but a primary jurisdiction situs is generally thought of to have more say in the vacatur/enforcement process.  The Eleventh Circuit did not hold that the federal district court lacked jurisdiction but rather held the case moot “for prudential reasons”.  The Court of Appeals was moved by IIC’s repeated failure to protect its rights by not posting a bond — but the New York Convention does not require the posting of a bond or automatically stay a secondary jurisdiction from enforcing an award upon such a posting.

New York’s Highest Court Interprets Both State and Federal Antitrust Law and Limits Extraterritorial Application

Global Reinsurance Corp. v. Equitas Ltd., No. 53 (NY Ct. App. 2012), addresses the sufficiency and, more pertinent for our purposes, the extra-territorial reach of antitrust claims under New York’s antitrust statute, the Donnelly Act (NY Gen Bus. Law sec. 340, et seq.).  In doing so, the High Court interpreted as well federal antitrust jurisprudence on extra-territoriality, a subject we have posted on as a matter of signficance to the international practitioner (e.g., here). 

Equitas arose from the Reconstruction and Renewal plan by the Names (the insurance underwriters) at Lloyd’s of London in 1996.  Its job was to reinsure otherwise uninsurable non-life obligations that Lloyd’s syndicates had taken as retrocessionary reinsurers.  The antitrust claims against Equitas alleged that Equitas’s goal was not to pay just reinsurance claims but to stall, take a “hard-nosed” approach, etc. 

The Court of Appeals of New York found the operative pleading against Equitas deficient for failute to allege “any anticompetitive effect attributable to the posited conspiracy beyond the Lloyd’s marketplace”. But the Court went further and held that, even if the pleading could be amended to allege market power, “there would remain as an immovable obstacle to the action’s maintenance, the circumstance that the Donnelly Act cannot be understood to extend to the foreign conspiracy plaintiff purports to describe”.

To arrive at that conclusion, the Court of Appeals was prepared to extend the reach of the Donnelly Act to nearly the same lengths as federal antitrust statutes can reach.  In describing the reach of federal antitrust extra-territoriality, the Court cited the Foreign Trade Antitrust Improvements Act to observe that “conduct involving [non-import] trade or commerce . . . with foreign nations” is actionable in the U.S. only where the conduct has a “direct, substantial, and reasonably forseeable effect” on domestic commerce.  Describing the pleading before it, the Court of Appeals states:

The complaint alleges, essentially, that a German reinsurer through its New York branch purchased retrocessional coverage in a London marketplace and consequently sustained economic injury when retrocessional claims management services were by agreement within that London marketplace consolidated so as to eliminate competition over their delivery. Injury so inflicted, attributable primarily to foreign, government approved transactions having no particular New York orientation and occasioning injury here only by reason of the circumstance that plaintiff’s purchasing branch happens to be situated here, is not redressable under New York State’s antitrust statute. That this is so, is demonstrable when the Donnelly Act is considered in the context of federal antitrust law.

The Court was not willing to extend the reach of the Donnelly Act because the business of insurance was involved.  Indeed, it was not willing to extent the Donnelly Act as far as the federal antitrust laws, stating instead that:

For a Donnelly Act claim to reach a purely extra-territorial conspiracy, there would, we think, have to be a very close nexus between the conspiracy and injury to competition in this State.

Ninth Circuit Reverses FSIA Exception; No Commercial Activity in the U.S. in Iraq’s Oil for Food Program

Terenkian v. Republic of Iraq, No. 10-56708 (9th Cir. 2012), addresses the important international practice question of whether activity by a non-U.S. sovereign satisfies the “commercial activity” exclusion to the application of the Foreign Sovereign Immunities Act, thus permitting the federal courts to exercise subject matter jurisdiction over a matter.  

The case concerned alleged breaches of contracts between Cyprus-based oil brokerage companies and the Iraqi State Oil Marketing Organization (SOMO), which had been selling oil through the Oil for Food Program.  Although the original contract provided for arbitration in accordance with ICC rules and designated the place of arbitration as Baghdad, the plaintiff argued that this was impossible because Terenkian faced death threats in Iraq, and also argued that the district court could not compel arbitration because Iraq was not a signatory to the New York Convention.

