The extraterritorial application of US law in cases that at first glance have little if any connection to the US may have a chilling effect on foreign businesses and authorities. A partner with New York-based White & Case LLP, Owen Pell, sitting in its Moscow office tells RAPSI that the situation is changing with interesting implications for non-US companies.
- Do the principles of extraterritoriality under US civil and criminal law share a common origin?
- Yes, the origin is the same. The difference is that in the civil sphere there has always been a presumption that unless a law specifically says otherwise it does not reach conduct beyond the borders of the US. In the criminal sphere, where the harm is to the state or the public, then the presumption is reversed, so that we presume, unless the law states otherwise, that the law was intended to reach conduct beyond US borders.
In the 1960’s-90’s US federal courts weakened the presumption by taking the view that they could reach the subject matter of disputes outside of the US if the claimant could allege facts showing that non-US conduct had foreseeable effects in the US or that conduct in the US furthered non-US conduct that gave rise to a claim. This was especially true in the areas of securities, antitrust, RICO (which allows certain types of private civil fraud claims to be brought in federal court), and human rights. Given how much commerce flows into the US, it was not hard for businesses to do things that had an effect in the US and so the scope of US jurisdiction widened.
But over the past few years the US Supreme Court has sought to return to the earlier principles of extraterritoriality. As a result we have seen the line moving back – narrowing the kinds of disputes that US courts will consider, especially under federal law.
In the Morrison case, (Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010)), the US Supreme Court dismissed a securities lawsuit brought under the US securities laws by the Australian shareholders of an Australian bank with Australian shares. The shareholders claimed to have relied on false financial disclosures in statements the bank filed with the US Securities and Exchange Commission (SEC), including untrue financial data from the bank’s US subsidiary. The Supreme Court said that the US securities laws do not say anything about applying beyond the US, and accordingly, the presumption against extraterritorial reach applied. The Court held that the US securities laws are directed toward claims involving transactions on US exchanges or which occur in the US. Thus, neither the SEC filings nor any misreporting of financial information from the bank’s US subsidiary could create the required US connection. The Supreme Court also said that the presumption against extraterritoriality applies to every substantive federal law.
Since that case, the US Supreme Court also has held that the presumption against extraterritorial reach applies to federal laws relating to the jurisdiction of US federal courts, and dismissed a human rights claim that involved non-US claimants suing a non-US company over alleged human rights violations outside the US. (Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659 (2013)). In that case, it did not matter that the company had a US office and had shares traded on US exchanges. Based on Kiobel, it now will be much harder for companies to be sued in US courts for human rights claims tied to their activities outside the US when those activities have no US connection. That’s not a small thing for companies doing business in South East Asia, Africa, or the Middle East, where, before Kiobel, human rights litigation had become a significant risk factor for a lot of companies.
In addition, in a case handled by White & Case, a US appellate court (just one level below the US Supreme Court) held that the federal RICO statute also does not reach beyond the US and dismissed a case involving claims by a non-US company against mostly non-US defendants relating to a dispute over ownership of a Russian oil company. (Norex Petroleum Ltd. v. Access Industries Inc., 631 F.3d 29 (2d Cir. 2010)).
US antitrust law was not affected by the Morrison decision because in the 1990s the US enacted legislation to clarify the extraterritorial reach of the antitrust laws. Based on this law, US antitrust law may reach beyond the US based on effects caused in the US by activities outside the US. This was the law applied recently in the potash cases (when several large potash producers including Russian JSC Uralkali and JSC Silvinit allegedly conspired to restrict the supply of potash, and to raise and fix potash prices outside the US, allegedly causing effects in the US). But what the antitrust cases highlight is that if there isn’t such a specific provision, there is now a strong presumption that a federal law should not be interpreted to reach activities beyond the US. So US federal court now must look to the facts alleged in each case and ask whether there is a strong enough US connection to support a claim under a federal law that does not otherwise state that it reaches beyond US borders.
- Do your business clients have concerns about the reach of US Civil Law the same way that potential criminal defendants might fear the reach of US Criminal Law because of extraterritoriality?
- Yes, for several reasons. Extraterritoriality is an assertion of judicial sovereignty and potentially opens a company up to broad US pre-trial discovery, which can be a costly exercise involving great amounts of business information being produced to an adversary and corporate executives being forced to answer questions from lawyers under oath. This is broader than the document disclosures that occur in English litigation. Also, in US discovery, parties may seek information that may not be relevant to the claim if they can argue that this irrelevant information might reasonably lead them to discover relevant information. So, the scope of discovery can be quite broad and intrusive.
In addition, the US court system is very large. The US – like Russia – is very big. This is unlike England where most commercial disputes are addressed in one place, London. The US is more like Russia. Not every significant commercial case in Russia gets handled in Moscow or St. Petersburg. Cases sometimes get handled in Siberia, for instance. The US is the same way. Not everything is necessarily addressed in the New York courts. Litigation might end up anywhere across the US.
