Can Morrison Be Outflanked?: How Foreign Purchasers Are Suing in U.S. and Foreign Courts

Lord Denning, a highly quotable British judge, once remarked:

“As a moth is drawn to the light, so is a litigant drawn to the United States.”[1]

Some reasons for this strong attraction are obvious: (1) the U.S. (and only a few other nations) authorize opt-out class actions; (2) the U.S. permits (and generously awards) contingent fees; (3) the U.S. has no “loser pays” rule (and most other countries do); and (4) the U.S. uses juries in civil cases and permits punitive damages.

As I discuss in a recent paper posted on SSRN, available here, the strongest evidence of the attractions of a U.S. venue to foreign litigants is probably the response to Morrison v. National Australia Bank, Ltd..[2] That 2010 decision destabilized the international world of securities litigation. Prior to it, an institutional investor who purchased its securities outside the United States had a good chance of being included in a global class action against the issuer.[3] But Morrison seemingly ended that migration of plaintiffs to the U.S. by finding that the antifraud provisions of the federal securities laws applied only to securities purchased or sold in the United States. In theory, this left foreign purchasers without access to U.S. courts (or to professional plaintiff’s attorneys willing to litigate on a contingent fee basis). In practice, however, this may have been only a temporary obstacle for some plaintiffs. Given the paucity of jurisdictions recognizing opt-out class actions, foreign plaintiffs (and their U.S. attorneys) are actively seeking ways to obtain access to U.S. courts. Nature, it is said, abhors a vacuum, and the vacuum generated by Morrison is now subject to increasing pressure from foreign plaintiffs seeking to regain access to U.S. courts.

1. The Legal Reaction in Cross-Listed Countries

The reaction to Morrison has been most pronounced in those countries with a substantial number of firms cross-listed in the U.S. (either on the NYSE or Nasdaq). Canada and Israel have the highest number of cross-listed issuers, and their reactions have differed. In Canada, the initial problem was unpredictability, because, when parallel class actions were filed in Ontario and the U.S., neither action could settle easily, as it was unknowable at this point whether class members would elect to settle in the U.S. or Canada. They might wait to see which settlement was larger or even try to file under both. Because U.S. courts disfavor reversionary settlements, more funds would have to be deposited in each settlement fund than were needed to pay the agreed recovery to claimants. D&O insurers balked. In Silver v. IMAX,[4] this problem was resolved through direct contact between the two courts, and a decision was reached by the Canadian court to limit Canadians purchasing on a U.S. exchange to suing in the U.S. class action.

Morrison seems to have caused Canadian courts to limit the reach of the Canadian securities statute. Although the Canadian statute was written expansively and arguably could have permitted a Canadian resident to sue foreign defendants who were not even listed on a Canada exchange, the Canadian courts rejected this possibility in Yip v. HSBC Holdings plc[5] and again in Leon v Volkswagen AG,[6] ruling in the latter case that:

“There is nothing unfair in expecting Ontario residents who purchase a foreign company’s shares on a foreign exchange (because the shares do not trade in Canada) to litigate their claims against this foreign defendant in the jurisdiction of the foreign exchange.”[7]

Thus, the practical approach taken in Silver v. IMAX has become a formal rule, and Canadian plaintiffs who buy in the U.S. must now sue there.

Israel, however, reached a very different position, deferring even more to U.S. law. In Cohen v. Tower Semiconductor, Ltd.[8] and Damti v. Mannkind Corporation Ltd.,[9] the Israeli Supreme Court ruled last year that the law applicable to a stock cross-listed in the U.S. should be U.S. law. Thus, even in a securities fraud suit between an Israeli citizen and an Israeli corporation in an Israeli court, where the plaintiff purchased on the Tel Aviv Stock Exchange, the governing law will be that of the U.S. (and hence Rule 10b-5). These decisions may yet have unforeseen consequences if the same plaintiffs seek to sue in the U.S. (as later discussed).

