Originally published June 24, 2010
Keywords: appellate, Securities Exchange Act, SEC, extraterritorial reach, arbitration agreements, Labor Management Relations Act, collective-bargaining agreement, tortious interference,
Today the Supreme Court issued two decisions, described below, of interest to the business community.
- Securities Exchange Act—Extraterritoriality
- Arbitration Agreements—Labor Management Relations Act—Tortious Interference
Securities Exchange Act—Extraterritoriality
Morrison v. National Australia Bank Ltd., No. 08-1191 (previously discussed in the November 30, 2009 Docket Report).
Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), authorizes the Securities and Exchange Commission ("SEC") to promulgate rules forbidding "any manipulative or deceptive device or contrivance" used in connection with the purchase or sale of securities. Section 10(b) has long been understood to support a private cause of action against persons or entities violating SEC Rule 10b-5, which generally prohibits the use of deceptive acts or schemes to buy or sell securities. The courts of appeals had taken different views as to whether this antifraud provision applies when the securities in question were bought or sold abroad.
Today, in Morrison v. National Australia Bank Ltd., No. 08-1191, the Supreme Court issued an important decision on the extraterritorial reach of American securities laws, holding that Section 10(b) applies only to purchases or sales of securities that occur on a domestic U.S. exchange or otherwise occur within the United States. Today's ruling precludes so-called "f-cubed" claims—claims by foreign investors who bought shares in foreign corporations listed on foreign exchanges.
In Morrison, foreign shareholders of National Australia Bank ("NAB"), an Australian corporation, filed suit alleging that NAB had defrauded its shareholders by overvaluing its mortgage holdings in its wholly owned subsidiary HomeSide Lending Inc., a Florida-based corporation. The district court dismissed the suit, and the Second Circuit affirmed, holding that the conduct that "comprises the heart of the alleged fraud" occurred in Australia at the behest of NAB. 547 F.3d 167, 175.
The Supreme Court affirmed, but with significantly different reasoning. In an opinion by Justice Scalia, the Court concluded that Section 10(b) has no extraterritorial reach because "there is no affirmative indication in the Exchange Act that §10(b) applies extraterritorially." Slip op. 16. In delineating what conduct is sufficiently domestic for purposes of the statute, the Court recognized a bright-line rule: "it is . . . only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which §10(b) applies." Id. at 18. This is because "the 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." Id. at 17. The Court expressly "reject[ed] the notion that the Exchange Act reaches conduct in this country affecting exchanges or transactions abroad." Id. at 20.This rule applies to federal regulators and civil plaintiffs alike.
Justice Breyer concurred in part and concurred in the judgment. He concluded that, because the purchases at issue "took place entirely in Australia and involved only Australian investors," the presumption against extraterritoriality barred application of the Exchange Act. Slip op. 1 (opinion of Breyer, J.). Justice Breyer noted, however, that state law and other federal statutes (such as those prohibiting mail and wire fraud) might nonetheless apply to fraudulent activity occurring within the United States.
Justice Stevens, joined by Justice Ginsburg, concurred only in the judgment. He disputed the Court's bright-line rule, arguing instead that Section 10(b) applies to certain domestic fraud relating to foreign transactions. Justice Sevens nevertheless agreed with the result in the case because "the bulk or the heart of the fraud" occurred outside the United States. Slip op. 13 (opinion of Stevens, J.).
Mayer Brown filed an amicus brief in support of NAB on behalf of the International Chamber of Commerce, the Swiss Bankers Association, Economiesuisse, the Federation of German Industries, and the French Business Confederation, which the Supreme Court cited in its opinion.
The financial regulatory reform legislation now being debated in Congress includes a provision that, if enacted, would have the effect of restricting application of the Court's decision today to private actions under Section 10(b). That provision grants the Securities and Exchange Commission authority to take enforcement action with respect to "conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States."
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Arbitration Agreements—Labor Management Relations Act—Tortious Interference
Granite Rock Co. v. International Brotherhood of Teamsters, No. 08-1214 (previously discussed in the June 29, 2009 Docket Report).
Today, in Granite Rock Co. v. International Brotherhood of Teamsters, No. 08-1214, the Supreme Court decided one issue of arbitration law and one issue of labor relations. The Court held that, when a party to a purported collective-bargaining agreement (CBA) with an arbitration clause asserts that the CBA was not ratified, the issue must be resolved by the district court rather than an arbitrator. The Court also declined to recognize a new federal common-law cause of action for tortious interference under § 301(a) of the Labor Management Relations Act (LMRA), which authorizes federal courts to fashion a body of law for the enforcement of CBAs.
Petitioner Granite Rock, a concrete and building materials company, had a CBA with a local chapter of respondent International Brotherhood of Teamsters (IBT) that expired in April 2004. Initial attempts to negotiate a new CBA failed, and local members initiated a strike on June 9, 2004. The parties reached a tentative CBA on July 2, 2004, which included no-strike and arbitration clauses but did not address union members' liability for any strike-related damages incurred by Granite Rock before the new CBA was negotiated. IBT opposed the local members' decision to return to work before the damages issue was resolved, and directed the local members to continue the strike.
Granite Rock sued the local union as a signatory to the CBA and IBT as the local union's agent or alter ego. The suit alleged that the continued strike violated the July 2 CBA and that IBT had tortiously interfered with the CBA by discouraging the local members from returning to work. In response, the unions asserted that the July 2 CBA had not been ratified and that the no-strike clause therefore could not be the basis for Granite Rock's claims. On August 22, 2004, the local union members ratified the new CBA. In the district court, the local members then argued that the dispute over whether the CBA was ratified on July 2 or August 22 should be sent to arbitration.
The court rejected the local members' argument, ruling that the question of when the agreement was formed was a question for the court rather than an arbitrator. The district court also refused to recognize a new tortious-interference cause of action under § 301(a) of the LMRA. The Ninth Circuit affirmed the dismissal of the tortious-interference claim, but held that the date on which the CBA was ratified should have been sent to an arbitrator. In an opinion by Justice Thomas, the Supreme Court affirmed the Ninth Circuit's LMRA ruling but reversed its arbitration ruling.
In its arbitration decision, the Court relied on the established principle that "a court may order arbitration of a particular dispute only where the court is satisfied that the parties agreed to arbitrate that dispute." Slip op. 7. "To satisfy itself that such agreement exists," the Court said, "the court must resolve any issue that calls into question the formation or applicability of the specific arbitration clause that a party seeks to have the court enforce." Id. The Court concluded that, as with the question whether an arbitration agreement exists, the question of when it was formed must be resolved by the district court rather than an arbitrator.
In refusing to recognize a new federal common-law cause of action for tortious interference, the Court explained that Granite Rock had not shown that other avenues of relief were unavailable and therefore had failed to demonstrate the need for a new cause of action. The Court left open the possibility that a cause of action for tortious interference could be recognized in a case in which the claimant was able to demonstrate the inadequacy of other available remedies.
Justice Sotomayor, joined by Justice Stevens, filed an opinion concurring in the Court's LMRA holding but dissenting from its arbitration holding. On the latter point, the dissenting Justices would have held that a December 2004 agreement rendered the CBA effective, and thus its arbitration clause applicable, as of May 1, 2004—a theory the Court found the unions had waived.
Mayer Brown filed an amicus brief with respect to the arbitration issue on behalf of the Chamber of Commerce in support of the petitioner.
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