Transnational litigation and global securities class-action lawsuits

Wisconsin Law Review

Volumn 2009, Issue 2, 2009, Pages 465-506

  Choi, Stephen J ^a   Silberman, Linda J ^a  

^a NEW YORK UNIVERSITY   (United States)

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EID: 84862917527     PISSN: 0043650X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (36)

1. We concern ourselves solely with jurisdictional issues involving class-action lawsuits with foreign defendants and at least some degree of trading outside of the United States. As Professor Buxbaum observes, U.S. courts are consistent in applying jurisdiction to U.S. investors transacting on U.S. markets as well as foreign investors also transacting in U.S. markets. Hannah L. Buxbaum, Multinational Class Actions Under Federal Securities Law: Managing Jurisdictional Conflict, 46 COLUM. J. TRANSNAT'L L. 14, 55-56 (2007).
2. The term f-cubed is found in Stuart M. Grant & Diane Zilka, The Role of Foreign Investors in Federal Securities Class Actions, in PLI CORPORATE LAW AND PRACTICE HANDBOOK SERIES, NO. B-1442, at 91, 96 (2004);
3. see also Buxbaum, supra note 4, at 14; John C. Coffee, Jr., Securities Policeman to the World? The Cost Of Global Class Actions, N.Y. L.J., Sept. 18, 2008, at 5.
4. See RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES §§ 402, 403, 416 (1986);
5. see, e.g., Europe and Overseas Commodity Traders, S.A. v. Banque Paribas London, 147 F.3d 118 (2d Cir. 1998) ("[T]he exercise of prescriptive jurisdiction by Congress would be unreasonable within the meaning of the Restatement of Foreign Relations⋯ and is particularly so when the transaction is clearly subject to the regulatory jurisdiction of another country with a clear and strong interest in redressing any wrong."). Courts often perceive the question of the extraterritorial reach of a statute as one of "subject matter jurisdiction," but it is probably more accurate to characterize the issue as one of "legislative" or " prescriptive" jurisdiction. For further discussion on the point, see RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES § 401, cmt. c (1986) as well as Justice Scalia's dissenting opinion in Hartford Fire Insurance Co. v. California, 509 U.S. 764, 813-14 (1993).
6. Cf. Ronald J. Gilson & Reinier H. Kraakman, The Mechanism of Market Efficiency, 70 VA. L. REV. 549, 549-52 (1984).
7. See RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES § 403(2 ) (1987s).
8. Laws classified as "public" or "regulatory" are generally thought not to be enforceable in the courts of other countries. For a history and critique of the doctrine, particularly when claims are brought by private plaintiffs, see William S. Dodge, Breaking the Public Law Taboo, 43 HARV. INT'L L.J.161 (2002).
9. See, e.g., Paraschos v. YBM Magnex Int'l, Inc., 130 F. Supp. 2d 642, 645 (E.D. Pa. 2000) ("The rationale for dismissals based on comity is⋯ deference to the foreign country's legal, judicial, legislative, and administrative system of handling disputes over which it has jurisdiction, in a spirit of international cooperation."). Interestingly, unlike some continental systems, the United States does not have a formal lis pendens doctrine to stay a case when prior proceedings have been instituted elsewhere. Some courts in the United States have relied upon forum non conveniens to dismiss such cases, whereas others have invoked "international abstention" or comity. See Linda Silberman, A Proposed Lis Pendens Rule for Courts in the United States: The International Judgments Project of the American Law Institute, in INTERNATIONAL COOPERATION THROUGH PRIVATE INTERNATIONAL LAW 341, 350-51 (Talia Einhorn & Kurt Siehr eds., 2004).
10. Royal Dutch/Shell Defendants' Memorandum in Support of Their Motion to Dismiss in Part for Lack of Subject Matter Jurisdiction at 40, In re Royal Dutch, 380 F. Supp. 2d at 509 (Civil No. 04-374 (JWB)).
11. See generally Richard A. Nagareda, Aggregate Litigation Across the Atlantic and the Future of American Exceptionalism, 62 VAND. L. REV. 1 (2009) (comparing mechanisms for aggregate litigation in Europe and the United States).
12. See John C. Coffee, Jr., Class Wars: The Dilemma of the Mass Tort Class Action, 95 COLUM. L. REV. 1343, 1354 (1995) ("[S]uspect settlements result in large measure because of the defendants' ability to shop for favorable settlement terms, either by contacting multiple plaintiffs' attorneys or by inducing them to compete against each other. At its worst, this process can develop into a reverse auction, with the low bidder among the plaintiffs' attorneys winning the right to settle with the defendant.").