2. Petrobras and Settlement Classes

Suppose a class requests class certification in a case where 80% of the purchasers can establish their domesticity (i.e., that they bought in the U.S.) and 20% cannot. This resembles the facts in the Petrobras litigation where the location of bond purchases was difficult to establish.[10] Although S.D.N.Y. Judge Jed Rakoff certified this class, the Second Circuit reversed, finding that the issue of domesticity was an “individual” issue, which precluded class certification under Rule 23(b)(3) of the Federal Rules of Civil Procedure.[11] But then the parties negotiated further and came back with a settlement for $3 billion (the largest U.S. securities settlement with a foreign corporation ever), and this settlement included the disputed bonds. But how could the district court now certify this settlement class over the Second Circuit’s objection? The answer given by Judge Rakoff (based on established Second Circuit precedent) was that the issue of “domesticity” was not an issue of subject matter jurisdiction, but simply an issue of the merits. Indeed, Morrison had said precisely this. Thus, any merits issue (including “domesticity”) can be waived by the defendant if it chooses. That poses a large question for the future: How far can this principle be pushed? For example, if half the shares in a putative class action were traded on the London Stock Exchange, can a U.S. settlement class cover both the U.S. and U.K.-traded shares? Serious issues would arise if the strength of the legal claims between these two groups differed significantly, but this could be solved through subclassing and independent counsel.[12] All that is clear today is that settlement classes can be extended beyond the boundaries of a litigation class. But could there be a bridge too far?

3. International Settlement Classes Under the WCAM Statute

One alternative to a suit in the U.S. is a global settlement class under the Netherlands WCAM statute. Originally designed to deal with mass torts (and, in particular, birth defects caused by pharmaceutical products), this statute offers an opt-out class action, but it requires a settlement.[13] Why would a defendant settle when it cannot be sued under this statute? One reason is that the Netherlands also permits investors to sue in groups (known as “stichtings”) which functionally amount to an opt-in class action.[14] If a public corporation is sued by multiple stichtings, each composed of many investors, it may decide that it is better to seek a global resolution under the WCAM statute (and thus cover all absent parties), rather than face a continuing series of suits by stichtings, whose demands are likely to escalate with each settlement.

This pattern has played out several times, beginning in 2009, when Grant & Eisenhofer, a well-known American plaintiff’s firm, orchestrated a major settlement with Royal Dutch Shell for $382 million that covered all persons purchasing outside the U.S.[15] Contemporaneous securities litigation in the U.S. had settled all U.S.-based claims, meaning that a global resolution was achieved in two steps.

Following the 2008 crash, the same pattern repeated itself in securities litigation against Fortis, the Dutch and Belgium banking and insurance giant that had gone insolvent in the crash. Fortis and its parent Ageas were sued by stichtings (some organized by U.S. plaintiff law firms), and then a global settlement was organized under the WCAM statute for a European record $1.5 billion.[16] Most recently, in the wake of the $3 billion Petrobras settlement in 2018, litigation is now pending in the Netherlands in an effort to cover those not included under the U.S. settlement.

Still, although a public corporation can seek a global settlement under WCAM, it may choose not to do so. The procedure has not been thoroughly tested, and civil law courts are unpredictable (in the Petrobras litigation, the Netherlands court has refused to recognize or enforce mandatory arbitration clauses applicable to some plaintiff investors).

So what alternative remains? Here, one remaining option has just begun to be explored:

4. Supplemental Jurisdiction

Even when a U.S. court otherwise lacks subject matter jurisdiction, it can still hear and decide a case if it is filed as a parallel action to a case over which the court does have jurisdiction, at least if the two cases share a core nucleus of operative facts.[17] Under 28 U.S.C. §1367(c), the court can still refuse to accept this case if it raises a “novel or complex issue” of law. But typically securities law cases share the same core operative facts and issues: Was there a material misstatement or omission? Did the defendant act with scienter?

To be sure, if a U.S. court were asked to apply Russian or Chinese law to a case, it might understandably refuse, finding that the issue was too “novel or complex.” But now recall that Israel (with a large number of cross-listed firms) has decided to adopt U.S. law in these cases. This has a twofold implication: First, U.S. law cannot be “novel or complex” to a court already hearing a parallel U.S. action, and, second and more importantly, there can be no injury to comity when the foreign jurisdiction has expressly adopted U.S. law.

