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Extraterritoriality and Collective Redress edited by Fairgrieve, Duncan; Lein, Eva (1st September 2012)

Part IV Extraterritoriality and US Law, 21 ‘Bridging the Gap’:

Vincent Smith

From: Extraterritoriality and Collective Redress

Edited By: Duncan Fairgrieve, Eva Lein

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 30 May 2020

Collective redress — Jurisdictional agreements and the Brussels Regulation

(p. 389) 21  ‘Bridging the Gap’:

Contrasting Effects of US Supreme Court Territorial Restraint On European Collective Claims

I. Introduction: Morrison and Empagran

21.01  The Morrison1 judgment from the United States Supreme Court highlights the legal limits to the territorial reach of United States federal civil law in the securities field, in particular where foreign plaintiffs sue foreign defendants in relation to activities on foreign (ie non-United States) markets (so-called F-cubed cases).

21.02  The Supreme Court had also previously ruled on the extraterritorial reach of United States civil law in the anti-trust (competition law) field in its Empagran2 judgment—also restraining the reach of United States law in F-cubed situations. But the decisions made by the court in these two fields led to different outcomes—with United States anti-trust laws having a wider reach. In both fields, though, the same unlawful action by the defendant may affect markets in both the United States and Europe—for example a trans-Atlantic cartel conspiracy, or a misrepresentation relating to a company with a stock exchange listing in both London and (p. 390) New York—and the precise detail of the reach of United States laws may have a significant impact on access to justice for the victims of the unlawful act.

21.03  This chapter discusses the reasoning behind the difference in approach to ­extra­territoriality by the Supreme Court in the two cases and how it may have an impact on the ability of claimants in Europe (in particular) to use the United States civil litigation system to gain redress (including using ‘collective’ procedures) for the harm caused to them by anti-trust or securities related fraud. That impact will, inevitably, have an effect on the development of collective redress in the European Union, not least by increasing the number of potential cases which could be brought in European courts.

21.04  A first, and important, point is that both cases turned on the interpretation of United States federal statutes—the ‘Sherman’ Act3 in the case of Empagran and the Securities and Exchange Act4 in the case of Morrison. The securities legislation does not expressly address the territorial scope of its provisions at all: in contrast, the Sherman Act was amended in 19825 expressly to exclude anti-competitive conduct relating to foreign commerce, unless that conduct also substantially and reasonably forseeably affects United States commerce, imports to the United States, or export commerce where the exporter is in the United States. Hence the Supreme Court was addressing the extraterritoriality issue without precise legislative guidance in Morrison: in Empagran, by contrast, it was interpreting and applying the express wishes of Congress.

21.05  Neither did the Supreme Court decide on the extent of Congress’s powers to legislate with extraterritorial effect. In Morrison, it was unnecessary to do so, since Congress had not stipulated what the territorial scope of the statute was. The court therefore simply relied on the presumption—born of international comity6—that national legislation is not to have effect outside the national territory unless the contrary express intention is shown. We will consider the court’s application of this public international law principle in more detail later on.

21.06  In Empagran, where Congress had expressly legislated,7 the Court’s analysis concentrated on the correct interpretation of the words Congress had chosen. There was, in particular, argument over the meaning of the words ‘substantially’ and ‘reasonably forseeably’ affecting commerce,8 although the Supreme Court expressly decided the question certified on the basis that the foreign effect was wholly independent of the domestic effect on commerce.9 Again, but this time as an aid to (p. 391) statutory interpretation, the Court relied (in part) on the principle of international comity to give an interpretation of the statute which significantly restricted the territorial reach of United States law10 so that it applies to less of the commerce affected by the cartel than the plaintiffs asserted in their pleadings.

