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Extraterritorial Application of American Law after the Insurance Antitrust Case: A Reply to Professors Lowenfeld and Trimble

Published online by Cambridge University Press:  27 February 2017

Larry Kramer
Larry Kramer*
Affiliation:
New York University School of Law
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American Journal of International Law , Volume 89 , Issue 4 , October 1995 , pp. 750 - 758
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Copyright © American Society of International Law 1995

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References

1 113 S.Ct. 2891 (1993).

2 See Andreas F. Lowenfeld, Conflict, Balancing of Interests, and the Exercise of Jurisdiction to Prescribe: Reflections on the Insurance Antitrust Case, 89 AJIL 42 (1995); Phillip R. Trimble, The Supreme Court and International Law: The Demise of Restatement Section 403, 89 AJIL 53 (1995).

3 113 S.Ct. at 2909. The reference to having “jurisdiction” because U.S. law applies is itself problematic, a third respect in which Hartford could matter in future litigation. What kind of “jurisdiction” was at issue? In dissent, Justice Scalia made the conventional distinction between subject matter jurisdiction—the competency of a court to adjudicate—and prescriptive (or legislative) jurisdiction—the power to extend substantive law to cover particular action or activities. He argued that Hartford concerned only prescriptive jurisdiction, because the question was whether Congress gave the plaintiffs a cause of action against these foreign defendants, not whether Congress gave the federal courts power to adjudicate. Id. at 2917. Justice Souter disagreed, dismissing “Justice SCALIA[’s suggestion] that what is at issue in this case is prescriptive, as opposed to subject-matter, jurisdiction,” on the ground that “[t]he parties do not question prescriptive jurisdiction … and for good reason: it is well established that Congress has exercised such jurisdiction under the Sherman Act.” Id. at 2909 n.22. The Court thus appeared to hold that the applicability of U.S. law to conduct abroad is a question of subject matter jurisdiction.

It is not clear that Justices Souter and Scalia were talking about the same thing when they referred to “subject-matter jurisdiction” in this exchange. Justice Scalia used the term in the conventional sense of power to adjudicate. Noting that the plaintiffs sought damages under a federal statute, he found subject matter jurisdiction under 28 U.S.C. §1331, which gives federal courts “original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.” But international lawyers, particularly in antitrust cases, have long used the term “subject matter jurisdiction” in a different sense: to refer to judicial decisions declining to recognize a plaintiff’s claim on grounds of comity. Technically, this usage is improper. Whether written by Congress or inferred by courts, limiting the scope of a cause of action is a matter of prescriptive jurisdiction. But the usage has persisted despite previous efforts by the Supreme Court to discourage it. See Lauritzen v. Larsen, 345 U.S. 571, 575 (1953); Romero v. International Terminal Operating Co., 358 U.S. 354, 359 (1959). The resulting confusion led the drafters of the Restatement (Third) to avoid the phrase “subject matter” altogether, referring instead to jurisdiction to adjudicate, to prescribe, and to enforce. RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES §401 & cmt. c (1987) [hereinafter RESTATEMENT (THIRD)]. In any event, while Justice Souter did not say his meaning was different from Justice Scalia’s, he may have been using the term “subject matter jurisdiction” in this unconventional sense.

The difference matters because questions of subject matter jurisdiction, properly so-called, are nonwaivable. If Justice Souter did use the term in its conventional sense, then, objections based on territorial reach could now be raised at any time by any party or by the court. Indeed, the court would have a duty to raise the objection on its own motion, and arguments about territorial scope could be made a basis for collateral attack and raised for the first time even in subsequent proceedings to enforce a judgment.

There are several reasons to prefer construing Justice Souter’s use of “subject-matter jurisdiction” in the unconventional sense of international antitrust lawyers. First, because Justice Scalia is so obviously right about subject matter jurisdiction in the conventional sense. Second, because making extraterritorial scope nonwaivable would create undesirable new opportunities for strategic behavior by lawyers and litigants. Unfortunately, Souter never made clear what he meant by subject matter jurisdiction, and the absence of any similar ambiguity in Justice Scalia’s dissent makes it plausible to argue that Souter and Scalia were talking about the same thing.

4 475 U.S. 574, 582 n.6 (1985).

5 148 F.2d 416, 444 (2d Cir. 1945).

6 RESTATEMENT (THIRD), supra note 3, §415 & reporters’ note 3.

7 1 PHILLIP AREEDA & DONALD F. TURNER, ANTITRUST LAW ¶236 (1978).

8 370 U.S. 690, 704 (1962).

9 344 U.S. 280, 288 (1952).

10 274 U.S. 268 (1927).

