What is the Jurisdictional Significance of Extraterritoriality? - Three Irreconcilable Federal Court Decisions Article Contributed by: Shorge Sato, Jenner and Block LLP Imagine the following hypothetical: your client, a foreign company, is being sued in an American federal court for a violation of an American federal law for its entirely foreign conduct. You research the federal statute and, as you suspected, it does not apply to such foreign conduct unless such conduct caused a direct and substantial effect inside the United States. Although the complaint alleges such an effect, its language is vague and forward-looking, clearly worded to manufacture such a jurisdictional predicate where (you are pretty sure) none, in fact, exists. Should you move to have a federal court dismiss the complaint for lack of subjectmatter jurisdiction? Will the court allow you to engage in expedited jurisdictional discovery in support of a preliminary evidentiary hearing on the threshold question of its subject-matter jurisdiction to overcome the thin allegations in the pleading? Who decides, and under what standard? The disparate conclusions reached in three recent federal Courts of Appeals decisions shows that federal courts lack a principled framework for determining the scope of their own authority when addressing the question of extraterritorial application of domestic laws. Three Cases In United Phosphorus, Ltd. v. Angus Chemical Companies, 322 F.3d 942 (7th Cir. 2003) (en banc), the Seventh Circuit affirmed the dismissal of an antitrust action based on predominantly foreign conduct, holding that the question of whether the Sherman Act applied to such a case was a prima facie matter of federal subjectmatter jurisdiction. The Court upheld the district court's findings as not clearly erroneous, based on the district court's review of thousands of pages of evidentiary materials at a preliminary evidentiary hearing. The Seventh Circuit held that the district court was allowed on this motion to weigh the facts, which it did in finding a lack of subject-matter jurisdiction. However, in Litecubes, LLC v. Northern Light Products, Inc., 523 F.3d 1353 (Fed. Cir. 2008), the Federal Circuit held that facts tending to show that allegedly infringing conduct did not occur in the United States were effectively irrelevant to a federal court's determination of its own subject matter jurisdiction over an otherwise wellpleaded Patent Act complaint. Accordingly, there was no need for a preliminary hearing on subject-matter jurisdiction, unless the facts would show that a jurisdictional allegation was wholly insubstantial and frivolous. Because the question of extraterritoriality was simply an element of the patent infringement claim, and not a prima facie matter of subject-matter jurisdiction, resolution of the question would be a decision on the merits for the trier of facts.
In Morrison v. National Australia Bank Ltd., 547 F.3d 167 (2d Cir. 2008), the Second Circuit held that the district court properly dismissed a Securities Exchange Act suit for lack of subject-matter jurisdiction where the action was brought by foreign plaintiffs against a foreign issuer of securities based on securities transactions in a foreign country. The Second Circuit stated that [d]etermining the existence of subject matter jurisdiction is a threshold inquiry and that a claim is properly dismissed for lack of subject matter jurisdiction when the district court lacks the statutory or constitutional power to adjudicate it. The Court further stated that [a] plaintiff asserting subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it exists, and that the district court may consider evidence outside the pleadings. Although the Second Circuit in Morrison appeared to follow the approach of the Seventh Circuit in United Phosphorus, there is one notable distinction between the Sherman Act and the Securities Exchange Act: whereas the express language of the Sherman Act contains a limitation that the act shall not apply to certain extraterritorial conduct unless a direct and substantial effect on American consumers is shown, 1 the Securities Exchange Act is silent as to its extraterritorial application. 2 Federal courts rely upon a common law presumption against extraterritoriality in construing the Securities Exchange Act, and engage in a binary inquiry which asks (1) whether the wrongful conduct occurred in the United States, and (2) whether the wrongful conduct had a substantial effect in the United States or upon United States citizens. 3 This distinction is important when compared to the express language of the Patent Act, which applies to anyone who, without authority, makes, uses, offers to sell, or sells any patented invention within the United States.... 4 The Federal Circuit in Litecubes found this express language to be an insufficient expression of Congress' intent to limit the subject matter jurisdiction of federal courts over allegedly extraterritorial infringement. It is difficult, however, to reconcile these three cases by simply comparing the statutory language. Although, arguably, the Sherman Act's shall not apply language appears to express a stronger Congressional intent to divest subjectmatter jurisdiction from federal courts as compared to the within the United States language of the Patent Act, it would be incongruous to read a stronger Congressional intent to divest subject matter jurisdiction in the Securities Exchange Act, which is completely silent about the issue, than from the express language of the Patent Act. Does Arbaugh v. Y&H Corporation Defeat the Presumption Against Extraterritoriality? The divergent outcomes between Litecubes and United Phosphorous can be reconciled somewhat when one reviews the rationale of the Litecubes decision. The Federal Circuit extended the holding of a recent U.S. Supreme Court case, Arbaugh v. Y & H Corporation, 546 U.S. 500 (2006), rendered after United Phosphorous, which narrowly construed the concept of subject-matter jurisdiction, and applied Arbaugh against the presumption against extraterritoriality. Noting the profligate overuse of the term jurisdiction as the basis for a dismissal of federal claims, the Supreme Court in Arbaugh created a readily administrable
