Commercial Litigation and Arbitration

Extraterritorial Application of Securities Laws Is Not Jurisdictional

It is commonplace to characterize the extraterritorial application of the securities laws as implicating the subject matter jurisdiction of the federal courts. Perhaps no longer. In In re Parmalat Secs. Litig., 2007 U.S. Dist. LEXIS 53459 (S.D.N.Y. July 24, 2007), Judge Lewis Kaplan observed that:

In Arbaugh v. T & H Corp., [546 U.S. 500 (2006),] the Supreme Court concluded that Title VII's definition of "employer" as having fifteen or more employees was an element of the Title VII claim rather than a limitation on subject matter jurisdiction. The Court ... enunciated a "readily administrable bright line" rule: "[W]hen Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character."

The limits on the extraterritorial application of the Securities Exchange Act are not set forth in the text of the Act itself, but instead reflect a recognition by the courts that Congress would not have wished "the precious resources of United States courts and law enforcement agencies" to be spent on predominantly foreign transactions. 11 Arbaugh's "bright line" rule thus suggests that this limit is an element of a securities fraud claim rather than a restriction on a court's subject matter jurisdiction. The Court need not decide the issue, however. While the appropriate characterization may affect the outcome in other cases, movants here prevail in either event.

There are some very serious practical implications that flow from this analysis. No jurisdictional discovery is going to be permissible if the issue of whether the ‛effects“ or ‛conduct“ test has been satisfied is not a jurisdictional question. On the contrary, if the issue of a simple 12(b)(6) question, the allegations of the complaint will control. (In fact, under the analysis of the Eleventh Circuit in Lowery v. Alabama Power Co., 2007 U.S. App. LEXIS 8289 (11th Cir. 2007), a CAFA decision that was decided in the removal context, the balance struck by Federal Rules of Civil Procedure 8(a) and 11 may arguably preclude discovery even if the question were jurisdictional.)

If, however, the allegations of the complaint control and suffice to move the case into discovery, another observation of Judge Kaplan in Parmalat is pertinent: ‛The plain language of the rule [12(b)(6)] ... contemplates that successive motions to dismiss for failure to state a claim may be filed.“

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