21.07  But nothing in either judgment purported to prevent Congress, if it so wished, to give extensive extraterritorial effect to its statutes—and indeed it has done so in a number of fields. Criminal law sanctions for foreign corrupt practices11 are (for example) clearly covered by existing United States federal statutes. Moreover, in addition to applying the statutes in the light of international law principles, the Supreme Court looked to the purpose of each statute (or relevant statutory amendment) to assist in deciding on the territorial scope of the legislation.12 One of the main differences often raised between the (European) civil law approach to statutory interpretation and the approach of the (Anglo-Saxon) common law courts is that the former is said to rely to a significant extent on the court’s view of the purpose of the legislation being examined whereas, in contrast, common law courts are said to take a more restrictive approach and feel themselves bound by the ‘black letter’ of the statute under consideration. It is therefore interesting and instructive to note that the most important common law court in the world is prepared to take a purposive approach to statutory interpretation when the circumstances warrant it. Again, this is likely to have an impact on lower federal courts’ approaches to claims under these statutes and hence on victims’ access to the United States courts in these kinds of cases.

21.08  Against the different statutory background and purposes of the legislation, it is perhaps unsurprising that the court reached differing conclusions on the territorial scope of United States securities and anti-trust laws. The court also approached the securities legislation—in the light of the argument put to it—by considering the intention of Congress—(again guided by the principle of international comity) as to the purpose of the legislative scheme.13 The Court found that the purpose of the Securities and Exchange Act was to protect the integrity of securities trading on United States securities exchanges and markets.14 Perhaps surprisingly, it did not find that the protection of United States resident investors (far less, that of United States citizens) was an aim of the legislation, and nor was significant fraudulent conduct perpetrated in the United States sufficient to engage the United States jurisdiction.15

21.09  From these general findings the Supreme Court decided that the Securities and Exchange Act only applied to claims relating to securities traded over United States (p. 392) exchanges.16 United States-based investors (as well as foreign investors) who bought securities over non-United States exchanges could not benefit from the protection of the Act—their remedy lay in the forum of the exchange where the contested transaction took place.17

21.10  The Supreme Court’s conclusion on the territorial reach of the Sherman Act (the anti-trust statute) was rather different. Given the wording of the 1982 amendment,18 it is clear that the Act is capable of having extraterritorial effect—in the sense of providing a remedy to non-United States victims and/or in respect of transactions taking place outside the United States—the trigger being a substantial and reasonably foreseeable effect on United States commerce.19

21.11  A pair of examples, with a similar (geographic) fact pattern in each of the securities and anti-trust fields, show the difference in outcome under these two United States decisions for potential claimants. Assume a different defendant in each case: for the anti-trust claim, Atlantic Transport (AT) is a shipping company based in Rotterdam offering trans-Atlantic freight services and which was in a cartel with other shipping companies on the north Atlantic routes, leading to a cartel overcharge to its customers. For the securities claim, Global Inc (Global) is a large United States corporation based in Chicago which has issued shares, listed on both London and New York stock exchanges, on the basis of a misleading prospectus published in both the United Kingdom and the United States. Assume also two potential claimants (plaintiffs), the same in each case, Charles and Carl. Charles is a United States citizen and resident, who has bought Global’s stock on both the New York and London exchanges, and has also contracted with AT to ship his personal effects from Europe to the United States following his relocation from Germany to the United States a year or so ago (within the cartel period). Carl is a German citizen and resident, who has also bought Global’s stock on both the United States and English exchanges, and has also contracted with AT to ship his late aunt’s Bechstein grand piano from the United States (where she recently died) to Frankfurt.

21.12  Applying the United States case law to each scenario, Charles will have a claim against AT in the United States courts in respect of the cartel overcharge, since there is likely a substantial and reasonably forseeable effect on import commerce to the United States resulting from the shipment of his personal effects at rates affected by the cartel. He will also have a claim against Global in the United States courts in respect of the securities he bought over the New York exchange, but not (following Morrison) in respect of the securities he bought in London.

(p. 393) 21.13  Carl does not have a United States anti-trust claim against AT, as the shipping services he purchased are export commerce and the shipper is not based in the United States. However, if he had chosen a United States resident company to ship his piano, the outcome of the jurisdiction analysis could have been different, on the basis of a likely substantial effect on export commerce by a United States business participating in a trans-Atlantic cartel. But, like Charles, he has a United States claim against Global as regards the securities he purchased over the New York exchange, but (also like Charles) not those purchased in London.