bright line to determine when the failure to meet a statutory element deprives a court of subject-matter jurisdiction: If the Legislature clearly states that a threshold limitation on a statute's scope counts 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. However, Arbaugh was a Title VII case involving whether the defendant employed a sufficient number of employees to trigger the act. 5 The Litecubes decision took the step of applying the bright-line rule of Arbaugh to the context of extraterritorial application of the Patent Act. The question then arises whether this step should be taken in the context of all federal laws the Litecubes decision was expansive in its holding and not limited to the Patent Act. If the reasoning of Litecubes was extended to the context of the Sherman Act, for example, foreign parties would not be able to seek dismissal of antitrust claims alleging a domestic effect on subject matter grounds, because the Sherman Act does not expressly state that the limitation on extraterritorial application is jurisdictional. There would be no separate phase of jurisdictional discovery in such cases, unless the allegation of domestic effect is wholly frivolous. There is no way to easily reconcile the outcome of Morrison with the reasoning of Litecubes, unless one distinguishes the field of securities litigation as sui generis. The history of the presumption against extraterritoriality is replete with instances where courts have deferred to 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. 6 The notion that the Supreme Court intended its bright-line rule in Arbaugh to overturn nearly a century of precedent supporting the default presumption against extraterritoriality is highly questionable. There are strong policy reasons why questions of extraterritorial application of American laws deserve threshold determinations. In United Phosphorous, the Seventh Circuit acknowledged the purity of an argument that under 28 U.S.C. 1331 a federal court could assert subject matter jurisdiction on the basis of a well-pleaded complaint, but concluded nothing is quite that simple. The majority noted that other courts of appeals treated the as setting a jurisdictional limit on the Sherman Act and that the.the majority noted the good policy reasons that warranted treatment of the limitations under Foreign Trade Antitrust Improvement Act of 1982 (which amended the Sherman Act to clarify its extraterritorial reach) as a matter of subject matter jurisdiction. Similarly, in Morrison, when the Second Circuit described the extraterritoriality test in the securities context as allowing subject matter jurisdiction only if the defendant's conduct in the United States was more than merely preparatory to the fraud, and particular acts or culpable failures to act within the United States directly caused losses to foreign investors abroad. The Court acknowledged the presumption against extraterritoriality, stating we are an American court, not the world's court,
and we cannot and should not expend our resources resolving cases that do not affect Americans or involve fraud emanating from America. 7 Squaring the Circle: How to Reconcile the Different Approaches to Extraterritoriality It is possible that each federal law should be reviewed on its own terms as to whether limitations on its extraterritorial reach constitute jurisdictional limitations or are merely elements of a claim. This would create considerable uncertainty, however, for foreign entities with some connection to the United States market. If a foreign defendant were sued for violations of the Patent Act and the Sherman Act arising out of the same conduct, for instance, a federal court might face a dilemma as to how to resolve a threshold challenge to its power to adjudicate the dispute. There must be some default rule, or consistent process for ascertaining the default rule. One could argue that Litecubes should be limited to the Patent Act. The territorial limitation in Litecubes only applies to actions for direct patent infringement under 35 U.S.C. 271(a). However, there is nothing in the scheme of the Patent Act that limits its application to only domestic conduct or effects. 8 It is also possible that the Litecubes decision is wrong. The Federal Circuit relied upon a distinction contained in Section 401 of the Restatement (Third) of Foreign Relations Law of the United States between a legislature's jurisdiction to prescribe and a court's jurisdiction to adjudicate. and equated the true question of subject-matter jurisdiction with the international law concept of territorial limitations on the jurisdiction to prescribe. However, Section 401 of the Restatement expressly disclaims any equivalence between the concept of jurisdiction to prescribe and subject-matter jurisdiction. In fact, the Restatement also disclaims any distinction between the concept of subject-matter jurisdiction and a court's jurisdiction to adjudicate. To equate a court's power to adjudicate a matter, or its subject matter jurisdiction, with Congress's power to legislate over the matter, turns the notion that Article III courts are courts of limited jurisdiction on its head. 9 Legal commentators have suggested that the very dichotomy between jurisdictional and non-jurisdictional rules is false, and a more nuanced approach is appropriate. Even if the presumption against extraterritoriality were technically a non-jurisdictional rule, federal courts would still retain the authority to enforce the presumption against extraterritoriality as a quasi-jurisdictional threshold matter, similar to their treatment of certain non-jurisdictional, yet mandatory, claimsprocessing rules. The problem with this approach, however, is that Federal Rule of Civil Procedure 12(b) does not include a motion to dismiss on quasi-jurisdictional grounds as a defense that may be presented by a motion. While filing a motion to dismiss on the alternative ground of improper venue may provide legal cover for a sympathetic district court, such venue objections can be difficult to maintain, especially for global corporate defendants who do business everywhere. If your foreign client is willing to be aggressive, move to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) and, if the facts allow, for improper venue under Rule 12(b)(3), and seek preliminary discovery and a hearing under Rule 12(i).