The plaintiff argued that Iraq was the actual defendant in the suit and that it was not entitled to sovereign immunity.  It initially argued that the alleged breach of contract had direct effect in the United States because some of the oil from the contract, which was no longer available, was intended for distribution in the United States. Later, in the opposition of Iraq’s motion to dismiss, the plaintiffs argued that Iraq was not entitled to sovereign immunity under the FSIA because of the exemption for commercial activity carried on in the United States.  The plaintiffs argued that the contracts at issue were executed in New York.  Additionally, the plaintiffs argued the act of depositing money in the United Nations escrow account outside the U.S. instead of in a New York bank caused a direct effect in the United States because the payment was not deposited in the US (which the original contract had required).

Iraq (the new government) moved to dismiss for lack of subject matter jurisdiction, arguing that it was not a party to the contracts (rather SOMO was) and that the alleged breaches did not have direct effect on the U.S. because the place of performance was Iraq and that there was no evidence that any oil would go to U.S. customers.

The district court denied the motion to dismiss, holding that the commercial activity exception applied; the commercial activity outside the U.S. had a direct effect in the U.S., based on the contract requiring payment be made in New York. It did not address the plaintiff’s alternative arguments.

The Ninth Circuit reversed.  It held that Iraq’s participation in the Oil for Food Program was not a commercial activity that could be engaged in by a private player, as defined in governing precedent. Additionally, there was no evidence that Iraqi officials signed the contract in the United States, and even if they had, that would not constitute significant activity or substantial contact in the U.S. The Court of Appeals also held that the alleged breach did not have direct effects in the United States, as Iraq had no obligation to perform in the United States. It also found that neither a potential financial loss nor the distant potential of oil sale loss was sufficient to constitute a direct effect.

Seventh Circuit Applies Non-U.S. Law, Finds Not Conflict, And Awards Full Damages on Breach of Fiduciary Duty Claim; Non-U.S. Law Proven Without Apparent Use of Experts

In re Griffin Trading Co. (Appeal of Leroy G. Inskeep), No. 10-3607 (7th Cir. 2012), reviewed a District Court application of Illinois law in a breach of fiduciary duty claim in which those in control of Griffin Trading were alleged to have breached their fiduciary duties by allowing segregated customer funds to be used to help cover a customer’s losses.  The transactions involved banks in England, Canada, France, and Germany.

In applying Illinois law, the District Court believed that the non-U.S. choice of law issue was raised too late.  This, the Circuit found, amounted to an abuse of discretion.  The Notes to Fed. R. Civ. P. 44.1 require “reasonable” notice of the reliance on non-U.S. law — in order to avoid “unfair surprise”.  The Circuit found that reliance on non-U.S. law was timely raised.

It then found that the U.C.C., relied on by the District Court, “cannot provide the operative rule of law”.  At the same time, all the potentially applicable rules of law were in essence the same.  None attaches signficance to the “moment of acceptance”, as does the U.C.C. (so presumed the Court); rather, each applicable law required “a causal link between the challenged activity (or inactivity) and the alleged injury.  It was the inaction of the principal controlling persons of Griffin that led to the loss; that was sufficient under the law of each potentially relevant jurisdiction for the imposition of liability.  Damages in the full amount of the improper transfer were then imposed (after another correction of the choice of law approach).

It is noteworthy that, in deciding the choice of law issue, the Court of Appeals appeared to relied on general reviews of non-U.S. law, including a law review article and The Encyclopaedia of Banking Law.  The Seventh Circuit has in the past written quite vigorously on the limitations of using expert evidence in the proof of non-U.S. law (see disuccsion here).