21.14  Does this different outcome create any gap in jurisdiction as between Europe and the United States?

21.15  The main European jurisdiction principle—under the ‘Brussels Regulation’20—is that a defendant shall be sued in the place of his domicile, regardless of his nationality.21 However, this basic—and simple—principle is subject to a large number of exceptions. In particular, it does not currently apply where the defendant is domiciled outside the European Union22—although there are proposals to change this and apply to ‘domicile’ rule to all (potential) defendants in European civil courts.23 These proposals may have a significant impact in the types of case considered in this chapter and we will comment on them later on.

21.16  A straightforward application of the ‘defendant’s domicile’ rule would, of course mean that both Charles and Carl can sue AT in the Dutch courts.24 Whether Global—domiciled in the United States—is subject to the jurisdiction of a civil court in Europe will (at least under current law) depend on the (private international) laws of each European Union Member State.25 Charles and Carl will therefore need to take advice on the best European forum for any claim they wish to bring.

21.17  As Carl’s only viable United States claim26 is in respect of New York purchases of Global’s securities, he will need to consider the appropriate forum for his claim against Global in respect of the remainder of his transactions, as Global does not have an EU domicile. Given that the purchase of the securities took place in (p. 394) London on the basis of a prospectus published there, England is a possible forum. On the basis that Carl’s claims are likely to be in tort (misrepresentation), traditionally English (private international) law applied the basic principle that the English court will have jurisdiction if the defendant has a presence in England on which the claimant is able to serve valid process.27 On our hypothetical situation, this appears unlikely in respect of Global. Carl may therefore need either to request permission from the English court for him to serve Global out of the jurisdiction (which, on these assumed facts, is likely to be granted)28 or to consider alternative fora (perhaps Germany, where he is resident) to pursue his claim. So, even if the possibility of a jurisdiction ‘gap’ is not high, it cannot be entirely ruled out29 and depends on the exercise of a court’s discretion—he appears not to have access to any court as of right for his ‘European’ securities claim.

21.18  It is suggested that it is unsatisfactory for parties to have to rely on discretionary jurisdictional rules to obtain a hearing at all. Previously, Carl could have turned to the United States courts in his claim against (United States corporation) Global30 but that recourse is now, after Morrison, closed to him—at least under United States federal statute law.

21.19  Charles’ position as regards his purchase of Global’s securities in London is, if anything, even less favourable than Carl’s. Despite being both a United States resident and citizen, he has no statutory claim against Global in the United States and, given he has no obvious link to any European Union forum, he may find it more difficult to persuade a European court to hear his claim. In respect of his anti-trust claim, in contrast, the United States courts will take jurisdiction.

21.20  These examples highlight the impact of the very different criteria used by different courts to establish jurisdiction in the two different types of case in the European Union and in the United States. European Union law relies primarily on the ‘fixed’ nexus of the defendant’s domicile, while the United States (and other common law countries) rely on a wider range of factors, often specific to the cause of action as asserted (place of performance of the harmful act—United States SEC law; place of the substantial effect of the harmful act—United States Sherman Act; place where (p. 395) the defendant can be served—English common law). These two types of approach do not necessarily fit easily together in the common sorts of case exemplified earlier. Furthermore, the outcome of the jurisdictional analysis differs substantially as between securities and anti-trust claims owing to the different criteria used by the Supreme Court (and Congress) to determine which cases can be heard by the United States federal courts. Because the ‘substantial effects’ test in anti-trust legislation is likely in most (if not all) cases to lead to the United States federal courts being able to take jurisdiction in a wider range of circumstances, the likelihood of a ‘jurisdiction gap’ seems reduced for Sherman Act claims.