Even if the motion fails for technical reasons, you have made your point to the court, and the groundwork is hopefully laid for a Rule 56 motion for summary judgment. Conclusion The evolution of federal subject matter jurisdiction has created a conundrum in federal courts of appeals: as the Supreme Court narrows the concept of federal subject-matter jurisdiction, what remains of the traditional presumption against extraterritoriality? This is an academic question for which there is no easy answer. However, the practitioner wonders, what do I tell my foreign client? Congress or the federal courts must definitively resolve the issue. A single rule any rule, really would be superior to the present situation, where different courts treat the same question of extraterritoriality in different ways under different statutes. Shorge K. Sato is an associate attorney at Jenner & Block LLP in Chicago. Mr. Sato would like to acknowledge and express his appreciation for the assistance of Jeff Koppy in preparing this article. The views expressed in this article are not to be attributed to Jenner & Block or its clients. 1 See the Foreign Trade Antitrust Improvements Act, 15 U.S.C. 6a (1982). 2 Morrison, 547 F.3d at 170. In a footnote, the Second Circuit urged that this significant omission receive the appropriate attention from Congress and the SEC. Id. at 170 n. 4. 3 Morrison, 547 F.3d at 171. 4 Patent Act, 35 U.S.C. 271 (2008) (emphasis added). 5 The Supreme Court in Arbaugh provided three reasons why the designation of a particular element or fact as pertaining to subject-matter jurisdiction matters: first, federal courts have an independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party. Thus, the question of subject-matter jurisdiction can never be forfeited or waived, and in fact, could be brought at any time including in a collateral proceeding. Second, in some instances, if subject-matter jurisdiction turns on contested facts, the trial judge may be authorized to review the evidence and resolve the dispute on her own. By contrast, if the issue merely pertains to the satisfaction of an essential element of a claim..., the jury is the proper trier of contested facts. Third, when a federal court concludes that it lacks subject-matter jurisdiction, the court must dismiss the complaint in its entirety. Conversely, if a dispute matter only pertains to an element of a claim, the court generally retains discretion to exercise supplemental jurisdiction... over pendent state law claims. 6 Smith v. United States, 507 U.S. 197, 204 (1993) (quoting EEOC v. Arabian American Oil Company, 499 U.S. 244, 248 (1991) and Foley Brothers, Inc. v. Filardo, 336 U.S. 281, 285 (1949)). See also United States v. Aluminum Co. of America, 148 F.2d 416, 443 (2d Cir. 1945) (Hand, J.) ( We should not impute to Congress an intent to punish all whom its courts can catch, for conduct that has no consequences in the United States. ); American Banana Co. v. United Fruit Co., 213 U.S. 347, 356 (1909) (Holmes, J.) (describing an almost universal rule that the character of an act as lawful of unlawful must be determined wholly by the law of the country where the act is done. )
7 A fair argument could also be made in the context of the Securities Act that the bright-line rule of Arbaugh should not apply to certain extraterritorial securities claims. However, this argument would be weakened by the fact that, unlike the Sherman Act as amended, Congress has yet to provide any express limitation on the extraterritorial reach of that statute. 8 or instance, under the doctrine of indirect infringement, the Patent Act could potentially reach conduct which occurs abroad but has domestic effects. Thus, viewing the Litecubes decision through the scheme of the Patent Act, its holding could possibly be narrower than its broad language. Still, on its face, the Litecubes decision is written broadly: the Federal Circuit consider[ed] whether there is something unique about a limitation that determines the extraterritorial scope of a statute that converts what would otherwise be a factual element of the claim into a restriction on the subject matter jurisdiction of the federal courts and conclud[ed] that there is not. 9 See, e.g., Friends of Earth v. EPA, 333 F.3d 184, 187 (D.C. Cir. 2003).