11 It is interesting to note that Alcoa was referred to the Second Circuit by a Supreme Court that could not muster a quorum to decide the case. See 148 F.2d at 421. That fact, together with the fact that Learned Hand wrote the opinion, has given the case a sort of informal, quasi-Supreme Court status. Nonetheless, Alcoa is not a Supreme Court precedent, and it did not bind the Court in Hartford. As for the Restatement and the antitrust treatise, these do not cite any Supreme Court cases not cited by Justice Souter, though they do list additional lower-court cases and secondary authorities.

12 See 370 U.S. at 704 (defendants cannot avoid liability under the Sherman Act “just because part of the conduct complained of occurs in foreign countries—).

13 213 U.S. 347 (1909).

14 228 U.S. 87 (1913). Pacific & Arctic Railway involved an alleged conspiracy by Canadian carriers to monopolize transport on certain routes between the United States and Canada. Citing American Banana, the defendants argued that the Sherman Act did not apply to acts by foreign corporations outside the United States. The Court agreed that “laws have no extra-territorial operation,” but rejected the defendants’ argument on the ground that “it would put the transportation route … out of the control of either Canada or the United States.” Id. at 106. The Court then went on to hold that it was enough if part of the conspiracy included acts in the United States.

In addition to Pacific & Arctic Railway, Justice Souter overlooked one other case in this line. See Thomsen v. Cayser, 243 U.S. 66 (1917).

15 For a more detailed discussion of these cases, see Larry Kramer, Vestiges of Beak: Extraterritorial Application of American Law, 1991 SUP. CT. REV. 179, 184–94.

16 See U.S. DEP’T OF JUSTICE, ANTITRUST ENFORCEMENT GUIDELINES FOR INTERNATIONAL OPERATIONS (1988), reprinted in 4 Trade Reg. Rep. (CCH) ¶13,109, and 55 Antitrust & Trade Reg. Rep. (BNA) No. 1391 (Nov. 17, 1988). The Justice Guidelines, like lower-court cases after Alcoa, recognize that deference to foreign law is sometimes appropriate despite intended effects in the United States. Such deference is measured by evaluating considerations similar to those identified in §403(2) of the RESTATEMENT (THIRD), supra note 3. See, e.g., Timberlane Lumber Co. v. Bank of America, 549 F.2d 597 (9th Cir. 1976); Mannington Mills, Inc. v. Congoleum Corp., 595 F.2d 1287 (3d Cir. 1979).

17 499 U.S. 244, 248 (1991) (quoting Foley Bros. v. Filardo, 336 U.S. 281,285 (1949)). According to Professor Lowenfeld, to say that legislation applies only within the territory of the United States “begs the question about whether one looks at conduct … or effect.” 89 AJIL at 46 (citing §402 of the RESTATEMENT (THIRD), supra note 3, which justifies effects-based assertions of power as an application of the territorial principle). The meaning of terms like “territorial” and “extraterritorial” is, to be sure, a matter of convention, and these words have been used in different ways at different times. In context, however, it is quite clear that the Supreme Court in Aramco meant the traditional definition, which refers to conduct occurring within a nation and was meant to exclude the exercise of power based on nationality or effects. See Kramer, supra note 15, at 181 & n.9.

18 See, e.g., Kollias v. D & G Marine Maintenance, 29 F.3d 67, 70 (2d Cir. 1994) (Longshoremen and Harbor Workers’ Compensation Act); Gushi Bros. v. Bank of Guam, 28 F.3d 1535, 1540 (9th Cir. 1994) (Bank Holding Company Act); Subafilms, Ltd. v. MGM-Pathe Communications Co., 24 F.3d 1088, 1095 (9th Cir. 1994) (Copyright Act); Environmental Defense Fund, Inc. v. Massey, 986 F.2d 528, 529 (D.C. Cir. 1993) (National Environmental Policy Act); Cruz v. Chesapeake Shipping, Inc., 932 F.2d 218, 224–25 (3d Cir. 1991) (Fair Labor Standards Act); The Supreme Court 1990 Term, 105 HARV. L. REV. 77, 369–79 (1991); David M. Barbash, Equal Employment Opportunity Commission v. Arabian American Oil Co., 85 AJIL 552 (1991); Conly J. Schulte, Note, Americans Employed Abroad by United States Firms Are Denied Protection under Title VII, 25 CREIGHTON L. REV. 351 (1991); John P. O’Brien, Note, It Is Business as Usual in the Extraterritorial World of Title VII: American Employers Who Employ Americans Abroad Are Not Subject to Title VII, 33 S. TEX. L. REV. 313 (1992).