II. How Might this New Situation Affect Collective Claims in Europe?

21.21  A first and most obvious practical consequence is that there is likely to be more demand for collective redress in European courts in relation to securities claims, since now United States federal claims can only relate to securities traded on United States exchanges (leaving aside for the moment the less attractive possibility of State court claims in the US). Some European jurisdictions (notably Germany31) already have collective redress mechanisms which apply specifically to securities claims of the kind asserted in Morrison. Others (the Netherlands, for example32) have more general collective redress rules which have been successfully applied to securities claims.33

21.22  A second consequence may be that it becomes more difficult for a court to decide whether the use of a collective redress mechanism is appropriate in a given case. Where some members of the group whose interests are being represented may not automatically fall within the jurisdiction of any court, even though substantively those group members’ claims may be identical to those of others which do automatically fall within the jurisdiction of a court seized of a proposed collective redress action (where they all result from the same unlawful act committed by the same defendant), the difference in the situation of these two sub-groups may lead a court to hesitate (at least) before allowing the collective claim to proceed in respect of all of the claimants represented.

21.23  Most collective redress actions can only be pursued where the use of the mechanism is in the interests of justice (or, as the United States Federal Rule has, it ‘is superior’ to other forms of relief).34 Representatives will therefore need to be (p. 396) careful to frame the collective claim as being on behalf of those who clearly fall within the jurisdiction of the court in which relief is sought and, equally important, to ensure that they do not distribute any compensation eventually awarded to claimants (however deserving) who fall outside that court’s automatic jurisdiction, unless of course the defendant has voluntarily agreed (and paid) for compensation for such extraterritorial claims.

21.24  The Supreme Court’s Morrison judgment has in one sense made it easier for representatives to assess the reach of United States federal law: if the transaction was done in the United States, you have a United States claim. If not, you don’t (whoever or wherever you may be). A very bright line.

21.25  But those (newly) excluded from the United States courts through having used European exchanges to trade their stocks or bonds cannot assume—as our example on page 392 shows—that the European courts will necessarily welcome them. The jurisdiction and other private international law rules of each European Union Member State, which still apply on a state-by-state basis where defendant(s) are located outside the European Union, vary considerably. And, as with individual claimants, collective representatives for such victims of securities fraud will need to think carefully about the most appropriate venue to bring a collective claim: it may be difficult to bring a single collective claim in a particular European civil court while continuing to act in the best interests of the entire group, some of whom may have a stronger jurisdictional nexus to another forum.

21.26  European courts may also find it more difficult to persuade themselves that a collective action is fair where some of the defendants to a (collective) securities action are domiciled outside the European Union (in the United States, for example) and the remainder are domiciled in the European Union. The former group of defendants might escape liability entirely for securities traded outside United States exchanges. However, the European Union domiciliaries might be liable not only for the losses caused by their own tortious actions, but (if they are joint tortfeasors with the putative United States defendants) also for the losses caused by the United States defendants. So, each defendant may be jointly liable for all losses—and the issue of whether the European defendants can recover a contribution from the United States defendants may be unclear. Although not in itself a reason to deny relief to the victims of mis-selling of securities, the perception of ‘greenmail’ against the European defendants arising from a substantial collective claim in this type of situation is likely to be particularly strong, and may well have an influence on the judicial attitude to the overall collective redress action.

21.27  The third main consequence flowing from the Morrison judgment would seem to be that jurisdictional issues will be resolved very differently for securities cases and for competition cases in ‘trans-Atlantic’ situations. As noted previously, in securities cases, there appears to be a real possibility of a ‘gap’ in trans-Atlantic jurisdiction. For competition cases, in contrast—even applying the 1982 amendment to (p. 397) the United States Sherman Act—the United States courts will accept jurisdiction over most ‘trans-Atlantic’ cases. Where the defendant cartelists are domiciled in the EU, the European court of domicile will also be required to hear any claim—in effect giving the possibility of a double layer of protection for victims (and the possibility of double jeopardy for infringers). The only type of ‘trans-Atlantic’ commerce not within the anti-trust jurisdiction of the United States court will be exports from United States facilities of goods trans-shipped from a third country by a European logistics firm. But, of course, here the European Union court of domicile is likely to have jurisdiction, especially where the carrier is acting as agent for the cartelist.35

21.28  Will the Commission’s proposal36 that the ‘defendant’s domicile’ and other European Union jurisdiction rules in the Brussels Regulation be extended to all cases, even where the defendant is domiciled outside the European Union, change this balance?