Eleventh Circuit Reiterates Its Rejection of Public Policy Defenses To the Compelled Arbitration of Federal Claims in Non-U.S. Arbitrations Applying Non-U.S. Law

Fernandes v. Carnival Corp., No. 09-15675 (11th Cir. 2012), provides a concentrated refresher of several international practice principles that the courts, especially in the Eleventh Circuit, have applied in increased rigor and consistency.  In a short decision, the Eleventh Circuit addressed claims by an injured fitter mechanic complaining of the alleged failure by Carnival to provide adequate medical care and the alleged wrongful forcing of the plaintiff to continue working in a post of employment that allegedly aggravated his injury.  The plaintiff asserted claims under federal law, the Jones Act.  He also asserted claims for maintenance and cure, which, he alleged, did not arise out of his employment contract but rather from his employment relationship.  The plaintiff worked on two Carnival ships, one in 2005 and one beginning in 2007.  One of the contracts the plaintiff had with Carnival, the one relating to the 2007 employement, contained an arbitration provision.  The former did not.  Plaintiff sued in state court.  After removal, the District Court compeled arbitration of the claims relating to the later contract and remanded to state court the claims relating to the former contract.  The arbitration had to be in the Philippines applying Bahamian law. 

The Eleventh Circuit reaffirmed the holdings of earlier decisions of the Eleventh Circuit, which we have posted on (e.g., here and here), and affirmed the decision below.  The federal claim was not entitled to a federal forum.  The removed claim was not entitled to stay in federal court. And the plaintiff’s noncontractual claims for maintenance and cure were also compelled to be arbitrated.   The Court would recognize no public policy defense under the New York Convention; rejected the argument that a 2008 amendment to the Jones Act changed earlier law; and without explanation

Fourth Circuit Affirms Personal Jurisdiction Over Non-U.S. Defendants, Upholds Extraterritorial Jurisdiction under the Copyright Act, and Reverses It under the Lanham Act

Tire Engineering and Distribution, LLC et al. v. Shandong Linglong Rubber Company, Ltd. et al., No. 10-2271 (4th Cir. 2012), addresses several issues of international practice.  The plaintiff sued non-U.S. defendant, not in contract (where arguably there is a greater opportunity to dictate forum for the resolution of any dispute), but for conspiracy to steal tire blueprints, produce infringing tires, and sell them to that had formerly purchased them from Plaintiff.  The jury awarded $26 million in damages.

Each of the three major issues addressed by the Circuit have international practice implications:

First, the Court of Appeals affirmed the finding of personal jurisdiction over the non-U.S. parties.  Applying Virginia’s long-arm statute, the Court of Appeals considered the three standard factors in determining personal jurisdiction:

(1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the forum state; (2) whether the plaintiff’s claims arise out of those activities; and (3) whether the exercise of personal jurisdiction is constitutionally reasonable.

The Court relied on purposeful availment in the jurisdiction and the absence of any “overpowering foreign nexus”.

Second, the Court addressed the extraterritorial reach of the Copyright Act claims.  Observing that “[a]s a general matter, the Copyright Act is considered to have no extraterritorial effect”, the Court of Appeals continued that a fundamental exception existed where extraterritorial jurisdiction did in fact exist: “‘when the type of infringement permits further reproduction abroad,’ a plaintiff may collect damages flowing from the foreign conduct”.  For this proposition the Court relied on the Second Circuit’s decision (Learned Hand, J.) in Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45 (2d Cir. 1939), where “[o]nce a plaintiff demonstrates a domestic violation of the Copyright Act, then, it may collect damages from foreign violations that are directly linked to the U.S. infringement”.  The description given by Judge Hand in Sheldon is that

The Culver Company made the negatives in this country, or had them made here, and shipped them abroad, where the positives were produced and exhibited. The negatives were ‘records’ from which the work could be ‘reproduced,’ and it was a tort to make them in this country. The plaintiffs acquired an equitable interest in them as soon as they were made, which attached to any profits from their exploitation, whether in the form of money remitted to the United States, or of increase in the value of shares of foreign companies held by the defendants. . . . [A]s soon as any of the profits so realized took the form of property whose situs was in the United States, our law seized upon them and impressed  them with a constructive trust, whatever their form.

The Fourth Circuit found this “predicate act doctrine” followed not only in the Second Circuit but in each other Circuit to have addressed the matter.