For some time, U.S. academics have argued that U.S. courts should permit foreign investors to file parallel actions based on supplemental jurisdiction.[18] But the few cases to have faced this issue have divided.[19] Those courts that have rejected attempts to use supplemental jurisdiction have either feared an injury to comity[20] or found that the U.S. had only a “minimal interest, if any, in providing a forum to litigate the claims of foreign stockholders under foreign securities laws.”[21]

These arguments have force, but much less so in the context of a settlement class (where the defendant may be reluctant to settle unless it can achieve a global resolution) or in cases where the foreign jurisdiction has adopted U.S. law (as Israel has). Settlements seldom, if ever, offend comity, and the U.S. may have a substantial interest in assisting a U.S. corporation to achieve a global resolution (and minimize costly litigation).

But, even if a settlement class can be certified, should a litigation class be certified in a parallel litigation based on supplemental jurisdiction? Here, there could be an injury to comity, and thus some U.S. interest in the litigation should be present. When Judge Henry Friendly first adopted the “conduct” test that long prevailed in U.S. courts prior to Morrison, he posited that the U.S. had an interest in not allowing itself to be used as a “base for fraud.”[22] Although that interest is not alone sufficient to overcome the presumption against exterritoriality in light of Morrison, it might be an additional requirement that a U.S. court would require to be present before exercising its largely discretionary power to accept a parallel action pursuant to supplemental jurisdiction. To illustrate, suppose a German corporation listed on the NYSE is sued in the U.S. by those who purchased its stock in the U.S. Next, a class of foreign investors who purchased on the London Stock Exchange seeks to file a parallel litigation class action pursuant to Section 1367(a). Should they be allowed to do so? My answer would be that, even though Section 1367(a) seems to permit such an intervention, the court should only accept this case pursuant to its supplemental jurisdiction if plaintiffs can credibly plead that substantial fraudulent conduct occurred in the U.S. Otherwise, the U.S. has no interest in allowing its courts to be so used. In contrast, this showing would not be necessary in settlement classes or where the intervening parties are relying on U.S. law.

All this may sound theoretical, but these cases are beginning to be brought.[23] The vacuum created by Morrison is, and will remain, under pressure. Lord Denning was right: The moths will keep returning.

ENDNOTES

[1] See Smith Kline & French Lab v. Bloch, (1983) 1 W.L.R. 730, 733 (Eng.).

[2] 561 U.S. 247 (2010). This brief piece will not discuss the complicated issue of when a transaction will be seen as taking place in the United States.

[3] Under the “conduct or effect” test that governed prior to Morrison, there had to be substantial fraudulent conduct in the U.S. to enable those who transacted abroad to sue in the U.S. See Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir. 1975); I.T.T. v. Vencap, Ltd., 519 F.2d 1001 (2d Cir. 1975).

[4] For the appellate decision, see Silver v. IMAX Corp., 2013 O.N.S.C. 1667; see also In re IMAX Sec. Litig., 283 F.R.D. 178, 184 (S.D.N.Y. 2012). As a matter of full disclosure, the author was an expert witness for defendants in this case.

[5] 2018 ONCA 626. Again, the author was an expert witness in this case.

[6] 2018 ONSA 4265.

[7] Id. at 1.

[8] Court Appeal 2898/18 (Ct 16, 2018). This ruling by the Israeli Supreme Court was on an appeal from the ruling of the District Court at Tel Aviv-Yatv (Judge Khaled Kabub) in 2017.

[9] Both Tower Semiconductor and Mannkind were the subject of a joint appeal to the Israeli Supreme Courts, Tower Semiconductor was incorporated in Israel in 1993 and listed first on Nasdaq in 1994 and the TASE in 2001. Mannkind was incorporated in the U.S. and listed first on Nasdaq and then on TASE.

[10] In In re Petrobras Securities Litigation, 317 F.Supp 3d 858 (S.D.N.Y. June 23, 2018), Judge Rakoff certified the class and approved a $3 billion settlement against Petrobras, the Brazilian oil and energy company. Most of the class consisted of stock purchasers, and the domesticity of their transactions was easily established. The bond purchasers had to clear their transactions through the Depository Trust Company, but the Second Circuit had earlier declined to accept that this factor could alone show domesticity.