This is of concern because there is not necessarily the same predictability or consistency among the many different US regions.
Finally, US pleading standards are somewhat lower than in other countries, where a claimant must allege very specific facts to state a claim. In the US, some facts may be asserted only on information and belief, and intent can be inferred from the surrounding facts and circumstances. Thus, it may be harder to defeat US claims in the early stages. US civil litigation risks can then be magnified if that litigation occurs at the same time as US regulatory investigations, which can be used by claimants in US civil litigation to enhance claims and to broaden the scope of discovery to include information shared with regulators or criminal authorities. That doesn’t happen in many other legal systems. It certainly doesn’t happen in Europe.
- In your view, how threatening is the reach of the US Foreign Corrupt Practices Act (FCPA)?
- As soon as you become listed on the US Stock Exchange, you are subject to the FCPA even if you are not engaged in any business in the US. The FCPA also can apply to activities that involve US conduct.
Recently, however, as to companies not listed in the US, the US courts have noted that the FCPA may not have a broad extraterritorial reach. If you think about who the injured party typically is in an FCPA action, it’s not the US government. Rather, it is a competitor which could not compete as effectively against the company that was bribing foreign officials, or the company whose employee was bribing somebody. So that means the presumption against extraterritoriality applies, and there may be some activities that would not be covered because they occurred only outside the US.
- Does that change things?
You may remember that recently there was a big investigation regarding a Siemens executive, a German person, who bribed people in Argentina and Africa and never set foot in the US. The only injured parties were people in Argentina and Africa. The case was thrown out of the US court.
What the Siemens case, Morrison and Kiobel all teach is that where non-US persons allegedly injure non-US persons outside the United States, it may now be much harder to bring claims relating to those injuries in the United States because there is not enough US connection.
In addition, another recent US Supreme Court case held that simply because a non-US company does a lot of US business, does not mean that this non-US company may be sued in the US for claims unrelated to its US activities. (Daimler AG v. Bauman (US Supreme Court No. 11-965, Jan. 14, 2014) In Daimler, the US Supreme Court held that Daimler in Germany could not be sued by non-US persons for allegedly aiding in human rights violations outside the US simply because Daimler did substantial US business through a US subsidiary. The Court held that US courts do not have jurisdiction over a foreign company for acts unrelated to the claims unless the company is incorporated here or has its principal place of business here. Since personal jurisdiction is an essential element of every lawsuit, the Daimler case will have broad ripple effects.
The Daimler case, like Morrison and Kiobel, further narrows the scope of US jurisdiction – and may be used along with those cases to make it harder for non-US companies to be brought before US courts.
For example, let’s say I have a US federal litigation and I want documents from a corporate non-party located in Russia which does some US business. After Daimler, my business in the US should not be enough to make me subject generally to the personal jurisdiction of US courts. In addition, Federal Rule of Civil Procedure 45 does not say anything about reaching beyond the US. Based on Morrison and Kiobel, the Russian company could argue that the US discovery rules were not meant to reach them unless their US business is directly and strongly related to the claims in the US action – and even then, any discovery may be narrowly limited just to that particular US business. The Russian company could argue that any other discovery would have to be conducted under the Hague Convention on Evidence in Civil and Commercial Matters, which would require an application through Russian governmental authorities and would be limited by Russian rules of procedure as to the production of evidence. So now there is a whole new argument against broad US discovery outside the US.
Another effect of these cases could be US jurisdiction relating to judgment enforcement. Let’s say a Russian company loses an arbitration (especially a non-US arbitration). The claimant thinks the Russian company has an account with the London or Moscow branch of a New York bank (or a non-US bank that also has a New York branch). The claimant could try to serve a judgment discovery order or attachment order on the New York bank (or New York branch of a non-US bank) seeking to find out information about non-US bank accounts and/or to freeze non-US accounts. After Daimler, Morrison and Kiobel, that is much harder to do – especially if the bank involved is the New York branch of a non-US bank. The federal judgment enforcement rules look to state law, and in New York, for example, state rules do not expressly provide for New York law to reach beyond the borders of New York. Under Daimler, just because a non-US bank does business in New York does not mean that all the banks operations all over the world are subject to New York jurisdiction. Moreover, under New York law, the branches of banks generally are viewed as separate entities, meaning that the non-US branches of a US bank may not be within the jurisdictional reach of a US court. None of these arguments worked very well before Daimler, Morrison and Kiobel. Based on these cases, we will start to see limits on how US courts enforce judgments when the assets aren’t located in the US.
- Do you anticipate a drop in human rights litigation based on the shrinking reach of US jurisdiction and law?