Third, with respect to the trademark claims under the Lanham Act, here the Circuit held that

Although the Lanham Act applies extraterritorially in some instances, only foreign acts having a significant effect on U.S. commerce are brought under its compass. Nintendo, 34 F.3d at 250. Confining the statute’s scope thusly ensures that judicial application of the Act will hew closely to its “core purposes . . . , which are both to protect the ability of American consumers to avoid confusion and to help assure a trademark’s owner that it will reap the financial and reputational rewards associated with having a desirable name or product.” McBee v. Delica Co., 417 F.3d 107, 120–21 (1st Cir. 2005). With these aims in mind, we have reasoned that the archetypal injury contemplated by the Act is harm to the plaintiff’s ‘trade reputation in United States markets’.

The Court of Appeals was unwilling to adopt a doctrine applied in other Circuits, permitting the “significant effects” test to be satisfied by “extraterritorial conduct even when that conduct will not cause confusion among U.S. consumers, where “sales to foreign consmers would jeopardize the income of an American company”.

Fourth Circuit Weighs in on Circuit Split Concerning Whether State Insurance Statutes “Reverse Preempt” Arbitration Provisions in International Agreements

ESAB Group, Inc. v. Zurich Ins. PLC, et al., No. 11-1243 (4th Cir. 2012), recently weighed in on a matter that has split the Circuits and has given pause to international contract draftsmen and international dispute resolution practitioners:  to what extent to international contracts containing mandatory arbitration provisions supercede contrary state (or even federal) law.  The superceding in this case would have taken the form of “reverse preemption” pursuant to the McCarran-Ferguson Act.  The Court of Appeals that there was no reverse provision.

ESAB Group is a South Carolina-based manufacturer of welding materials.  It sued its towers of insurance carriers for coverage in products liability cases against ESAB relating to injuries caused by exposure to welding consumables.  ESAB sued in state court, the insurers removed.  The District Court ordered arbitration of certain policies.  South Carolina law purported to preclude arbitration under the state’s power to regulate the business of insurance. 

Those opposing preemption argued that both the New York Convention and the federal legistlation enacting the New York Convention into law did not succumb to South Carolina’s state insurance statute.  The Court of Appeals then summarized decisions from the Second and Fifth Circuits addressing whether the New York Convention applied to the states as a treaty or as implementing federal lesiglation, and the Fourth Circuit saw a conflict in the holdings of the Second and Fifth Circuits.  For the Fourth Circuit, it acknowledged that “the question of what constitutes a self-executing treaty has long confused courts and commentators”.  Ultimately the Court of Appeals did not utilize that taxonomy.  Instead, the Court found:

Where a statute touches upon foreign relations and the  United States’ treaty obligations, we must proceed with particular care in undertaking this interpretive task. As the Supreme Court observed in considering a prior potential conflict between the Convention Act and a federal statute, “[i]f the United States is to be able to gain the benefits of international accords and have a role as a trusted partner in multilateral endeavors, its courts should be most cautious before interpreting its domestic legislation in such manner as to violate international agreements.”

Given the importance of “speak[ing] with one voice when regulating commercial relations with foreign governments”, the Circuit was unwilling to let the state statute preclude arbitration. 

The Court of Appeals also affirmed the District Court’s determination to remand to state court all claims that were not arbitrable.

Second Circuit Affirms FSIA Tort Exception in Claim Against Namibia, Using New York State Law To Define the Tortious Behavior

USAA Casualty Ins. Co. v. Permanent MIssion of the Republic of Namibia, Dkt. No. 10-4892-cv (2d Cir. 2012), involves an appeal from an order we posted on in 2010 (see our discussion here).  In the district court, Namibia claimed immunity under the Foreign Sovereign Immunities Act.  On a motion to dismiss, the District Court rejected the defense.  Namibia appealed that decision under the Collateral Acts Doctrine, which permitted an immediate appeal rather than one occurring at the end of the case. 

The Circuit affirmed the absence of the defense.  At issue was whether Namibia could be held liable in tort for property damage done in connection with construction of its mission headquarters in New York (a shared or party wall fell).  The FSIA contains an explicit exception, allowing suit against non-U.S. sovereigns where damage occurs in the U.S. and is “caused by the tortious act or omission of that foreign state”.