19 Under Aramco, the decision to extend federal legislation to conduct outside the United States must be stated explicitly in the language of a statute; statements in the legislative history that this is what Congress desired or expected will not suffice. And while the Sherman Act applies in terms to “commerce … with foreign nations,” 15 U.S.C. §1, Aramco holds such “boilerplate language” insufficient to overcome the presumption against extraterritoriality. 499 U.S. at 250–51.

20 In Lujan v. Defenders of Wildlife, 112 S.Ct. 2130 (1992), the Court granted certiorari to review the extraterritorial scope of the Endangered Species Act but got sidetracked on the issue of standing and reversed the judgment below on that basis; Justice Stevens concurred in the judgment, finding that the plaintiffs had standing but that Aramco required limiting the Act to conduct in the United States.

21 113 S.Ct. at 2918–19 (citing the same cases as the Court to explain why Aramco does not control the outcome). Justice Scalia’s express reference to Aramco makes Justice Souter’s failure to mention the case appear all the more deliberate, hence all the more puzzling.

22 15 U.S.C. §§77b(7), 78c(a)(17).

23 See note 19 supra.

24 See Bersch v. Drexel Firestone, Inc., 519 F.2d 1001 (2d Cir. 1975) (Friendly, J.); Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir.), rev’d on other grounds, 405 F.2d 215 (2d Cir. 1968); RESTATEMENT (THIRD), supra note 3, §416 cmt. a and reporters’ notes 1–5. For many years, the Securities Exchange Commission took the position that U.S. securities laws could be applied to any conduct affecting U.S. markets. In 1990 it issued Regulation S restricting the registration requirements of §5 of the Securities Act to offers or sales within the United States. The agency took care, however, to say that” [t]he Regulation does not limit in anyway the scope or applicability of the antifraud or other provisions of the federal securities laws … .” [1989–1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶84,524, at 80,664.

25 In this connection, see Justice Jackson’s famous quip in Brown v. Allen, 344 U.S. 443, 540 (1953) (concurring in result), that the Supreme Court is not final because it is infallible but rather is infallible only because it is final.

26 See Kramer, supra note 15.

27 89 AJIL at 52. For a fuller discussion of Professor Lowenfeld’s views, see his General Course at the Hague Academy of International Law, International Litigation and the Quest for Reasonableness, 245 RECUEIL DES COURS 1, 59—80 (1994 I).

28 89 AJIL at 51.

29 113 S.Ct. at 2911.

30 Predictability is usually discussed as an interest of the parties, but it has broader significance. If nations have overlapping regulation, someone’s law and policy must necessarily be subordinated in every case. An optimal system of conflict resolution acknowledges this consequence and seeks instead to maximize the extent to which each nation can effectuate its policies across many cases. This requires coordination among nations and at least a rough ability to predict outcomes—goals that are impossible to achieve with case-by-case balancing. For elaboration of this argument, see Larry Kramer, On the Need for a Uniform Choice of Law Code, 89 MICH. L. REV. 2134, 2142–46 (1991); Larry Kramer, Return of the Renvoi, 66 N.Y.U. L. REV. 979, 1015–28 (1991).

31 Justice Scalia’s dissent in Hartford is a good example. He wanted Aramco, but thought he was prevented from getting it by precedent. So he manipulated the factors in §403(2) to reach what amounts to the same result, perhaps not self-consciously orchestrating so much as intuitively ordering open-ended factors to fit his own idiosyncratic preferences. Anyone familiar with the Restatement (Second) of Conflict of Laws (1971), which adopts a comparable balancing test for domestic choice-of-law cases, could point to hundreds of similar examples.

32 89 AJIL at 54–55, 57.

33 Id. at 55, 57.

34 The limits on prescriptive jurisdiction under customary international law are described in RESTATEMENT (THIRD), supra note 3, §402. In addition to the interests listed in text, §402 recognizes a few instances in which a nation can apply its law to protect nationals abroad, the so-called passive personality principle. See id. cmt. g (applicable “to terrorist and other organized attacks on a state’s nationals by reason of their nationality, or to assassination of a state’s … officials—). Customary international law also recognizes a principle of “universal” jurisdiction, which presently applies only to piracy, genocide and possibly terrorism, but which permits any nation that obtains physical custody of a defendant to apply its law. See United States v. Yunis, 681 F.Supp. 896 (D.D.C. 1988). There are other twists in this uncertain and evolving area, but the basic grounds are those mentioned in the text: territoriality, effects and nationality. The Restatement contends that international law qualifies these grounds with the “reasonableness” principle of §403, but that is still disputed. See, e.g., Laker Airways v. Sabena Belgian World Airlines, 731 F.2d 909, 950 (D.C. Cir. 1984); Matthias Herdegen, Book Review, 39 AM. J. COMP. L. 207, 209–10 (1991); Trimble, 89 AJIL at 55.