- Yes, it’s going to be much harder for those lawsuits to happen. They will have a very hard time finding a home in the US. But companies should be aware that potential claimants now will begin to work harder to find corporate connections to the US in order to argue, for example, that people in the US are directing or making decisions relating to events outside the US. So, this could affect how companies move executives from place to place.
Let me give you an example. Let’s say that you are an oil drilling specialist, and you are sent by your company to Africa to assess a potential site for exploratory drilling. The place you want to look at is in the middle of nowhere. The local government tells you that where you want to go has no roads and is very dangerous, but the army will provide you with security and help you get to the place you need to be. Then the army offers to build a road for you. You tell them where the road should be. Then the army goes in and allegedly commits atrocities and forces local villagers to build your road. Those facts were the facts at issue in the Talisman Energy case which was based on events that occurred in Sudan, and led to a Canadian energy company being sued in New York for aiding in the human rights violations because the Sudanese claimants said that the atrocities would not have occurred if the company was not looking for oil in that part of Sudan. After Kiobel, that lawsuit will not easily survive because there is no US connection.
But in response to Kiobel, plaintiffs are going to start digging, and they’re going to start looking for information to create a US connection. Maybe they will look on the Internet at how the companies set up their subsidiaries and which subsidiaries do business in which places. If they can find that the oil drilling specialist was employed by a US subsidiary, or was meeting with people in the US to decide where the roads needed to be built, or that the road project was paid for with money borrowed by the company in the US, then the plaintiffs may at least be able to argue that there are US connections to the non-US human rights claims that might justify US jurisdiction.
Based on Kiobel, Morrison and Daimler, non-US companies will need to be very careful in assessing their US operations and what non-US operations they allow their US operations to touch. If the US operations are isolated from other corporate operations – including difficult work done in dangerous places around the world – non-US companies may be able to better insulate themselves from being sued in the US.
- So the Internet rules the world?
- The Internet is becoming a more and more powerful tool for suing multinational corporations and most multinational corporations do a very bad job of managing their digital footprint in terms of lawsuit protection.
- And what changes do you anticipate in terms of the work of US regulators such as the SEC under the circumstances?
- The regulators know that it’s getting harder to bring certain kinds of cases in the US. But that doesn’t mean that they won’t try.
It also must be noted that, although the US scope of jurisdiction is shrinking, the number of other countries that are now looking at certain areas that they never used to look at is growing. Prior to 9/11 very few nations had anti-corruption legislation like the FCPA and only 33 had signed the United Nations Anti-Corruption Convention. In the years after 9/11, 125 additional countries signed that Convention. So now, lots of countries have jurisdiction over corruption issues. In addition, countries have noticed that the US and EU authorities make substantial revenue from the finds associated with regulation – literally billions of dollars each year. Based on this, many cash-strapped governments are now looking at regulatory enforcement as a revenue source.
It used to be that if the US Department of Justice (DOJ) started looking at a corruption problem, there would probably only be that one investigation. Now if the DOJ starts an investigation, within 6 to 12 months there might be 7 or 8 investigations being launched in 7 or 8 other countries. That’s a significant phenomenon. Another interesting trend is that more and more FCPA investigations are not starting in the US.
Instead, increasingly, the US starts an investigation after it hears about it from another country. A notable recent example was when large pharmaceutical companies got in trouble in Eastern Europe. A number of companies were found to be giving money to local charities where the people running the charities also were the people who approved medicines and medical devices for purchase at local hospitals. Investigations were launched in Poland, Romania, Hungary, and it was those investigations which then prompted a US FCPA investigation, which in turn led to large fines against a group of pharmaceutical companies. So the good news is that the scope of US jurisdiction is shrinking somewhat, but the bad news is that everybody else is now trying to play the same game as the US in a number of regulatory areas – especially anti-corruption, antitrust and securities, meaning that multinational businesses increasingly will face overlapping investigations regarding their worldwide operations.
Another area where this may spillover is taxation. Again, cash-strapped governments are viewing tax issues as more and more important. The number of cross-border tax cases is increasing, and you have to assume that governments will take these issues very seriously. It is not unusual for FCPA issues, for example, to have tax effects, given that when bribes are paid they often have not been properly accounted for either by the entity paying the bribe or the entity receiving the bribe. That may raise tax issues which governments will pursue.
- In other words, regulators are exceedingly sophisticated and commercially oriented?
- Yes, and that will become even more so in a world of multi-jurisdictional investigations. Remember GlaxoSmithKline (the UK multinational pharmaceutical and healthcare company),which announced that it had problems in China and within 3 weeks faced 7 new investigations including in the US, France, England, and Germany.
This will change the way companies view and manage legal risks. Knowing that there are likely to be multiple investigations in multiple countries places a premium on using outside counsel who have offices situated for close coordination and who can help companies consider how to manage risk, how to store information and where information should be stored – all with an eye toward where investigations or litigation could occur.
Interviewed by Vladimir Yaduta, RAPSI.