13. See Kapitalanleger-Musterverfahrensgesetz [KapMuG] [Act on the Initiation of Model Case Proceedings in Respect of Investors in the Capital Markets], Aug. 2005, BGBI. I S. 2437 at 16, available at http://www.bmj.bund.de/files/-/1110/ KapMuG-english.pdf. The legislation was sparked by the large settlement of the U.S. shareholder class-action lawsuit in favor of U.S. shareholders brought against Deutsche Telekom, whereas German claimant shareholders had no such redress.
14. See CIVIL PROCEDURE RULES (U.K.) 19.10-.12 (2008) (providing a set of rules to deal with group litigation). Some mechanism for the consolidation of common claims was thought necessary since the traditional "representative action" in England, see id. at 19.6, is construed very narrowly such that "the interests of the representatives and represented [must be] virtually the same." ADRIAN ZUCKERMAN, ZUCKERMAN ON CIVIL PROCEDURE: PRINCIPLES OF PRACTICE 511 (2d ed. 2006).
15. The GLO was held inappropriate as a means to seek redress for the misselling of investments by financial advisers. Press Release, Reynolds Porter Chamberlain LLP, High Court Judgment Kills Hopes of US Style Class Actions for Split-cap Mis-selling (Mar. 17, 2006), available at http://www.rpc.co.uk/ Default.aspx?sID=755&cID=17&ctID=43&lID=0.
16. Group Proceedings Act (Svensk författningssamling [SFS] 2002:599) (Swed.), available at http://www.sweden.gov.se/content/1/c6/02/77/67/bcbe1f4f. pdf.
17. Under Sweden's opt-in system, group members are not parties unless they have intervened as parties. Only parties are liable for costs. See HENRIK LINDBLOM, NATIONAL REPORT: GROUP LITIGATION IN SWEDEN 13 (Dec. 6, 2007)
18. (presented at The Globalization of Class Actions, a conference held in Oxford, England from December 12-14, 2007), available at http:// globalclassactions.stanford.edu/PDF/Sweden-National-Report.pdf.
19. Securities Act, R.S.O., 1990, ch. S.5 (as amended by Bill 198, effective Jan. 1, 2006), available at http://www.ontla.on.ca/bills/bills-files/37- Parliament/Session3/b198ra.pdf.
20. Australian Securities and Investment Commission Act, 2001 § 12GM, available at http://www.austlii.edu.au/au/legis/cth/consol-act/asaica2001529/ s12gm.html.
21. For further discussion of these provisions, see Gary L. Gassman & Perry S. Granof, Global Issues Affecting Securities Claims at the Beginning of the Twenty-First Century, 43 TORT TRIAL & INS. PRAC. L.J. 85, 87-94 (2007).
22. See, e.g., Kerr v. Danier Leather, Inc., [2007] 286 D.L.R. 601 (Can.), available at http://csc.lexum.umontreal.ca/en/2007/2007scc44/2007scc44.html (upholding a lower court's award of costs against the representative plaintiff under section 31(1) of the Ontario Class Proceedings Act, 1992 and stating, "[P]rotracted litigation has become the sport of kings in the sense that only kings or equivalent can afford it. Those who inflict it on others in the hope of significant personal gain and fail can generally expect adverse cost consequences.").
23. See COMM'N OF THE EUR. CMTYS., WHITE PAPER ON DAMAGES ACTIONS FOR BREACH OF THE EC ANTITRUST RULES 4 (April 2, 2008), available at http://ec.europa.eu/ competition/antitrust/actionsdamages/files-white-paper/whitepaper-en.pdf (suggesting representative actions brought by certain qualified entities and opt-in collective actions in the area of antitrust law);
24. JULES STUYCK ET AL., CTR. FOR EUR. ECON. LAW, AN ANALYSIS AND EVALUATION OF ALTERNATIVE MEANS OF CONSUMER REDRESS OTHER THAN REDRESS THROUGH ORDINARY JUDICIAL PROCEEDINGS 260-321 (2007), available at http://ec.europa.eu/consumers/ redress/reports-studies/comparative-report-en.pdf (assessing whether collective action for damages for consumers is "practical and effective").
25. In an earlier article, one coauthor argued for such an approach to rule 10b-5 prescriptive jurisdiction for the general, non-class-action situation. See Stephen J. Choi & Andrew T. Guzman, The Dangerous Extraterritoriality of American Securities Law, 17 NW. J. INT'L L. & BUS. 207, 208 (1996).
26. Many have written on the possibility of frivolous lawsuits. See, e.g., Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 STAN. L. REV. 497, 501 (1991);
27. Stephen J. Choi, Do the Merits Ma ter Less After the Private Securities Litigation Reform Act?, 23 J.L. ECON. & ORG. 598, 612 (2007);
28. Marilyn F. Johnson et al., Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act, 23 J.L. ECON. & ORG. 627, 627 (2007).
29. For evidence that smaller-sized firms face a lower incidence of securities class-action lawsuits, see James Bohn & Stephen Choi, Fraud in the New-Issues Market: Empirical Evidence on Securities Class Actions, 144 U. PA. L. REV. 903, 928-45 (1996); Choi, supra note 125, at 606-13. (Pubitemid 126408754)