21.29  The proposal as currently envisaged37 will create a uniform set of international private law rules which will oust those rules in the Member States which are inconsistent with the Regulation (for example the English ‘presence in the jurisdiction’ principle) in relation to all jurisdiction issues having a European element (even where the defendant is domiciled in a third State). This might have serious consequences if the Brussels Regulation only enshrined the principle that a defendant may be sued in the place of his domicile, but fortunately it does not.

21.30  For trans-Atlantic anti-trust claims, even this restricted ‘domicile’ rule would not have particularly serious consequences, given that, for almost all substantively viable claims, the United States courts will still accept jurisdiction even if European courts would not. However, for international securities claims, the consequences of a limited European rule based on the defendant’s domicile could have had serious consequences. European citizens purchasing United States securities (or equivalents) on non-United States exchanges could have found themselves without judicial recourse at all against the United States defendant issuer. The United States courts of the defendant’s domicile would not have been able to take jurisdiction and the European courts, bound by the defendant domicile rule, would have been similarly impotent.

21.31  However, the proposal makes clear that the rules which will apply to defendant non-European Union domiciliaries include not just the forum of domicile rule, but also the exceptional jurisdiction rules contained currently in Articles 3–8 of the proposed revised Regulation. In particular, United States domiciled defendants (p. 398) would now be within the jurisdiction of a European civil court where (if they are sued in tort) the harmful event occurred38 or (in contract) where the contract is to be primarily performed39—unless a jurisdiction clause has been agreed. There has been significant jurisprudence of the European Court of Justice on the meaning of these terms so that their application can be determined with reasonable certainty in most circumstances. The extent to which a judgment given by a court taking jurisdiction under these exceptional rules will be recognized outside the European Union must as yet, nevertheless, be unclear—an issue which is outside the scope of a chapter such as this.

21.32  If the current Commission proposals become European law, the difference in outcome in trans-Atlantic securities and competition claims would likely disappear. For competition (anti-trust) claims, the overlap in jurisdiction between the United States and European Union courts would remain—and indeed may become greater in some (fairly narrow) factual situations, for example where European claimants are harmed by a wholly United States-based cartel. For securities cases, however, the current post-Morrison situation would be very much improved. This would be especially true given that the potential jurisdiction gap for claims in respect of United States securities sold over European exchanges—Carl’s and Charles’ transaction in Global shares in London in our example on page 392—would now be unequivocally within the jurisdiction of the relevant European civil courts whether the claim is in respect of a contractual misrepresentation—the contractual ‘obligation’ triggering automatic jurisdiction is likely to be the delivery of the securities to Carl (assuming no other forum has been chosen by agreement)—or in tort—the tortious act would likely be the publication of the misleading prospectus in, for example, London.

III. Conclusion: Increasing Collective Claims in Europe?

21.33  Given the probable increase in claimants seeking redress in European civil courts as a result of the Morrison decision, there is likely to be an increased impetus for the development of collective claims practice and law in the main fora where securities claims are likely to be brought (London, Amsterdam, Germany). The proposed amendments to the Brussels Regulation would mean that, not only would more claims fall within the jurisdiction of the European civil courts, but also the incidence of preliminary US/EU jurisdictional questions for some members of the represented group would decrease—probably dramatically—as a result of the new US ‘bright line’ in Morrison. This in itself would likely lead to a greater number of (p. 399) collective claims, as it will be easier to ensure that funding is available to commence them as the risk involved is reduced by increased jurisdictional certainty.

21.34  Morrison, like Empagran before it for anti-trust, may therefore represent the moment when United States securities plaintiffs become alive to the need for greater engagement with collective redress processes outside the United States. And the European litigation funding community—more developed at present in Europe than for United States collective claims—is also likely to welcome the combination of the Supreme Court’s jurisdictional restraint and the European Commission’s willingness to legislate to fill the vacuum created.(p. 400)