In light of the existence of the tort exception, Namibia argued that its conduct was not tortious.  In analyzing that, the Circuit first determined that the law of the state in which the locus of injury occurred would determine whether alleged action was a tort within the meaning of a federal statute.  Here that was New York.   And under New York law, the Court of Appeals found, there was a duty imposed on Namibia under the Building Code, and that duty was nondelegable — Namibia therefore had to “ensure that the structural integrity of the party wall was maintained during construction”.

Why was the duty nondelegable?  Because, said the Circuit, relying on the New York Court of Appeals (which is New York’s highest court), “statutes and regulations that address specific types of safety hazards create nondelegable duties of care”, which is different from when the statute merely incorporates “the ordinary standard of care”, using terms like “adequate”, “effective”, or “suitable”.

Third Circuit Severs Invalid Forum Clause For Arbitration, Permits Arbitration To Proceed Only In District of Challenge

Control Screening LLC v. Technology Application and Production Company, No. 11-2896 (3d Cir. 2012), involved a review of the District Court’s direction that arbitration occur in the District of New Jersey.  The parties to the contract were U.S. and Vietnamese citizens. 

The international practice aspects of the decision include:

First, on the strict matter of appellate jurisdiction, the Court of Appeals said yes, it had such jurisdiction and in terms of the standard of review, “A district court decides a motion to compel arbitration under the same standard it applies to a motion for summary judgment” and that “the party opposing arbitration is given the benefit of all reasonable doubts and inferences that may arise.”

Second, this blog is always on the lookout for differences in interpretation or application that the courts find between the Federal Arbitration Act and the New York Convention, especially that part that is codified as U.S. law in 9 U.S.C.  Here, the Court of Appeals states that:  A “district court‟s primary authority to compel arbitration in the international context comes from 9 U.S.C. § 206, rather than from 9 U.S.C. § 4”.  As a result, the Court of Appeals did not apply to this international arbitration Section 4’s requirement that an action to compel arbitration “accrues only when the respondent unequivocally refuses to arbitrate”.  

Third, the venue provision of the arbitration agreement provided that “disputes shall be settled at International Arbitration Center for European countries for claim in the suing party’s country under the rule of the Center”.  As the Court of Appeals found, there technically is no International Arbitration Center of European countries”.  The Circuit therefore went on the rule that, “since the parties mistakenly designated an arbitration forum that does not exist, the forum selection provision of the arbitration agreement is “null and void” under Article II(3)” of the New York Convention, which regulates the area.  Also, the Court found that, “Even though the forum selection portion of the arbitration clause is ‘null and void’, there is sufficient indication elsewhere in the contract of the parties intent to arbitrate, meaning that the parties “agreement to arbitrate remains in force”.

But where?  As to this the Circuit held that “when an arbitration agreement lacks a term specifying location, a district court may compel arbitration only within its district”.  The Circuit reached this conclusion even though the extrinsic evidence in the case pointed to the parties’ understanding that they would be arbitrating, not in the U.S.

Second Circuit Reverses Class Action Denial of a Settlement Class — Matters Essential To Proving Trial Manageability Need Not Be Proven in the Context of a Settlement Class

Readers of this blog know that we address significant decisions in class or collective action law and procedure because it is an aspect of international practice that is growing in importance. 

In Re American International Group, Inc. Securities Litigation, Dkt. No. 10-4401-cv (2d Cir. 2012), addresses the interplay between the rigorous requirements of class action procedure in the context of certifying a class action and the strong public policy in favor of collective settlements.   The District Court the denied a motion to certify a class for settlement purposes only.  The decision rested on the determination made by the District Court that those proposing the class could not satisfy the “predominance” requirement of Federal Rule of Civil Procedure 23(b)(3).  That requirement is that the Court must find “that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy”. 

Here the District Court found that the predominance requirement was lacking “because the fraud-on-the-market presumption” (available in securities cases to prove reliance, which is a necessary element of a securities law claim) did not apply to the class’s securities law claims — that would mean that individual questions rather than common questions would predominate.