[11] In re Petrobras Secs. Litig., 862 F.23d 250 (2d. Cir. 2017), the Second Circuit sustained all of Judge Rakoff’s rulings, except on class certification, and it remanded for further proceedings on that issue. On remand, Judge Rakoff found that the predominance requirement applied differently at settlement than at a trial. 317 F. Supp. 3d at 870. He relied both on Amchem Products and In re Am. Int’l Group Sec. Litig., 689 F.3d 229 (2d Cir. 2012).

[12] See, e.g., Charron v. Weiner, 931 F.3d 241, 250 (2d Cir. 2013). As the Supreme Court said more broadly in Amchem Products Inc. v. Windsor, 521 U.S. 597, 652 (1997), there would need to be “structural assurances of fair and adequate representation for the diverse groups and individuals” in such a case.

[13] For a brief review of the WCAM statute (which translates as “Act on Collective Settlement of Mass Claims”), see John C. Coffee, Jr. The Globalization of Entrepreneurial Litigation: Law, Culture and Incentives,  165 U. Pa. L. Rev. 1896, 1905-1907 (2015).

[14] “Stichting” formally translates as “foundation,” and each such entity owns only the legal claim, but not the right to control the proceeds of any settlement. Effectively, this is an “opt-in” procedure (but without any formal procedures for notice to all affected victims) which operates much like an opt-in class action. The Netherlands has no other procedure (other than the WCAM) statute for a class action.

[15] This settlement is reported in Hof’s Amsterdam 29 Mei 2009, JOR 2009, 197 M. Nt. AJIA Leitjen [ECLI:NL:GHAMS:2009:B15744]. The parallel U.S. action is In re Royal Dutch/Shell Transport Sec. Litig., 552 F.Supp. 2d  712 (D.N.J. 2007). For an overview, see Coffee, supra note 13, at 1905-1908.

[16] For a contemporary description of this litigation, see Alison Frankel, “Dutch Court approves $1.5 billion Fortis shareholder deal, but there’s a catch,” Reuters, Latest Venture Capital News, July 16, 2018. See also, Coffee, supra note 13, at 1905-1908.

[17] Once this was called “pendant jurisdiction” (but only older readers will remember that term). For a recent Supreme Court decision outlining its operation, see Arbaugh v. Y&H Corp., 546 U.S. 500, 506 (2006). The origins of the doctrine lie in United Mine Workers of America v. Gibbs, 383 U.S. 715 (1966).

[18] See Hannah Buxbaum, Remedies for Foreign Investors Under U.S. Federal Securities Laws, 75 Law and contemporary Problems 161, 177 (2012).

[19] For decisions declining to recognize supplemental jurisdiction in a securities case, see Stoyas v. Toshiba Corp, 191 F.Supp. 3d 1080, 1090 (C.D. Cal. 2016), rev’d on other grounds, 896 F.3d 933 (9th Cir. 2018); In re Mylan N.V. Sec. Litig., 2018 U.S. Dist. LEXIS 52084 (S.D.N.Y. March 28, 2018); In re Toyota Motor Corp. Sec. Litig., 2011 WL 2675395 at *7 (C.D. Calif. July 7, 2011). For cases finding that the court could exercises supplemental jurisdiction, see Roofer’s Pension Plan v. Papa, 2014 U.S. Dist. LEXIS 12585 (D.N.J. July 27, 2018); In re Verifone Holdings Inc. Sec. Litig., 2014 U.S. Dist. LEXIS 20044 (N.D. Calif. Feb. 18, 2014). The facts of these cases are discussed in Coffee, Global Settlements: Promise and Peril, (available on SSRN).

[20] See, in particular, In re Toyota Motor Corp. Sec. Litig.; supra note 19, at *7.

[21] See In re Mylan N.V. Sec. Litig., supra note 19, at *56.

[22] See cases cited supra at note 3.

[23] In particular, Roofer’s Pension Plan v. Papa, supra note 19, may signal the direction of future litigation.

This post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.