35 See, e.g., GARY BORN & DAVID WESTIN, INTERNATIONAL CIVIL LITIGATION IN UNITED STATES COURTS 600–03 (2d ed. 1992) (discussing England’s “blocking statute,” which prevents the recovery of treble damages and authorizes British officials to forbid compliance with U.S. discovery orders). Consider also the struggle over the Siberian pipeline or the controversy surrounding the Fruehauf case, both discussed in ANDREAS F. LOWENFELD, TRADE CONTROLS FOR POLITICAL ENDS 90–105, 268–76 (2d ed. 1983).

36 There is a huge literature on statutory interpretation, and many different theories have been articulated. Without going into these in detail, I think it fair to say that, with the sole exception of Justice Scalia’s much-criticized textualism, none supports Professor Trimble. Judges may exercise judgment and creativity in interpreting laws in a way that is not only consistent with, but supportive of, democratic institutions. See, e.g., BENJAMIN N. CARDOZO, THE NATURE OF THE JUDICIAL PROCESS (1921) (interpret laws in light of the best understanding of relevant moral and practical considerations); HENRY M. HART & ALBERT M. SACKS, THE LEGAL PROCESS, ch. 7 (William Eskridge & Phillip Frickey eds., 1994) (interpret laws to further their purposes); GUIDO CALABRESI, A COMMON LAW FOR THE AGE OF STATUTES (1982) (update statutes to keep them consistent with other developments); R. M. DWORKIN, LAW’S EMPIRE, ch. 9 (1986) (read statutes to ensure their “fit” with principles of political morality). This general proposition also conforms rather well with actual judicial practice. See WILLIAM N. ESKRIDGE, DYNAMIC STATUTORY INTERPRETATION (1995).

37 Professor Trimble quotes the House Report, which declines either to repudiate what courts have done or to enact it into law: “this bill would have no effect on the courts’ ability to employ notions of comity … or otherwise to take account of the international character of the transaction. Similarly, the bill is not intended to restrict the application of American laws to extraterritorial conduct where the requisite effects exist. …” H.R. REP. NO. 686, 97th Cong., 2d Sess. 12 (1982), quoted in 89 AJIL at 55–56. The clear message is that Congress wanted to leave development of the doctrine of extraterritoriality to the courts.

38 See 89 AJIL at 55, 56. It is not clear whose wishes Trimble thinks are important. The Sherman Act was enacted in 1890, when strict territoriality was dominant and decades before the effects doctrine received formal recognition.

39 Endless authorities could be cited to support this proposition. In addition to those cited in note 36, some of the more well-known include 1 WILLIAM BLACKSTONE, COMMENTARIES *59—62; RICHARD A. POSNER, THE FEDERAL COURTS: CRISIS AND REFORM 286 (1985); HENRY J. FRIENDLY, Mr. Justice Frankfurter and the Reading of Statutes, in BENCHMARKS 196 (1967); Lon Fuller, Positivism and Fidelity to Law—A Reply to Professor Hart, 71 HARV. L. REV. 630, 662–67 (1958).

40 113 S.Ct. at 2909 (emphasis added).

41 Under this interpretation, the result in Hartford is surely correct. The plaintiffs alleged a conspiracy aimed solely and exclusively at U.S. markets and whose anticompetitive effects were felt entirely within the United States. Under such circumstances, it is hard to understand why U.S. law should not apply. If the defendants had stood in England and lobbed explosives into the United States, we would not hesitate to conclude that it was appropriate to apply U.S. law to make them pay for the resulting injury—even if England made such conduct legal or had chosen not to prosecute it. But that case is indistinguishable from Hartford, except that the injury alleged in Hartford was economic, and surely that does not make a difference.

The only decent argument for not applying U.S. law is based on the fact that the McCarran-Ferguson Act exempts domestic insurers from antitrust liability in deference to state regulation. Justice Scalia read this to suggest that the United States has only a weak interest in regulating foreign insurers for antitrust violations. 113 S.Ct. at 2921. But the conduct alleged may have constituted a “boycott” that even states could not exempt. See 15 U.S.C. §1103(b) (1988); 113 S.Ct. at 2913–17. More important, allowing states to displace federal antitrust law does not pose the same risks to federal objectives as exempting foreign insurers. This is so for at least two reasons: First, state regulation is a product of the same basic legal culture and hence is less likely to diverge from federal goals too much. Second, if a state exempts conduct that significantly tfireatens national interests, Congress can preempt it. Neither of these conditions is true of foreign regulation—which might explain why the McCarran-Ferguson Act was limited to states in the first place, and which does, in any event, suggest that we proceed cautiously before extending a similar exemption to foreign nations.

42 See text at and note 24 supra.