The Second Circuit reversed.  It held that

“under Amchem Products, Inc. v. Windsor, 521 U.S.591, 620 (1997), a securities fraud class’s failure to satisfy the fraud-on-the-market presumption primarily threatens class certification by creating “intractable management problems” at trial. Because settlement eliminates the need for trial, a settlement class ordinarily need not demonstrate that the fraud-on-the-market presumption applies to its claims in order to satisfy the predominance requirement”

In explaining this holding, the Court of Appeals first acknowledged that the District Court’s decision on class certification is reviewed under an abuse of discretion standard (for nonlegal determination), though even here the Circuit said, “we accord a district court noticeably less deference than when we review a grant of class certification”.   Then, citing Amchem, the Court of Appeals reasoned that a district court “[c]onfronted with a request for settlement-only class certification . . . need not inquire whether the case, if tried, would present intractable management problems, for the proposal is that there be no trial.” Id. at 620 (citing Fed R. Civ. P. 23(b)(3)(D)). At the same time, however, the Court of Appeals, like Amchem, stressed that in the settlement context “other specifications of [Rule 23] – those designed to protect absentees by blocking unwarranted or overbroad class definitions – demand undiluted, even heightened, attention.” Id.

The Court of Appeals reversed and returned the case to the District Court for further consideration.

New York State Court, Reviewing Securities Case Dismissed from Federal Court on Exterritoriality Grounds, Rules that New York is a Proper Forum and Rejects Motions To Dismiss Fraud and Unjustment Claims.

Viking Global Equities and Glenhill Capital LP, et al. v. Porsche Automobil Holding SE, Index Nos. 650435/11, 650678/11 (Sup. Ct. N.Y. Cty. 2012), are related actions by global hedge funds who allegedly lost money in short positions when Porsche allegedly made misstatements involving its intention to attempt a takeover of Volkswagon.  The case is of interest to international litigation practitioners because its federal predecessor action was dismissed for want of proper jurisdiction under the federal securites laws and the Supreme Court’s Morrison decision (see our discussion here).  The federal case is on appeal.

The defendants principal argument on this motion was forum non coneniens.   Is that a motion that has a better chance in the state court than in federal court?  The Second Circuit recently reiterated that it would dismiss on FNC grounds even if the non-U.S. jurisdiction had significantly different substantive law (see our discussion here)

Applying law on forum non conveniens similar to the established federal law on the subject, the State Court began by enumerating the points of “factual nexus” between the two actions, the burden on New York sours, the potential hardship to the defendant of litigating here, the availability of an alternative forum, and the residency of the parties.  Said the court, “the plaintiff’s choice of forum is afforded great weight and should not be disturbed unless the balance strongly favors the jurisdiction in which the defendant seeks to litigate the claims”.   All plaintiffs here had principal places of business in New York.  The Court denied the FNC motion, not finding any compellng to tranfer it.

The Court turned next to whether the fraud allegations were legally sufficient — here, even though “a sophisticated plaintiff enjoys access to critical information” and hence a different legal standard might be applied to them, the Court found nonetheless that the plaintiffs did not have enough information, finding that “the question of what consititues reasonable reliance is fact-intensive”.  The Court denied the motion to dismiss the fraud claim.

The Court also found that the cause of action for unjust enrichment was sufficiently pled and so did not dismiss any part of the plaintiffs’ claims.  All that was needed, said the court, was that other party was enriched, at plaintiff’s expense, and that it is against equity and good conscience to permit the other party to retain what is sought to be recoved.

Second Circuit Grants Forum Non Conveniens Dismissal in the Face of Non-U.S. Statute Limiting Recovery

Figueiredo Ferraz E Engenharia De Projecto Ltda v. Republic of Peru, et al., Dkt. Nos. 09-3925-cv, 10-1612-cv (2d Cir. 2011), addresses a key issue in international practice, especially attempts to enforce international arbitral awards in the context of motions to dismiss on forum non conveniens grounds.  (For a general discussion of the forum non conveniens doctrine, see our e-book, International Practice: Topics and Trends.)

