The Supreme Court recently gave a significant victory to those
seeking to prevent plaintiffs’ lawyers from taking advantage of
our overly generous civil justice system. In Morrison v.
National Australia Bank Ltd., the Court held that plaintiffs
who purchased securities traded on foreign exchanges could not
bring an action for securities fraud in U.S. courts. The case
involved a lawsuit brought against an Australian company for
alleged misstatements made to foreign investors in connection
with securities traded on the Australian securities market. The
Court held that Congress declined to provide a venue for foreign
plaintiffs seeking to pursue such fraud claims in U.S. courts.
Prior to Morrison, some courts had interpreted the
law much differently, holding that such cases may proceed where a
sufficient portion of the alleged misconduct occurred in the
United States or where the foreign activities had sufficient
“effects” on U.S. investors and securities markets. As Justice
Scalia noted in his majority opinion, this result was contrary to
the plain language of the securities laws and the strong
presumption that Congress intended laws to apply solely within
the boundaries of the United States. Nonetheless, foreign
plaintiffs were lining up to bring such suits, leading some to
fear that the United States had “become the Shangri-Law of
class-action litigation for lawyers representing those allegedly
cheated in foreign securities markets.”
The Court’s decision in Morrison cut off this
potential expansion of the securities laws to reach foreign
disputes — a ruling that is likely to have a significantly
positive effect. With the recent economic downturn and
accompanying drop in stock prices, the plaintiffs’ bar is lining
up to file new lawsuits accusing companies of fraud. The last
thing the judicial system needs is a wave of additional
litigation over foreign securities clogging the U.S.
courts.
Moreover, as Justice Scalia noted, each country has its own
standards for defining what constitutes securities fraud.
Allowing disputes over foreign securities to be brought in U.S.
courts would usurp other countries’ authority to determine their
own laws and upset settled expectations of those selling
securities in foreign markets. A “race to the bottom” would
ensue, with foreign plaintiffs rushing to U.S. courts that they
believed might employ comparatively lax standards and offer
potentially greater awards.
While the result in Morrison is a welcome one, it
raises a more fundamental question: Why are foreign plaintiffs
increasingly attempting to resolve their disputes in U.S. courts?
Even a cursory analysis provides several potential answers. Class
action practice in the United States often makes it easier for
plaintiffs to join claims in a single suit. By bundling claims
together, plaintiffs can put additional pressure on defendants to
settle regardless of the merits. The United States also stands
out in allowing contingent fees under which plaintiffs’ lawyers
may take a “piece of the action” in the form of a percentage of
any judgment if the plaintiffs win. This provides a powerful
incentive to bring new cases and an effective funding mechanism
for litigation. Finally, the vagaries of U.S. juries often
provide the potential for windfall verdicts. Given these risks,
companies often find that it is safer to simply settle cases,
rather than going to trial. In sum, U.S. law often facilities
litigation — whether meritorious or not.
Cases such as Morrison should prompt a thorough
review of our civil justice system and provide an impetus for
reform. In the absence of such reform, the United States will
increasingly become a magnet for foreign lawsuits — of all
kinds. This is a result that our country can ill afford at this
time.