30. For example, Labaton Sucharow LLP, a plaintiffs' attorney firm, has entered into alliances and "cooperation relationships" with law firms in Germany, Italy, the Netherlands, France, England, Canada, and Australia with the goal of creating "a truly international law practice." See Labaton.com, International Presence, http://www.labaton.com/en/about/ international/International-Presence.cfm (last visited Mar. 10, 2009).
31. Because not all fraud is detected, damages for fraud should exceed the benefit to the wrongdoer for "optimal" deterrence. See Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169, 198-99 (1968). The disconnect between secondary-market damages and the benefit to wrongdoers is so large (and uncertain), however, that overdeterrence is likely.
32. For a discussion of securities damages under rule 10b-5, see Janet Cooper Alexander, Rethinking Damages in Securities Class Actions, 48 STAN. L. REV. 1487 (1996). Of course, if private litigation tends to reach settlements where individual officers and directors do not pay much (if anything) out of their personal resources into the settlement fund, rule 10b-5 may not result in overdeterrence (and may actually underdeter fraud). However, this problem is not unique to f-cubed litigation - but rather affects all private class actions under rule 10b-5. Congress or the SEC should devise a more general solution that addresses this problem for all types of rule 10b-5 class-action litigation (such as increasing public enforcement against directors and officers). Primary market fraud (involving sales directly by an issuer to investors) poses a different situation. Unlike secondary-market fraud, in a purely primary-market rule 10b-5 class-action lawsuit, the damages paid by the issuer will correspond to the trading losses of investors who purchase from the issuer. Few rule 10b-5 class-action lawsuits, however, are brought solely for primary-market fraud. Even if a primary-market fraud component is present, the class typically also includes those who transact in the secondary market in the period immediately following the primary offering. Moreover, given the incentive already in place for plaintiffs' attorneys to bring a lawsuit to the extent primary-market purchases occur inside the United States and the uncertainty facing issuers and investors of not taking a bright-line-rule approach, we argue for an exchange-based jurisdictional presumption even if a rule 10b-5 class-action lawsuit includes a primary-securities-transaction component. (Pubitemid 126407557)
33. Securities transactions, on the other hand, are becoming increasingly fragmented. An investor in London may place a purchase order for a company's securities; the order may get executed in any number of possible securities markets, including markets in the United States. Fragmentation may make it difficult to trace the exchange where a particular transaction occurs with a specific foreign investor. It is unclear nonetheless how far markets will become fragmented. Liquidity benefits exist from having large amounts of securities all within one market. Even where tracing is a problem, courts could shift the burden to the plaintiffs to demonstrate tracing. If the possibility of securities enforcement is valuable to investors, the market will respond to such a burden with a greater paper trail for transactions to enable tracing. Note also that fragmentation is a potential problem not only for our exchange-based proposal but also for the present conduct and effects tests. The application of the conduct and effects tests also relies on distinctions between transactions that occur inside and outside the United States. Whether a transaction is an f-cubed or non-f-cubed situation turns in part on the location of the transaction. See Donald C. Langevoort, U.S. Securities Regulation and Global Competition, 3 VA. L. BUS. REV. (forthcoming 2009) (arguing that increased fragmentation of securities order flow will diminish the incentives of any single national regulator to "devote precious resources to policing issuer disclosure simply based on the fact that some (varying) percentage of issuer stock is traded there").
34. For a more detailed argument on the benefits of regulatory competition under the securities laws, see Stephen J. Choi & Andrew T. Guzman, Portable Reciprocity: Rethinking the International Reach of Securities Regulation, 71 S. CAL. L. REV. 903, 922 (1998); (Pubitemid 128429204)
35. Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J. 2359, 2419 (1998).
36. For an argument against regulatory competition in securities regulation, see Merritt B. Fox, Retaining Mandatory Securities Disclosure: Why Issuer Choice Is Not Investor Empowerment, 85 VA. L. REV. 1335, 1395-96 (1999).