The plaintiff sought to confirm an international arbitral award in the Southern District of New York.  The District Court denied the motion to dismiss, which was predicated on the forum non conveniens doctrine.  Application of the doctrine in turn rested on the existence of a Peruvian statute “that limits the amount of money that an agency of the Peruvian government may pay annually to satsify a judgment”.  (The limit is 3% of the agency’s budget.)  The award was for over $21 million; the cap caused a limit on payment so that only $1.4 million had been paid on the award.  Confirmation of the award was sought under the New York Convention and the Panama Convention.  The District Court’s denial of the motion to dismiss was appealed as an interlocutory order, which the Second Circuit granted.  The Circuit invited the views of the United States, since “aspects of the appeal . . . might have implications for the conduct of the foreign relations of the United States”. 

On appeal, the Circuit did not address the issue of subject matter jurisdiction first, relying on the Circuit’s practice from time to time of “exercising discretion to consider an FNC dismissal without first adjudicating issues of subject matter jurisdiction”.

On the issue of forum non conveniens dismissal, the Court of Appeals noted that the non-U.S. forum did not have to provide identical relief to that of a U.S. court for the non-U.S. jurisdiction to be adequate.  Indeed, in a case in which the author of this blog was counsel, the Second Circuit affirmed an FNC dismissal of a RICO claim even where the non-U.S. jurisdiction did not have anything like the RICO statute (see the blog discussion here).  The Circuit “agreed with the Appellants that the cap statute is a highly significant public factor warranting FNC dismissal”.   The Court of Appeals did not discuss whether the same relief might have been available if the U.S. court had applied Peruvian law on public policy grounds in the confirmation or enforcement proceeding.

The Circuit granted an FNC dismissal on the condition that the defendant waive any applicable statute of limitations defense, and “subject to the further condition that if, for any reason, the courts of Peru decline to entertain a suit to enforce the Award, this lawsuit may be promptly reinstated in the District Court”. 

Judge Lynch dissented, including by observing that the concern over “escap[ing] Peruvian judgment-enforcement limitations designed to protect the budget of a developing country” was simply “not one that sounds in the interests assessed by a forum non conveniens ruling”.

Eight Circuit Court of Appeals Affirms Dismissal under the Foreign Sovereign Immunities Act

Community Finance Group, Inc., et al. v. Republic of Kenya, et al., No. 11-1816 (8th Cir. 2011), decided an FSIA case with practical implications for international dispute resolution practitioners. 

The transaction involved the purchase and release of gold from Kenya.  CFG paid, but there was no delivery, allegedly on the basis that there was more than gold in the shipment (diamonds).  There then ensued a series of statements from the Kenyan police.  The consignment was never released — but nor were the funds returned.

The Eight Circuit addressed the issue as one of subject matter jurisdiction.  The Court looked first at the commercial activity exception but found it inapplicable.  Since the allegations of the complaint alleged actions such as failure to investigate, failure to secure the gold, and failure to return funds, the District Court and the Court of Appeals found that there was no commercial activity exception; “[t]he decisions regarding whether or how too investigate an allegedly fraudulent commercial transaction between private parties, regulate exports, enforce criminal laws, and seize property during criminal investigations are governmental rather than commercial activities”.  The Court of Appeals did not address the question directly of the refusal to return the funds, which, allegedly, the defendants had, having seized it from the alleged wrongdoers.   So the alleged wrongdoers no longer had the funds; defendants did.  Where were the plaintiffs going to get the funds if not from the Defendants, who, based on allegations that were being accepted as true, were involved in the transaction and aftermath. (The plaintiffs said that the wrongdoer was not an agent of the Kenyan government but also alleges that the Kenyan police were involved.)

The Court of Appeals further ruled that the tort exception to the FSIA was inapplicable.  It covers “‘only torts occurring within the territorial jurisdiction of the United States’, regardless of whether the alleged tor ‘may have had effects in the United States'”.  Assuming the plaintiffs were U.S. entities, that the funds came from the U.S., and that the loss was suffered in the U.S., is there an argument that the tort occurred here?