1  Robert Morrison et al v National Australia Bank Ltd et al, 130 S.Ct 2869 (2010).

2  F Hoffmann LaRoche Ltd et al v Empagran SA et al, 542 U.S. 155, 124 S.Ct 23598 (2004).

3  Sherman Anti-trust Act 1890, 26 Stat. 209, 15 U.S.C. s 1.

4  Securities and Exchange Act 1934, 48 Stat. 891, 15 U.S.C. s 78a.

5  Foreign Trade (Anti-Trust Improvements) Act 1982, 96 Stat. 1246, 15 U.S.C. s 6c.

6  Morrison (n 1) 5–6, citing ‘Aramco’ (EEOC v Arabian-American Oil Co, 499 U.S. 244 (1991)).

7  Under the FTAIA (n 5) ss 1–7: cited in Empagran (n 2) at 4–5.

8  Empagran (n 2) 17–19.

9  Empagran (n 2) at 2.

10  Empagran (n 2) at 7.

11  Foreign Corrupt Practices Act 1977, 15 U.S.C. s 78 dd-1 et seq.

12  Morrison (n 1) at 17–18 and Empagran (n 2) at 5–6.

13  Morrison (n 1) at 17–19.

14  Morrison (n 1) at 18.

15  Morrison (n 1) at 21–4.

16  Morrison (n 1) at 24.

17  Morrison (n 1) at 20–1.

18  Under the FTAIA (n 5).

19  As to the standard the plaintiff must reach, see US Supreme Court, Bell Atlantic Corp v Twombly, 550 U.S.544, 127 S.Ct 1955 (2007).

20  Council Regulation (EC) 44/2001 of December 21, 2000, on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters, OJ (2001) L 12/1.

21  Regulation 44/2001 (n 20) Art 2(1).

22  Regulation 44/2001 (n 20) Art 4.

23  The current proposals (draft Regulation amending Regulation 44/2001) were published on 14 December, 2010 (COM(2010) 748 final) avialable at: http://ec.europa.eu/justice/policies/civil/docs/com_2010_748_en.pdf.

24  They would almost certainly have a cause of action based on breach of the directly effective EU law prohibition against cartels in Art 101 Treaty on the Functioning of the European Union: a trans-Atlantic cartel will in almost all cases have an appreciable effect on trade between Member States, see eg C395-6/96 Compagnie Maritime Belge (CMB), CMBT and Dafra Lines v Commission [2000] ECR-I 1365.

25  n 50.

26  Unless he wishes to rely on non-statutory causes of action, or possibly in a State court.

27  See John Russell & Co Ltd v Cayzer, Irvine & Co Ltd [1916] 2 AC 298 (HL).

28  See Civil Procedure Rules, PD 6B 3.1. In tort (which is the most likely cause of action here) the court may give permission for service out of the jurisdiction either where damage was sustained by the claimant within the (English) jurisdiction or the tortious act was committed there (which seems likely on these facts). In exercising its discretion to permit service out of the jurisdiction, the court will need to be satisfied by the claimant that there is a serious issue to be tried on the merits (see Seaconsar v Bank Markazi [1994] 1 AC 438 (HL)) and that the English court is the forum conveniens for hearing the claim.

29  See also Spiliada Maritime Corp v Cansulex Ltd [1987] 1AC 460 (HL). The claimant must clearly show that England is the forum conveniens. The court may also consider whether a foreign court will accept jurisdiction and will give the parties a fair trial (Oppenheimer v Louis Rosenthal & Co AG [1937] 1 All ER 23 (CA)).

30  See the discussion of previous United States appellate case law in Morrison (n 1) at 6–11.

31  Kapitalanleger-Musterverfahrensgesetz (KapMuG)—16 August, 2005, BGB 2005 I, 50.

32  Wet collectieve afwikkeling massaschade (WCAM), 23 June, 2005, Stadsblad 340.

33  See Dexia (settlement of 15 July, 2004) and Royal Dutch Shell (settlement of 24 May, 2009; available at: https://royaldutchshellsettlement.com).

34  US Federal Rules of Civil Procedure 23(b)(3).

35  Regulation 44/2001 (n 20) Art 5(5).

36  See n 23.

37  As at December 2012 the proposal is undergoing legislative scrutiny and it is therefore subject to amendment.

38  Regulation 44/2001 (n 20) Art 5.3.

39  Regulation 44/2001 (n 20) Art 5.1.